GO
Loading...

At last, China stocks get something to shout about

Monday, 18 Nov 2013 | 2:29 AM ET
Shanghai, China
Tomohiro Ohsumi | Bloomberg | Getty Images
Shanghai, China

Chinese shares hit a one-month high on Monday as news in China of sweeping economic reforms ignited a fresh lease of life into what has proven to be Asia's worst performing major market this year.

The benchmark Shanghai Composite stock index rose almost 2.9 percent to a peak of about 2,198, while Hong Kong's Hang Seng stock index jumped 2.6 percent to its highest level in over nine months.

(Read more: China's sweeping reforms: What you need to know)

Beijing late on Friday unveiled a 60-point reform plan for the world's second-biggest economy, which is moving away from investment-led growth towards consumption. The plan included steps to open up Chinese markets to more competition and step-up financial reforms such as giving qualified private investors the go ahead to set up banks.

It also included a decision to relax China's controversial one-child policy – this itself sparked gains of more than 10 percent in baby-related stocks in Hong Kong such as milk powder maker Yashili International.

China announces sweeping reforms
David Kuo, CEO, The Motley Fool Singapore shares his take on China's new wave of wide-ranging reforms.

(Read more: Is a baby boom coming for China)

"China is aiming high," said David Kuo, CEO at investing firm The Motley Fool Singapore. "It is saying these are the over-arching things we want to achieve. If they can achieve 50 percent of that, then that would be a great achievement."

"China is finally acknowledging that it's not the great allocator of capital and that companies should be able to decide if they are profitable or not. These are things we should welcome," he added.

In a sign of renewed optimism about China shares, Swiss bank UBS on Monday upgraded China stocks to "overweight" and said the market was likely to outperform Asia ex-Japan markets in the next few months.

Deutsche Bank meanwhile said it expected a 20 to 25 percent "upside" to the MSCI China index over the next 12 months from current levels around 64.48.

"The mega reform package approved by the Third Plenum is by far the most profound in a decade, if not decades, in terms of scope, depth, and impact," Deutsche Bank said in a note, referring to this month's key policy meeting of China's leaders at which the economic reforms were discussed.

"We expect market sentiment to be significantly lifted, as investors will gradually understand the increase in China's growth potential as well as the improving sustainability of economic growth and stability of the financial, real estate, fiscal, and pension systems due to reforms," Deutsche said.

(Read more: China's new home prices rise at record pace)

Will China's reforms tackle its credit problems?
Chi Lo, Senior Strategist, Greater China, BNP Paribas Investment Partners and Frederic Neumann, MD & Co-Head of Asian Economics Research at HSBC say shadow banking and credit risks could still rise in the next few years despite China's reform plans.

China's equity market has been the poorest performing major stock market in Asia this year. It is down about 4 percent, a performance that contrasts with a rise of roughly 45 percent in Japan's Nikkei index and a rise of around 16 percent in Australian shares.

Still, the market has recovered about 17 percent of its value from a 4-1/2 year low hit in June amid a spike in Chinese money market rates that sparked fears about a credit crunch.

And analysts say the market now appears to be going through something of a re-rating.

"Investors have wanted to see the reforms that have been promised come through," Andrew Sullivan, director for Asian sales trading at Kim Eng Securities, told CNBC.

"That is what we have seen in the last week really, when we first got the general statement from the Third Plenum everyone was disappointed. When we go the details on Friday everyone was emboldened and said yes we're now going in the right direction," he said.

—By CNBC.Com's Dhara Ranasinghe; Follow her on Twitter @DharaCNBC

Featured

Contact Asia News

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More

Asia Video