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A Stock Trader’s Guide to Navigating China’s Third Plenum

(Bloomberg)

(Bloomberg) -- A high-profile gathering of China’s top leaders next week will be keenly watched for the winners and losers in the country’s stocks, which have struggled lately in bear-market territory.

The Third Plenum, an event held roughly once every five years where major economic and political changes are announced, will offer investors clues on Beijing’s direction with regard to markets and the economy. A sluggish macro picture and rising geopolitical challenges weigh in the backdrop.

“What will define the market’s direction is just how convincing the policies are perceived by investors as addressing the structural slowdown in growth and the challenges in the real estate sector,” Gary Dugan, chief executive officer of The Global CIO Office, said in a note. 

The meeting comes at a crucial moment for the Chinese stock market, as a policy-driven rally falters. The MSCI China Index has entered a technical correction, while a gauge of Chinese equities listed in Hong Kong is flirting with the same milestone. The CSI 300 Index capped a seventh week of losses last Friday, the longest losing streak since early 2012.

The weakness may well continue after the event, if history repeats itself. Since China’s equity markets were first launched in the early 1990s, performances of the Shanghai Composite Index one week and one month after previous Third Plenums have often been lackluster.

However, this meeting along with earnings progress should help catalyze an expansion in valuations, according to Yifan Hu, chief investment officer for Greater China and head of macroeconomics for Asia-Pacific at UBS Group AG.

If the leadership can deliver on reforms that enhance market mechanisms, boost private enterprise and offer stable and transparent regulation, “the Chinese equity market would probably rise significantly in the coming months and tech giants like Alibaba, Tencent and so on will benefit from multiple expansion and institutional inflows,” said Redmond Wong, market strategist at Saxo Capital Markets.

Here are some sectors that traders and analysts are watching:

New Productive Forces

A campaign by Xi Jinping to foster “new productive forces,” as growth engines like property sputter, is set to gain attention. The slogan, which covers areas including electric vehicles, spaceflight and quantum technology, has helped shares of related firms rally.  

Further efforts to gain dominance in high-tech manufacturing would help stocks in those sectors, Barclays strategist Kaanhari Singh and economist Yingke Zhou wrote in a note. 

But a lack of fresh measures to support tech innovation and supply-chain self-reliance “will read as more of the same and largely be a non-event for markets,” they said.

Shares that may move on the outcomes include artificial intelligence firm Zhongji Innolight Co., and Zhejiang Wanfeng Auto Wheel Co., which is related to the so-called low-altitude economy that comprises things like drones, air delivery and even flying cars.

Fiscal and Tax Revamp 

A potential new round of fiscal and tax system changes may boost information-system development.

Servyou Software Group Co., a firm that operates as a financial and taxation information service provider, has rallied in the leadup to the Third Plenum, as have related companies such as Pansoft Co. and Beijing Join-Cheer Software Co.

“There are investment opportunities in fiscal and tax digitalization-related fields,” AVIC Securities Co. analysts including Zou Runfang wrote in a note. “The realization of digital tax management by enterprises has become the top priority of the national tax system reform.”

SOEs

Hopes are high for Beijing to press ahead with efforts to boost efficiency at state-owned enterprises, which comprise about a fifth of China’s total market value. That might structurally boost their return on equity and valuations. 

“Brokerages and leading state-owned enterprises may provide strong support” for Chinese stock gauges given the likely outcomes from the Third Plenum, Zhongtai Securities analysts including Xu Chi wrote in a note.

Top SOEs include those in traditional banking, telecom and insurance industries like China Construction Bank Corp., China Mobile Ltd. and China Life Insurance Co.

Power Market Reform 

China’s power stocks have enjoyed a good run this year owing to electricity price hikes and investor preference for high-dividend-paying and state-owned enterprises, and more recently after a call by Xi to deepen electricity market reform. 

Possible reforms to be unveiled at the Third Plenum include incentives to boost renewable energy usage, which might trigger more grid investments, according to Citigroup Inc. analysts. There might be new policies on market mechanisms for price setting, which may boost usage of solar and wind energy with minimal variable costs, they added.

These measures are expected to benefit companies like Pinggao Electric Co., XJ Electric Co., Sieyuan Electric Co, CGN Power Co. and China Longyuan Power Group, analysts including Pierre Lau wrote in a note. 

--With assistance from Ivy Chok and George Lei.

©2024 Bloomberg L.P.

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