Traders embrace battered Chinese infrastructure stocks amid expectations of policy shift in Beijing
Gauge of 67 building and construction companies has rallied by 8.9pc this week
China Communications Construction and other infrastructure stocks are winning back favour among investors, who expect a shift to looser monetary policy and a softened stance on shadow banking in Beijing will reverse a downward spiral in share prices.
A gauge of 67 building and construction companies has rallied by 8.9 per cent this week, compared with a 1.6 per cent gain by the benchmark Shanghai Composite Index, according to data provider Shanghai DZH. The buying frenzy in the sector followed a State Council meeting this week that pushed for more flexibility in monetary policy and an acceleration in special bond sales by local authorities.
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Three notices on asset management products issued by the People’s Bank of China and other financial regulators last weekend have also fuelled the rally. The notices made it clear the vast pool of China’s asset management products will continue to be allowed to invest in non-standard credit assets – or bonds that do not trade either on stock exchanges or the interbank market. This riskier asset class constitutes a major funding source for local government financial vehicles, which are in charge of infrastructure investment regionally.
“The policy stance has shifted apparently,” said Li Zhiyi, an analyst at Shenwan Hongyuan Group in Shanghai. “It will significantly allay worries among financial institutions about these financial vehicles and increase their risk appetite.”
Shenwan Hongyuan Group recommends buying stocks such as China Communications, China Railway Construction and China Gezhouba Group, a contractor of water conservancy projects.
Chinese infrastructure stocks bore the brunt of a sell-off this year amid a crackdown on shadow banking and clean up of infrastructure projects exposed to private investment by the government that strained funding sources used by the private sector. The gauge tracking the sector had shed as much as 22 per cent until early July.
Infrastructure stocks made up only 0.7 per cent of the combined holdings of mutual funds by the end of the second quarter, close to the record low, according to GF Securities.
These stocks may gather momentum after their initial recovery this week, as the central bank is expected to further turn on its taps and boost liquidity to aid economic growth, according to GF Securities.
The People’s Bank of China may cut the reserve requirement ratio twice in the second half of 2018, according to GF Securities. On Monday, the central bank injected a record 502 billion yuan (US$73.8 billion) into the financial system through the medium-term lending facility.
“The marginal improvement in the central bank’s monetary and credit policies is conducive to liquidity unleashing,” said Yao Yao, an analyst at the Guangzhou-based brokerage. “It will continue to boost the construction sector’s valuation recovery.”