Goldman: 5 key developments in Chinese markets since the national congress

Chinese President Xi Jinping. Feng Li/Getty Images

Chinese markets have largely stayed out of the headlines since President Xi Jinping consolidated power at the 19th National Congress in October.

Shares on the benchmark Shanghai Composite index have dipped by 3% since the Congress, but stocks on mainland China are still up by around 4.4% for the year.

And the Chinese bond market came under pressure in mid-November, as bond yields rose amid tighter liquidity and a broader selloff on global markets.

There have been no major aftershocks, but Goldman Sachs note that Chinese policymakers have still been busy implementing key changes to the economy — mostly relating to further engagement with the global economy.

In a research note to clients, Goldman highlighted five key areas where regulatory shifts are underway which could have implications for equity markets.

1. Cleaning up the environment

China’s move to eliminate less efficient steel and coal production over the past year is just the beginning of a long-term strategy that will underpin commodity prices in the years ahead.

“China needs to cut annual emissions by 50%-70% to meet its own air quality standards, implying a potential decade of accommodating policy measures,” Goldman said.

“Capacity cuts/suspension, winter pollution control measures and inspection-related disruptions will tighten supply, implying higher prices for longer and a very different cycle versus the past.”

2. Integration with global markets

Back in June, global index provider MSCI said it would finally include shares from mainland China on the MSCI Emerging Markets Index for the first time, starting next year.

In the meantime, Chinese policy makers have raised the prospect of selected Chinese stocks to convert freely onto the global-linked Hong Kong stock exchange, which will allow more foreign investment in Chinese companies.

“China’s equities are going global and aside from the structural changes that will occur as mainland assets converge with international standards, a unique and supportive flow narrative is building to the benefit of numerous institutions that sit at the crossroads,” Goldman said.

3. Taking the danger out of financial products

Despite increasing concerns among analysts around debt levels in China’s shadow banking system that are hard to quantify, Goldman says Chinese authorities are making meaningful efforts to address risk.

“This time China’s financial regulatory bodies are coming together to close the regulatory loopholes governing asset management product,” Goldman said.

“This is the first broad, coordinated regulatory document released by the newly established Financial Stability and Development Committee.”

Goldman said the short-term pain from a crackdown on the murky world of wealth management products will be outweighed by long-term gain, with larger Chinese banks set to benefit as they face less compliance risk.

4. Healthcare overhaul a “game changer”

“China is paving the way for the recognition of international medical trials. Historically drug approvals could take significantly longer to be released on the mainland, in part due to capacity bottlenecks for certified clinical trial sites,” Goldman said.

Multinational pharmaceutical companies will now be able to conduct some early-stage trials in China, with processes in place to fast-track approvals for select trials carried out offshore.

Goldman called the developments a “game changer for global pharma”, with multinational companies well-placed to gain market share in the higher-end market as a result of the deregulation.

5. Reduced travel bans

“Travel tour restrictions saw Chinese visitations to Korea fall 60% while similar restriction reports in Japan continue to be an overhang for many exposed stocks,” Goldman said.

“For now, however, geopolitical tensions across Asia appear to be easing, and the tourism pressure valve is releasing faster than many expected.”

As more Chinese tourists travel abroad, it bodes well for regional casinos and consumer products outlets spanning cosmetics to luxury apparel.

And that’s likely to continue to benefit Australia, with data from the ABS in October showing China is already on the verge of becoming Australia’s largest source of international visitor arrivals.

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