The leaders have spoken. In 2014, China’s economy will grow by 7.5% from a year earlier, retail sales will rise 13.5% and investment will increase 17.5%. Except that won’t necessarily happen; the figures only offer guidance to what may play out. In fact, many of the pledges made at the National People’s Congress this week have only cast further doubt on GDP growth this year, which started to slow towards the end of 2013. “With a flat government budget deficit, lower FAI growth target and a currency difficult to devalue to boost exports, the chance of not being able to reach 7.5% [GDP target] is quite high,” Hong Hao, managing director and chief China strategist at Bank of Communications in Hong Kong, said in an email on Friday. This doesn’t make China stock-picking fun. So when in doubt keep it simple, the experts suggest. “My approach is quite easy,” Francis Cheung, head strategist at brokerage CLSA in Hong Kong said in an email on Thursday. “The best strategy is to buy sectors that government policy is favouring.” Cheung and Hao both cited clean energy and national defense as sectors to watch. Outside of the more obvious picks, Cheung noted that Beijing has pledged support for Macau, thereby offering a boost to the gaming sector. A darling among analysts is currently Las Vegas Sands (LVS.NYSE), which has a big exposure to the territory. “They are also very supportive of broadband growth, 4G, eCommerce which is good for internet sector,” said Cheung. Lenovo (0992.HKG) is a widely cited internet play because of the growing demand for its cheap smartphones. Take note, however. The Chinese economy is in a very unpredictable place right now. Emerging market volatility and mounting geopolitical tensions in East Asia and Europe are adding to this uncertainty. Now is not the time for an uncalculated one-way bet that anything China-related will only go up.
Sell houses, buy guns
The announcement of a 12.2% increase in China’s defense budget this week surprised few. Up from last year, it comes amid hardening territorial disputes with Japan as well as some tension with South Korea. Taiwan remains a key issue. Perhaps it’s a good idea to cash out of that condo in Hainan, China’s “Hawaii” where property prices have surged even beyond the general boom in China real estate, and invest in US defense manufacturers. Washington’s “pivot” to Asia announced in 2012 already created room for additional demand, trade group Aerospace Industries Association has said previously. Any conflicts in the region involving China will be naval and aerial, so demand for the tanks that General Dynamics (GD.NYSE) specializes in probably won’t show much change. Northrop Grumman (NOC.NYSE) could sell more drones and missile systems, although those weapons are more commonly linked to North Korea’s posturing. The big deals are most likely for aerial defense and combat, favouring aerospace giants Boeing (BA.NYSE) and Lockheed Martin (LMT.NYSE). Boeing supplies America’s international allies with aircraft including the Super Hornet strike fighter and Apache combat helicopters. Lockheed Martin is building the radar-defying F-35 joint strike fighter that could give Japan and co a much needed advantage against China’s rapidly improving air warfare capabilities. There lies the risk that the US government might not sanction exports of high-margin advanced technologies coming online to prevent the chance of weaponry falling into enemy hands and avoid the risk of inflaming regional tensions. But with China’s large arms spending and boisterous – if so far peaceful – strategic ambitions showing no signs of abating, lawmakers might be persuaded to be more open to business.
Don’t sweat the default
Investors may have caught word of ripples moving through China’s corporate bond market. Shanghai Chaori Solar Energy Science and Technology (002506.SHE) missed a RMB89 million payment on a RMB1 billion bond today, making it the first onshore Chinese company to default without the government dashing in to save the day (We suppose there might be a few more hours left on Friday for officials to do that, but it seems unlikely). Chaori is a small company and a default such as this poses little systemic risk to China’s financial system. In fact, it’s healthy for the development of the country’s bond market. After all, how do you price a bond if it has no chance of defaulting? Few international investors have access to China’s bond market, so there aren’t many implications for this and any other corporate bond defaults that follows as the government removes its longstanding implicit guarantee on bonds. The market should, however, take view in the Chaori default as a sign that China’s leaders are committed to financial reform.
Some interesting China consumer IPOs to look out for in Hong Kong in the coming week. Haichang Holdings (2255.HKG), an operator of theme parks and adjacent commercial properties on the mainland, hopes to raise about US$346 million amid strong interest in Chinese consumer and leisure spending. It will be the first Asian theme park operator to go public. Another to watch is Sunfonda (1771.HKG), the second-biggest luxury and super luxury auto dealer in Northwest China last year, a fast-growing market, according to an IPO note from UOB Kay Hian. But with the ongoing clampdown on corruption and big ticket spending by government officials, who favour the Audis the company sells, it might struggle in the short-term.
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