Investors pile into defence stocks after South China Sea ruling

China also makes formal announcement of new national aircraft engine company

PUBLISHED : Wednesday, 13 July, 2016, 10:27pm
UPDATED : Wednesday, 13 July, 2016, 11:02pm

Investors ploughed into defence industry-related stocks in Hong Kong and the mainland markets on Wednesday, for the second day running, after an international tribunal court ruled on Tuesday against Beijing’s claims to contested areas of the South China Sea.

The boost to sentiment came as the government also announced the formation of a new national aircraft engine company, that will become the heart of the country’s future aerospace and defence ambitions.

China Aerospace International Holdings jumped 1.02 per cent to close at 99 HK cents, adding to a 3.2 per cent gain on Tuesday.

AviChina Industry & Technology gained 0.34 per cent to close at HK$5.87 after climbing 2.3 per cent in the previous session.

Shanghai-listed China Shipbuilding Industry rose 0.42 per cent to 7.23 yuan, extending its 0.4 per cent gain on Tuesday, while Shenzhen-listed Sainty Marine Corp gained 4.97 per cent to close at 10.13 yuan, after rising 5 per cent the day before.

The State-owned Assets Supervision and Administration Commission said in a notice published on Wednesday on its website that it had now approved government investment in the newly formed China Aerospace Engine Group.

The mega company merges 46 entities into one, with which China aims to boost its aircraft engine manufacturing capability, analysts said.

China is now expected to pump hundreds of billions of yuan into the civil and military aircraft engine building industries.

China and the US have verbally fought on the [South China Sea] issue, but investors generally do not believe there will be any immediate military confrontation
Ben Kwong Man-bun, executive director at KGI Asia

In the past, its reliance on imports had been seen as restricting its military capability.

Aircraft engines and gas turbine development have been given top priority, within a list of 100 key sectors in the country’s 13th five-year plan until 2020.

The Communist Party’s Organisation Department announced various top management appointments at China Aerospace Engine in March. It was registered on May 31, with initial capital of 50 billion yuan.

The international tribunal in The Hague ruled on Tuesday that China’s claims to sovereignty over much of the South China Sea had no legal basis, a claim Beijing immediately rejected.

“We continue to favour defence stocks and advise investors to pile in,” Bohai Securities wrote in a report on Wednesday.

Louis Tse Ming-kwong, director of VC Brokerage, said if there was an escalation of the dispute, or even conflict, however, “Hong Kong and mainland markets would be hard hit”.

Ben Kwong Man-bun, executive director at KGI Asia, said there had, as yet, been no significant fallout on stock markets from the ruling.

“China and the US have verbally fought on the issue, but investors generally do not believe there will be any immediate military confrontation,” Kwong said, adding the tension has failed to offset the optimism generated by a record close for the Dow Jones Industrial Average index in New York, which had also helped fuel a global market rally.

“As the US market hit a record high and Britain now has a new prime minister, Brexit fears have diminished,” Kwong said.

“The gold price and the yen both fell, which showed investors are coming out of safe havens and started to invest in stocks again. This will help boost the Hong Kong stock market as it is trading at a very low valuation.”