Stock Trader’s Guide to China’s Weeklong Policy Meeting

(Bloomberg) – Any political signal on China’s troubled real estate and tech sectors will be watched closely by equity investors as they focus on the country’s highest political meeting which begins on Saturday.

Relief from the real estate sector, which has been driven by falling sales and an unprecedented cash crunch, will top traders’ agendas. They will also be on the lookout for any further fallout from the year-long crackdown on the country’s tech sector.

The timing for the National People’s Congress comes as China’s economic outlook is murky at best. Onshore stocks are still reeling from a $1.2 trillion market rout following regulatory restrictions and as financial risks in the real estate sector continue to mount. Meanwhile, soaring global inflation, divergent US monetary policy and the war in Ukraine are further complicating decision-making in Beijing.

Still, many expect stability and even a rebound in stocks, at least in the short term. China’s CSI 300 index has risen an average of 2.6% in the month following the political rally over the past 13 years, according to data compiled by Bloomberg. Traders say the event, where around 3,000 delegates gather in Beijing to shape economic policies for the year, could be the much-needed catalyst to boost sentiment

“Capital market performance around meetings could be relatively positive, and a trough for earnings growth could emerge as early as the first quarter,” China International Capital Corp. analysts, including Wang Hanfeng, wrote in a note to the media. February 27. Investors should watch for new signals regarding monetary policy, fiscal spending, tax cuts, affordable housing and infrastructure investment, they added.

Here are the key areas to watch:

Ownership issues

Investors wonder if Beijing will loosen its grip on the real estate sector. In recent weeks, authorities have pushed banks to cut mortgage rates and cut payments for homebuyers. At the same time, officials also warned against speculation, suggesting they don’t want to see another spike in house prices.

UBS AG economists including Ning Zhang said the NPC could provide more breathing space for the industry, including a targeted approach to loosening local ownership and possibly delaying the implementation of a tax land.

While struggling and generally smaller developers may continue to struggle, such a policy adjustment should benefit their larger and financially healthier counterparts such as Poly Developments and Holdings Group Co. (+9.5% since the beginning of the year), China Vanke Co. (+1% YTD in HK) and China Resources Land Ltd. (+16% YTD)

Big tech

Beijing’s year-long crackdown has wiped some $1.5 trillion from the country’s tech stocks, with the Hang Seng Tech index trading at less than half the value of its February 2021 peak.

The sector suffered another wave of selling last week, after an official call for food delivery platforms to cut fees and warnings against metaverse-oriented fundraising reignited concerns about the reach of the regulatory assault.

Economists at Societe Generale SA say Beijing may feel the need to loosen its grip as the impact on jobs from tougher regulations looks serious enough.

A softer tone to curb the expansion of private capital could give stocks such as Tencent Holdings Ltd a much-needed boost. (-5.5% YTD), Meituan (-23% YTD) as well as tech companies that have recently reported consensus-beating earnings like NetEase Inc. (-9.6% YTD) and Baidu Inc. (+10% YTD)

Digital Economy

China’s latest plan to build computing hubs and data center clusters is another milestone in its quest for a digitized economy and technological autonomy.

The initiative is part of a so-called “new infrastructure” concept and has already sent shares of service providers Nanjing Canatal Data-Centre Environmental Tech Co. (+80% YTD) and MCC Meili Cloud Computing Industry Investment Co. ( +126% YTD) booming since the official announcement.

Some investors also view the ban on several Russian banks from using the SWIFT messaging system as helping companies linked to China’s own cross-border payment system, including Brilliance Technology Co. (+19% since the start of the year) and Shenzhen Forms Syntron Information Co. (+30% YTD)

Infrastructure spending

Traders are hoping Beijing will resort to its old trick to get out of an economic downturn. A gauge of infrastructure stocks hit a nearly three-year high last month, driven by bets on construction companies, telecom operators and waste disposal companies.

The government’s budget deficit target and any further instructions to local authorities to use sales of more special bonds to fund new projects will be closely watched.

Among the top performers this year are Chongqing Construction Engineering Group Corp. (+26% YTD), China Communications Construction Co. (+16% YTD in China) and ARTS Group Co. (-7.1% YTD), with investors monitoring whether the trade still has legs.

Energy

As Beijing seeks to strike a balance between economic growth and ambitious environmental goals, traders are looking for signs of further relaxations on the use of traditional energy sources like coal while continuing to encourage the development of greener solutions such as solar energy.

As global policy is geared towards growth, “a repeat of the policy-driven power shortages, as we saw in the third and fourth quarters, will be quite unlikely this year,” Goldman Sachs Group analysts wrote. Inc., including Maggie Wei, in a note.

A more tolerant stance could bode well for hydro and wind power producers, such as China Three Gorges Renewables Group Co. (-6.1% YTD) and China Power International Development Ltd. (-15% YTD), according to China Galaxy Securities Co.

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