Chinese stocks will extend their rally after the government vowed to carry out the broadest expansion of economic freedoms since at least the 1990s, Wilmington Trust said.
The iShares China Large-Cap ETF (FXI:US), the biggest U.S.-listed exchange-traded fund, jumped the most since July on Nov. 15, gaining 4.4 percent to $38.44. The Bloomberg China-US Index of the most-traded Chinese stocks in the U.S. climbed 5 percent in the biggest weekly advance in 10 months, while the Shanghai Composite Index (SHCOMP) gained 1.4 percent.
China pledged to allow more private investment in the state-controlled industries, loosen its one-child policy and expand farmers’ land rights, according to a Communist Party policy decision published by Xinhua News Agency on Nov. 15. The nation is liberalizing its policies in an effort to bolster an economy that’s heading to its weakest annual expansion since 1999. The Shanghai benchmark index has slumped 5.9 percent this year as the sluggish growth has cut into corporate earnings.
“Now that we have confirmation that policies are moving in the right direction, valuations and stock prices should rise through the end of 2013 and into early 2014,” Clement Miller, an investment strategist at Wilmington Trust, which manages about $79 billion in assets, said by phone Nov. 15 from Baltimore. “As the economic power is gradually shifting from the state-owned enterprises to the private sector, investors need to look at opportunities with companies that are able to take advantage of the liberalization.”
The Shanghai gauge traded at 8.3 times 12-month projected profit on Nov. 13, the lowest since August, after falling 12 percent from February. The Standard & Poor’s 500 Index added 0.4 percent on Nov. 15, extending a record, as investors assessed data on factory production amid speculation the Federal Reserve will maintain stimulus.
The Communist Party document, covering 60 measures, follows a communique issued Nov. 12 after a four-day party conclave in Beijing that pledged to elevate the role of markets in the nation while keeping the state in a “dominant” position.
Couples may have two children if either parent is an only child, according to the party decision. Under China’s current family-planning policy, couples are allowed to have a second child if both parents are only children. Last week’s document said the party plans to implement the reforms by 2020.
China will develop a “mixed ownership economy” that helps state-owned assets maintain or increase their value and boost their competitiveness, according to Xinhua.
The nation will accelerate convertibility of the yuan and freeing-up of interest rates, improve treasury yield curves and let qualified private investors set up small-to-medium sized banks, according to the decision.
“On balance, the news has been pretty positive,” Julian Mayo, who helps manage $2.5 billion in emerging-market assets as the co-chief investment officer at Charlemagne Capital Ltd. in London, said by phone Nov. 15. “It will continue to have a positive impact in the medium term as markets adjust to these changes.”
Youku Tudou Inc. (YOKU:US) led a rally in Chinese stocks in New York after saying it will make a profit this quarter. Its American depositary receipts climbed 11 percent to $29.30 on Nov. 15, with volume four times the 90-day average. It jumped 13 percent for the week, the best performance in three months.
The Beijing-based company, owner of China’s biggest video websites, forecast it will make a profit in the fourth quarter on a non-generally accepted accounting principles basis, according to its Nov. 14 statement. The company’s third-quarter revenue of $140.2 million was in line with the average projection of eight analysts surveyed by Bloomberg.
Home Inns, the biggest operator of budget hotels in China, rallied 11 percent to $41.31, the biggest advance since November 2010. Its weekly surge of 17 percent was the steepest since November 2009.
The Shanghai-based company reported adjusted profit of 3.7 yuan (61 cents) for each of its ADR, beating the average 3 yuan mean estimate of three analysts surveyed by Bloomberg. That compared with 2.9 yuan per ADR in the year-ago period, according to its statement Nov. 14.
“The market will be happier with this more specific document,” Wilmington’s Miller said. “Big state-owned companies are gradually losing their monopolies to private companies. As the economic power is gradually shifting from the state-owned enterprises to the private sector, investors need to look at opportunities with companies that are able to take advantage of the liberalization.”
ADRs of China Petroleum (SNP:US), Asia’s biggest refiner, known as Sinopec, jumped 4.5 percent to a six-month high of $85.69 in New York. They traded 2.2 percent above the stock in Hong Kong, the widest premium this month. Each ADR represents 100 underlying shares in the company.
Simon Powell, head of oil and gas research at CLSA Ltd., said Nov. 12 investors had expected an announcement on liberalization of resource prices and the opening of the energy industry to more private investment, while any fuel price reforms would be “mildly positive” for Sinopec.
China Life Insurance Co., the nation’s biggest insurer, surged 6.4 percent to $42.45 in New York, 3.3 percent above its Hong Kong stock. The premium was the biggest since December 2011.
“The support to the private sector and liberalization of certain industries is the most important one for the investment case in China,” Elena Ogram, a Zurich-based investor at Bank Bellevue AG, who oversees $50 million in emerging-market assets including Chinese stocks, wrote by e-mail Nov. 15. “More details are needed, especially on land reform, SOE reform and Hukou,” or China’s residence registration system.
The Hang Seng China Enterprises Index (HSCEI) in Hong Kong advanced 3 percent last week to 10,702.70, after rallying the most in three months on Nov. 15. The Shanghai Composite jumped 1.7 percent to 2,135.83 on Nov. 15 before the report by Xinhua detailing the changes.
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