"Support Measures Still Crucial Beyond Tech Stocks"
CSI300 Index Expected to Rise on Policy Surprises
If Not, Tech Stock Concentration Likely to Intensify
There is an analysis that the policies to be unveiled at the upcoming China’s largest annual political event, the Two Sessions (Lianghui), starting next week, could act as a 'catalyst' for the recent China stock market rally led by tech stocks to spread to other industries. In particular, if stronger-than-expected comments emerge in areas such as real estate and excess industrial restructuring, the CSI300 index, composed of large-cap stocks from the Shanghai and Shenzhen stock exchanges, is expected to rise. However, in the opposite case, the concentration on tech stocks is expected to intensify further.
Choi Seolhwa, a researcher at Meritz Securities, stated in a 'Two Sessions Preview' report on the 27th, "This year, due to the rise of deep tech, the China stock market has surged, so the attention to the Two Sessions is lower compared to previous years. However, the Two Sessions still hold significant meaning this year." In China, the Two Sessions refer to the Chinese People's Political Consultative Conference (CPPCC), the top policy advisory body, and the National People's Congress (NPC), the regular national legislature. They will open on March 4 and 5, respectively.
Researcher Choi said, "Although the China stock market is strong recently, the trend is led by tech stocks only, and there is no spread to other industries. This is because the Chinese economy has not yet fully recovered." He added, "For an overall rise in the stock market, recovery in industries other than tech stocks is essential, and the policy announcements at the Two Sessions can serve as a catalyst for that." Since the beginning of this year, thanks to the deep tech boom, tech-focused indices such as the Hang Seng Tech and the STAR 50 have surged sharply, while the large-cap benchmark CSI300 index has been sideways.
Researcher Choi pointed out the key points to watch at this year’s Two Sessions as ▲ a growth target around 5% ▲ a downward revision of the inflation target from last year’s 3% to 2.0% ▲ the intensity and direction of the expansionary fiscal policy previously disclosed ▲ continued monetary easing ▲ the scale of stimulus measures to prevent further decline in the real estate market ▲ strategic industrial policies including artificial intelligence (AI) ▲ and excess industrial restructuring.
China is expected to maintain an annual growth target around 5% at this year’s Two Sessions, while the inflation target based on the Consumer Price Index (CPI) is expected to be lowered from the previous 3% to 2%. Researcher Choi noted, "The 1 percentage point downward adjustment in the target is not very significant in practical terms," adding, "What is more important is whether China will actually escape deflation this year, which has been confirmed over several years."
The key in fiscal policy is the intensity and direction of spending. The market expects China to raise the general fiscal deficit ratio from 3% to 4% of GDP and to increase the issuance of special government bonds compared to last year. Researcher Choi explained, "If the market’s current expectations are met, the total fiscal expenditure (broad sense) will increase by 4.1 trillion yuan to 13.1 trillion yuan compared to last year," adding, "The additional spending is expected to be allocated to local government debt refinancing, commercial bank capital replenishment, old-for-new replacement and equipment renewal policies, social welfare, and national strategic industries."
Monetary policy is expected to be 'appropriately accommodative' as revealed at last year’s economic work conference. Based on this, Researcher Choi maintained a forecast of a 30 to 40 basis points (bp = 0.01 percentage points) interest rate cut annually. Regarding real estate, since the rebound momentum has weakened this year, the impact on the financial market will depend on the scale of funding and the intensity of relief measures to be announced at the Two Sessions. He also expected industrial policies to be announced in a direction that re-emphasizes technological innovation and self-reliance due to the rise of deep tech. Furthermore, he emphasized the importance of whether the stance on excess industrial restructuring will be strengthened at this year’s Two Sessions.
Researcher Choi said, "At this point, the areas that could exceed market expectations at the Two Sessions are real estate and excess industrial restructuring," explaining, "Because market expectations are not high and these areas can partially resolve China’s chronic deflation problem." Conversely, the area that could fall short of market expectations is the scale of fiscal spending.
He added, "As a result, stock prices will move depending on whether there are policy surprises," and forecasted, "If stronger-than-expected comments come out regarding real estate and excess industrial restructuring, the China stock market could see a spread of price increases from the tech stock dominance to other sectors such as steel and real estate. In other words, the relative strength of large-cap stocks like those in the CSI300 will increase."
However, Researcher Choi noted, "Currently, the 12-month forward price-to-earnings ratio (PER) of the CSI300 index is 15.2 times, which has risen to the +1 standard deviation level over the past five years, so it does not have strong value appeal," adding, "if the macro stimulus measures at the Two Sessions meet consensus or fall short of expectations, the concentration on tech stocks with higher industrial growth visibility could rather intensify. The 12-month forward PER of the Hang Seng Tech is 26 times, which is still relatively low compared to the past.
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