Korea Investment Corp. (KRINVTZ) and HI Asset Management Co., awarded permission to invest in mainland China, expect consumer stocks to benefit from government efforts to reduce the Chinese economy’s reliance on exports.
“Consumption-related stocks are likely to outperform, especially durable goods such as autos or home appliances as the government is likely to move to help boost disposable income,” Sohn Je Seong, who helps manage $5.3 billion at Seoul-based HI Asset, said in a March 27 interview. “The Chinese government, which moved in advance to tighten, has enough policy tools and more room to wiggle.”
HI Asset became in December one of 147 companies with Chinese government-approved qualified foreign institutional investor status to buy so-called A shares on the mainland and is awaiting its investment quota. Korea Investment, the $45 billion sovereign wealth fund, was awarded a $200 million investment quota on March 9.
A gauge of consumer-staple shares on the CSI 300 Index (SHSZ300) is the best performer of 10 industry groups since March 5 when Premier Wen Jiabao announced a lower economic growth target for China and signaled a shift toward expansion driven more by domestic consumption. The industry measure’s 2.9 percent decline through yesterday compares with an 8.3 percent drop by the CSI 300, which measures stocks in Shanghai and Shenzhen.
“Domestic demand-related companies are expected to post high growth as the consumption market is set to expand,” Park Sang Il, a spokesman at Seoul-based Korea Investment, wrote on March 28 in an e-mail response to questions. “We’re currently working to set up a detailed investment strategy.”
The consumer gauge, which includes liquor makers Kweichow Moutai Co. (600519) and Wuliangye Yibin Co., traded at 19.7 times estimated profit on March 26, the biggest premium to the CSI 300 since Jan. 3. An index of consumer-discretionary companies such as Suning Appliance Co. is valued at 10.8 times profit.
The Shanghai Composite Index (SHCOMP) has fallen 7.5 percent since Wen announced the new growth target of 7.5 percent for this year, down from an 8 percent goal in place since 2005. The government highlighted plans to endorse higher minimum wages during this month’s National People’s Congress.
China’s Commerce Ministry plans to hold a program to boost consumption from April 2-May 4, according to a March 9 statement on its website. The package is meant to improve people’s quality of life and expand consumer spending, the ministry said, without providing details of specific measures.
The two consumer gauges on the CSI 300 index are the top performers since Nov. 9, 2008, rising at least 99 percent through yesterday after China unveiled 4 trillion yuan ($634 billion) of stimulus in the wake of the global financial crisis. The CSI 300 increased 46 percent in the period.
The index rose 0.5 percent as of 1:03 p.m. today. The consumer discretionary gauge climbed 1 percent, while the consumer staples measure lost 1.9 percent.
“Executing a more proactive fiscal policy is a core part of China’s 2012 economic agenda,” Goldman Sachs Group Inc. analysts led by Helen Zhu wrote in a March 27 report. “The major beneficiary is mass market consumption as disposable incomes rise faster than wages.”
The Goldman Sachs analysts are favoring retailers and building-material companies, according to the report. The Chinese Finance Ministry’s 2012 budget shows increased spending on areas including education, health care, social housing and employment, which were the industries that grew the fastest in 2011, they wrote.
The Shanghai Composite slumped 24 percent in the past 12 months as the government tightened monetary policy to curb inflation and Europe’s debt crisis hurt overseas shipments. The gauge trades at 9.4 times estimated profit, compared with the Standard & Poor’s 500 Index’s multiple of 13.5, according to data compiled by Bloomberg. The 30 percent discount is the widest gap since at least January 2006, the data show.
“We believe China is more attractive in terms of market size and future growth potential, compared with other markets,” Korea Investment’s Park wrote by e-mail.
The sovereign fund was one of 15 so-called QFIIs that were granted a combined $2.11 billion of investment quota this month, a record amount since the program first started in 2003. Foreign institutions get a QFII license from the China Securities Regulatory Commission first before they obtain quota from the State Administration of Foreign Exchange to buy yuan-denominated stocks and bonds.
Policy makers have accelerated quota allotments as foreign- exchange reserves dropped and stocks slumped. SAFE issued $2.91 billion of quota this year to 23 institutions, compared with 2011’s $1.92 billion and a high of $3.4 billion in 2006, according to data posted on its website on March 9. The regulator has granted a total of $24.55 billion in quota to 129 foreign firms since 2003, the data showed.
The CSRC plans to raise QFII quotas and will broaden the scope for investments to attract more overseas funds, Vice Chairman Yao Gang said at a forum on March 25. That will benefit HI Asset, which is waiting for its quota.
“Chinese stocks have valuation merits, with the benchmark index underperforming for the past two years,” HI Asset’s Sohn said. “China’s tightening policy, which had been the biggest drag on the market, has now shifted its course. I believe there’s room for gains.”
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