Key sectors and ETFs benefiting from Chinese reforms
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Most railway operators will benefit from the Chinese reforms since the administrative and commercial functions will now operate separately. The reforms require performance to be measured with profitability as a key measure, unlike the past when efficiency and safety were key criteria. In the longer term, railroad equipment manufacturers will benefit as train density per kilometer increases. CSR Corp (HK:1766) and CNR Corp (CHI:601299) will benefit from the reforms and will likely keep their duopoly positions. Construction companies on the other hand, such as China Railway Group (CHI:601390), will likely suffer in the short term given the uncertainty of the reforms implementation. CHIE, the China Industrials ETF, would benefit in the longer term as the infrastructure improves supply chain logistics.
Another important sector of the reforms is the media & entertainment sector. The regulatory agencies for Press & Publication and Radio, Film & TV will be merged into one, which should lead to a more efficient copyright process for new product launches. The reforms aim at transforming the handling of digital content, which should help internet and digital companies thrive. The largest company in the sector to benefit from a growth in Chinese digital content is Baidu (BIDU), which is considered the Google of China.
The reforms are also moving towards deregulating pricing in the energy sector, which would allow players in the industry to eventually charge market based prices to respond to changes in global prices. Kunlun Energy (HK:135) and ENN Energy (HK:2688) would benefit from such a change given their leading positions in the gas industry. Huaneng Power (HK:902), as one of the main electric producers and distributors, would highly benefit from market based pricings. A play on the sector as a whole would be CHIE, the China Energy ETF, though keep in mind that reform implementation will occur over the long term while the National Development and Reform Commission is integrated into the National Energy Administration.
And last, but definitely not least, the financial sector reforms will likely have the deepest impact across all industries. The reforms aim to boost SME (small and medium size enterprise) funding as well as social funding, which should help drive growth within the middle market. Investors can benefit in the medium to longer term by looking at China small cap ETFs such as as HAO and ECNS, as well as EWHS, Hong Kong’s small cap ETF. The eventual creation of a Chinese bond market and possible liberalization of interest rates would drive explosive growth in the capital markets and benefit the main banks in the market, but the time horizon for this is will be very long. A long term bet on this would be CHIX, which is an ETF that covers the Chinese financials sector.