Pedestrians walk past the People’s Bank of China in Beijing (Photographer: Nelson Ching/Bloomberg)

China May Use PBOC ‘Lever of Power' to Aid Stocks, Nomura Says

(Bloomberg) -- Chinese equities will make a comeback this year amid potentially significant help from the government and likely improved relations with the U.S.

That’s according to Nomura Holdings Inc.’s head of Asia excluding Japan research Jim McCafferty, who sees the stock market as an important domestic policy tool.

The People’s Bank of China could start buying Chinese equities in 2019 to encourage discretionary spending, as more than 90 percent of the stock market is held by domestic investors, McCafferty said in a report Monday.

“China will go beyond historic measures to stimulate the stock market. Specifically, the Chinese government might mandate the PBOC with a role in buying up equities,” he said. A strong equities performance “would be much more effective at stimulating domestic consumption than the construction of another railway line.”

National Team

It isn’t that the government hasn’t been active in stocks in the past. The so-called National Team of government funds has purchased stocks through various entities before: Nomura estimates that the group, which includes the State Administration of Foreign Exchange (SAFE), controls around 3 percent of the A-share market.

Its exposure “looks relatively modest” compared to other countries -- it’s about half, in percentage points, of what Japan’s GPIF owns in its domestic stock market, and about a third of what South Korea’s National Pension Service holds of the nation’s equities, McCafferty noted in the report.

China May Use PBOC ‘Lever of Power' to Aid Stocks, Nomura Says

What Else?

On top of that, Chinese investors can also look forward to an improvement in relations with the U.S., which will ease the turbulence seen in 2018, McCafferty said. Investors are awaiting the outcome of fresh talks on trade as the U.S. and China meet in Beijing this week. The Trump administration expressed optimism it can reach a “reasonable” trade deal with China as President Xi Jinping dispatched one of his top aides to negotiations in Beijing.

The MSCI China index will become a “must-have exposure” due to index reclassification as well, one that foreigners can no longer ignore, the report said. MSCI Inc. said in September that it was considering increasing the weight of A shares in its global indexes this year and this will make the market “too big to ignore,” McCafferty added. The MSCI China Index fell 20 percent last year, its biggest loss since 2011.

According to McCafferty, investors can take shelter in defensive stocks in the short-term, as the market continues to see earnings downgrades from weak fourth quarter results. Sentiment is likely to recover from the second quarter and MSCI China will end the year about 11 percent higher at 78.6.

McCafferty’s defensive picks:

Stock Price Target 
China Mobile Ltd.HK$102
China Resources Gas Group Ltd.HK$38.7
Hengan International Group Co. HK$90.2
Ping An Insurance Group Co. HK$104.52
Shenzhou International Group Holdings Ltd. HK$112.3
NetEase Inc. ADRs$283

“We suspect a recovery in the market may materialize from the second quarter, as earnings revisions come to a close and the national team swings into action,” McCafferty said.

©2019 Bloomberg L.P.