Investors look for economic lift

Stock investors will be keeping a close watch on the latest economic data as well as any moves by the Chinese government to extend its monetary easing policy.[Photo/Agencies]

Data released this week on inflation and trade will be heavily scrutinized

Investors will be hoping for increased stimulus measures backed up by a bold reform agenda from Beijing policymakers as China continues to face strong economic headwinds next year.

Monthly economic data on inflation, trade and foreign exchange reserves will be released this week.

Already economists are predicting that the government could roll out more monetary easing and step up reform plans if the economic situation shows signs of deteriorating.

Weakening growth momentum and rising deflationary pressure could prompt action, they point out.

Chang Jian, China economist at Barclays Plc, believes the People's Bank of China, or central bank, may cut the benchmark interest rates by another 25 basis points in December.

"We believe the positive developments in consumption growth and the services sector are not strong enough to fully offset the broad weakening in growth momentum," Chang said.

Economists at investment bank Goldman Sachs are forecasting similar measures.

They are predicting that the Chinese monetary authority will cut the amount of cash banks need to set aside in reserves by 300 basis points and reduce benchmark interest rates by 50 basis points next year.

Market expectations for more monetary easing surfaced after recent economic data showed that industrial profit figures declined by 4.6 percent in October compared to the same period last year.

Manufacturing activity dropped to its weakest level in more than three months, while external trade also fell.

Even the domestic property sector, which used to be a key GDP driver, continues to struggle amid slower home sales and stagnating prices.

For market investors, the challenge will be to cherry pick the right stocks that will benefit from greater economic reform and monetary easing.

Ning Jing, portfolio manager of China-focused funds at global asset management firm Fidelity International, still feels there are ample opportunities in the so-called "old economy" with certain businesses undervalued.

"Companies in infrastructure, heavy machinery and property sectors are likely to benefit from China's sustained reform agenda next year," she said.

Last week, speculation about government policies to boost home sales and loosen mortgage restrictions led to strong rallies in A-share market property stocks.

At the same time, Premier Li Keqiang has vowed to further open up China's capital market and to deepen financial reforms following the inclusion of the Chinese yuan into the Special Drawing Rights currency basket of the International Monetary Fund.

A-share listed financial companies, including banks and securities brokerages, will also benefit from China's plan to step up integration of its financial sector with the rest of the world, according to analysts.

Foreign institutional investors will closely follow whether the government reforms will prove to be effective in unwinding the excess industrial capacity in the economy, which could be painful but necessary for a strong economic recovery in China, Ning at Fidelity said.

Moderate consumer inflation, analysts believe, could also offer greater leverage for policymakers to stimulate the economy. But some noted that the valuation of the yuan could complicate issues for investors.

"China's economy could see the yuan weaken in the coming year, yet a large-scale devaluation isn't likely as the government promotes the currency's global use," Banny Lam, co-head of research at Agricultural Bank of China International Securities Ltd in Hong Kong, told Bloomberg.

Goldman Sachs' strategists hold a similar view.

"Politically, a large depreciation would be awkward when the SDR decision is still fresh in the mind and China looks forward to hosting the next G20 summit in early September 2016," they told Bloomberg.