China Traders Await Policy Signals to Boost Faltering Stocks

(Bloomberg) --

China's defense and technology sectors may offer investor opportunities as the nation's top political meeting starts this week, which could help inject fresh impetus into the country's equities.

Measures to help achieve President Xi Jinping's pledge of a carbon neutral economy by 2060 could be released at the meeting which begins Friday, according to brokerages including Guotai Junan Securities Co. Plans for an expanded defense budget are also likely to be published at the National People's Congress, Tianfeng Securities Co. analysts said.

Also topping analysts' watch lists are policies to drive China's economic growth in the post-pandemic era. Approval of a five-year plan, which includes strategies to cut dependence on the West for crucial components like computer chips and make bets on emerging technologies such as hydrogen vehicles, is expected. Beijing has repeatedly signaled a desire to reduce reliance on exports and expand domestic consumption under its “dual circulation” mantra.

Such plans could help bolster investor confidence after recent equity declines, amid concerns about high valuations and official warnings about bubble risks. The CSI 300 Index has lost more than 6% since hitting its highest level since 2007 in February, one of the worst performers in Asia Pacific during the period. Stocks rebounded on Wednesday to have their best day in nearly a month, led higher by financial and energy-related shares.

“New policy directions from the meeting may provide fresh points of focus for the market, boosting sentiment,” wrote Essence Securities Co. analyst Chen Guo in a Monday note. “Historically A shares had solid performance” during and in the week after the NPC, Chen added.

Here are the sectors to watch:

Carbon Neutral

In September, President Xi announced a target for China's emissions to reach net-zero in less than 30 years after peaking in 2030. Market watchers are anticipating the announcement of specific measures for the ambitious undertaking over the next five years.

China will need total investments of about 100 trillion yuan ($15.5 trillion) to reach carbon neutrality by 2060, roughly equivalent to the country's annual gross domestic product in 2020, wrote Goldman Sachs Group Inc. analysts including Hui Shan in a note last week.

Chinese authorities have long been concerned about overcapacity in the renewable energy sector given investors' enthusiasm to pile in the industry, partly due to generous government subsidies. The National Energy Administration released a consultation paper late Tuesday that proposed to require provinces to set a “guaranteed grid-connection quota” for new wind and solar projects.

Solar and wind stocks broadly declined on Wednesday in response to the publication, with Tongwei Co. and Xinjiang Goldwind Science & Technology Co. among the biggest losers in the CSI 300 Index. However brokerages including BOCI Research Ltd. and Haitong Securities Co. suggest investors buy certain industry leaders on the dips given the possibility of policy support, as China strives to achieve the carbon neutrality goal.

“The industry's growth prospects remain positive,” said Haitong Securities Co. analyst Zhang Yichi in a note. “We view any correction in stock prices as buying opportunity.”

Analysts are also upbeat on electric vehicle supply chain companies such as battery maker Contemporary Amperex Technology Co., biodegradable plastic manufacturers like Kingfa Sci & Tech Co., and large waste treatment firms including Wangneng Environment Co. and Chongqing Sanfeng Environment Group Corp.

National Defense

Military spending is likely to accelerate from this year through 2025, with the annual growth rate exceeding the roughly 7% level seen in the previous five years, Tianfeng Securities Co. analysts including Li Lujing wrote in a Monday note.

China's push to ensure that the strength of the military grows in proportion with the economy may boost shares such as AVIC Shenyang Aircraft Co., Jiangxi Hongdu Aviation Industry Co., and AECC Aviation Power Co., they said.

Technology

Beijing has stressed the pressing need to make breakthroughs in cutting edge tech such as microchips and other crucial components to reduce dependence on foreign products, particularly at a time of heightened tensions with the U.S.

Technological self-efficiency could be raised to a higher priority during the NPC, market watchers say. That will benefit shares of high-tech manufacturing firms and chip makers such as Avary Holding Shenzhen Co., Maxscend Microelectronics Co., Will Semiconductor Co. and Shenzhen Goodix Technology Co.

Rural Development

The revitalization of rural areas and agriculture is also likely to be high on policy makers' agenda, according to analysts. Recent government statements underlined the importance of food security and innovation in seed breeding and modern farming, as well as increasing rural income to beef up the spending power of residents in the countryside.

Watch shares of agricultural firms Wens Foodstuffs Group Co., Tech-Bank Food Co., New Hope Liuhe Co., Yuan Longping High-tech Agriculture Co., Beijing Dabeinong Technology Group Co., as well as consumer discretionary names such as Geely Automobile Holdings Ltd. and Midea Group Co.

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With assistance from Bloomberg