BlackRock expects Chinese policy reforms to attract capital inflows and boost stock markets

BlackRock’s head of China equities expects cement, chemicals and thermal power sectors to benefit from reforms this year

PUBLISHED : Thursday, 04 January, 2018, 7:30am
UPDATED : Thursday, 04 January, 2018, 7:30am

Chinese stocks will rise further this year as policymakers focus on the quality of growth and push through reforms to structurally improve the economy, which in turn will encourage capital inflows from investors, according to BlackRock, the world’s largest fund manager.

Although China’s economic growth is likely to slow to 6.5 per cent or even lower in 2018 from about 6.8 per cent in 2017 that will still be acceptable to policymakers and capital markets, said Helen Zhu, head of China equities at BlackRock.

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Global funds and emerging market funds are still underweight on China from an allocation perspective so increasing liquidity flows will drive Chinese markets, Zhu said.

“The quality of China’s growth and the sustainability of growth is what the market cares the most,”

Zhu said. “From this perspective, even if growth were to slow, structural improvements in the economy will lead to further gains in Chinese stocks.”

The Hang Seng Index has been extending a 36 per cent rally in 2017, making the benchmark the best performer among the world’s major equity markets. The Hang Seng China Enterprises Index, or the H-share index, gained 25 per cent in 2017 while the CSI 300 – which tracks the large caps listed in Shanghai and Shenzhen – rose 22 per cent.

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“There will be a rotation of sectors that can benefit from this year’s policy reforms however,” Zhu said. “For example, steel and coal sector were beneficiaries of policy reforms in 2016, while the aluminium sector got a boost last year. In 2018, cement, chemical industries and thermal power sectors are likely to benefit.”

Zhu is also positive on hi-tech engineering and consumer discretionary. Financial stocks, which underperformed last year, look attractive in valuations and are likely be supported by the central bank’s tighter monetary policy bias and higher interest rates.

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However, technology, media and telecom stocks are unlikely to perform as well as in 2017 given that valuations have reached record highs, and pressure from recent sales and demand data.

Meanwhile, southbound flows through the Shenzhen and Shanghai connect programmes will continue to be a driving force for Hong Kong’s equity markets because of the massive size of the mainland’s financial sector, and given the diversification needs of Chinese financial institutions, which have allocated less than 1 per cent of funds to overseas and Hong Kong markets so far.

Hong Kong’s equity bull run started in early 2017, after the launch of the second leg of the stock connect programme with Shenzhen.