By maintaining a moderate rate of growth and not promising a huge stimulus the Chinese government has shown that it is not being “hijacked by the markets,” Steven Sun, HSBC’s Head of China Equity Strategy said Monday.
“Clearly the government doesn’t want to be hijacked by the (equity) market, and instead is focused on doing the right thing. At the moment that appears to be under appreciated by the market, but eventually I think that’s the right approach,” Sun told CNBC’s “Cash Flow.”
“I think the government doesn’t want to repeat its mistake from the 2008 stimulus, by over-stimulating the economy. Instead it is trying to maintain a moderate level for growth,” he added. China has a growth target of 7.5 percent for 2012.
Recently weak Chinese data have contributed to a sharp selloff in Asian equity markets, with participants calling for more support from the world’s second-largest economy.
China, however, last week erased market expectations of another 2008-style stimulus while reiterating its commitment to growth. The Chinese government launched a 4 trillion yuan ($630 billion) stimulus package - equivalent to about 13 percent of GDP – in 2008 to prop up the economy following a slump in global markets.
But Sun says instead of a big-bang stimulus, China will boost growth via monetary measures like cutting bank’s reserve requirement ratios and through investments in infrastructure projects.
Because of the government’s support for the infrastructure sector, Sun says investors should be overweight infrastructure related sectors such as cement, railway equipment manufacturers and selected construction machinery.
“These sectors have been underperforming defensives, but this is reversing due to cheap valuations and a better earnings outlook on pro-growth policies,” Sun added.