Great expectations of economic reforms is likely to fuel a rally in the domestic securities market in the coming weeks. (Photo provided to China Daily)
Policy clarity and details of efforts to stabilize economic growth expected by next week
Market-people think any fresh policies aimed at stabilizing economic growth could fuel a rally in Chinese equities that could last till April-end and, perhaps, even beyond.
The two sessions of China's top lawmakers and political advisors, which started last week in Beijing and will end on March 16, are expected to debate key government reform plans before approving them.
Clarity will likely emerge only next week, which could spark the expected rally.
So, in the run-up, the benchmark Shanghai Composite Index rose 3.8 percent last week, paring its overall loss this year to 18.7 percent.
China's stock markets have been undulating, and at times yo-yoing, ever since the summer rout of June 2015. Investors' frayed nerves were calmed only recently by a stabilizing renminbi, an accommodative monetary policy aimed at supporting a recovery in the housing market and Beijing's improved communication.
Premier Li Keqiang delivered the Government Work Report on Saturday in front of the delegates of the country's top legislature, the National People's Congress. He reiterated Beijing's commitment to continued structural reform, and emphasized trimming of industrial overcapacity and lightening tax burdens on companies as the current environment is challenging.
Li said that tax cuts this year would be more than 500 billion yuan ($76.6 billion）which would benefit companies and individuals. To offset the impact on overall figures, the government has budgeted a 560-billion-yuan increase in fiscal deficit to 2.18 trillion yuan or an unprecedented 3 percent of GDP.
"... China will face more and tougher problems and challenges in its development this year, so we must be fully prepared to fight a difficult battle," Li said in his speech.
Some investors found relief that Li's report did not mention the launch of the registration-based initial public offering system. There have been fears that the new system could pressure the market with a huge supply of new shares.
Liu Shiyu, the newly-appointed chief of the securities regulator, said on the sidelines of the NPC session that in order to restore investors' confidence and better protect their interests, the regulator will strictly enforce the law and step up oversight of the stock market.
Wendy Liu, chief China strategist at Nomura Securities, said, "Details on supply-side reforms will strengthen investor confidence that Beijing is taking action on economic reforms."
The goal of stable growth is expected to receive priority. Lawmakers will likely adopt the final version of the country's 13th Five-Year Plan (2016-20), which will serve as the blueprint of China's social and economic development in the coming five years.
Liu said in a research note an interim rally, particularly in oversold stocks of industry leaders with strong track records and undemanding valuations, could last through April. "Beyond April, one issue to watch out for is if China's growth may surprise on the downside, with the credit cycle unfolding and supply-side reforms kicking in."
It is still too early to assess whether it may help usher in more policy accommodation in the second half of this year, Liu said.
Analysts with Chinese investment bank China International Capital Corp echoed Liu's view, saying the A-share market will see a "relief rally" this month after the substantial correction since the beginning of this year.
Sectors like coal, steel, commodities and building materials, which will benefit from supply-side reforms, will likely outperform the general market while technology, media and telecommunications will experience correction after the recent strong rebound, CICC said in a report.
Lirong Xu, chief investment officer, Franklin Templeton Sealand Fund Management Co, was quoted by Bloomberg as saying that China's stocks will rebound as much as 20 percent in the short term as economic growth picks up and volatility in the yuan decreases.
Fitch Ratings maintained the stable outlook for China's sovereign rating as it is looking at the NPC meeting for more information on the authorities' strategy for addressing the structural issues.
