Premier Li speech boosts Chinese stocks, with more measures to support the economy


Fund Commentary
17 Apr 2015


China stocks continued to rally, thanks to ongoing easing policies and a supportive speech by Premier Li.  A shares outperformed H shares with the CSI 300 Index up 13.4% and the MSCI China Index up 2.4%.  Given the weak macro trend, China announced another interest rate cut of 25 basis points in early March, which came as no surprise to the market as it had been expecting several rounds of rate cuts.  

The real boost came after Premier Li promised a raft of additional measures to support the economy if he saw downside risk to this year’s 7% GDP growth target.  Chinese property stocks, having lagged year to date, finally outperformed the market following further policy support.  Share prices of small and mid cap stocks, especially those that had reported better than expected results, performed strongly.

The economy remains  slow with a weakened PMI reading of 49.6 in February.   New construction starts and national housing sales in the first two months of 2015 continued to decline year on year, despite the lifting of restrictive property measures in the second half of 2014. This trend prompted the government to step up policy easing, not only did it cut interest rates again by 25 basis points, it also further relaxed the mortgage lending policy.  The new down-payment requirement of the second home mortgage is now 40% (60-70% previously) while property transaction tax on homes owned over two years (five years previously) will be waived.  The Investment Adviser expects this move to stimulate upgrade and investment demand in the coming months, which in turn is positive for Chinese property stocks.

The Chinese government’s announcement allowing China mutual funds to buy Hong Kong (HK) stocks directly is a big re-rating catalyst for the market.  The Investment Adviser not only  envisages arbitrage opportunities for dually listed H shares (A shares in general are trading at a 20% premium to dually listed H shares) but also expects re-ratings of small and mid cap stocks that trade at deep discount to A share listed peers – small and mid cap Technology, Media and Telecommunications (TMT) stocks fall into this category.

The Fund was up 3.39% in March, thanks to a strong run of some non-index stocks such as Li Ning, New Ocean Energy, China CYTS Tours and Sinosoft, up 40-50%, on better than expected results. The Fund’s exposure to Chinese properties (11.5% as of end of March) also contributed 0.64% .  Further, as 6.4% of the Fund is invested in H shares that are dually listed in the A share market and trade at 50% discount to their A share counterparts, re-ratings are anticipated given the sizable valuation gap.

The views and statements  contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 14/04/15 and are based on internal research modelling.