China's Small-Cap Stocks Rise, Yuan Weakens After NPC Omissions

Inside China's Economic Blueprint
  • Policy makers fail to mention IPO reforms, yuan support steps
  • Plan to make development a top priority boosts builders

For investors reacting to China’s annual policy road-map, it’s what authorities didn’t say that mattered most.

Chinese small-cap stocks rallied after Premier Li Keqiang failed to mention a planned shift to a more market-based system for initial public offerings, a reform seen luring funds from existing equities. The yuan snapped a four-day gain after policy makers refrained from announcing any support measures. While Li’s pledge to make development a top priority boosted transport and infrastructure shares, the nation’s sovereign bonds fell on concern the government will boost borrowing to back the economy.

Li outlined an economic growth target of 6.5 percent to 7 percent for 2016, with 6.5 percent pegged as the baseline through 2020. To reach the target, the government said it raised its money supply expansion target and will permit a record high deficit. China’s plan to streamline rules for IPOs is unlikely to be implemented this year, according to a person familiar with the situation. Data on Monday showed the decline in the nation’s foreign-exchange reserves moderated last month as the yuan stabilized.

Investors consider the delay to new IPO rules as "good news," said Jackson Wong, associate director at Huarong International Securities Ltd. in Hong Kong. "They announced the GDP target, which was rather a bit worrying because they said 6.5 percent to 7 percent, which means it might drop to 6.5 percent. But the market is still ignoring that."

The Shanghai Composite Index added 0.8 percent to 2,897.34 at the close. The gauge climbed 3.9 percent last week after China intervened to support its stock market on Friday, according to two people with direct knowledge of the situation. The Hang Seng China Enterprises Index climbed 0.8 percent in Hong Kong.

The ChiNext small-cap index advanced 2.4 percent. Officials drafting Li’s address decided not to mention the new IPO system because they judged it unlikely to be realized in 2016, said the person, who asked not to be identified as the discussions were private. Speculation the registration system would begin with the small-cap board triggered a 7.6 percent plunge in the index on Feb. 25.

Commodity and industrial companies also rose. Citic Heavy Industries Co. advanced 2.6 percent in Shanghai. China Communications Construction Co. rallied 4 percent to its highest level this year in Hong Kong.

China’s top economic planning body launched a three-year action plan to develop major transportation infrastructure, and a draft document of the country’s next five-year economic plan pledged to build at least 50 new airports by 2020. Total fixed asset investment is projected to increase by 10.5 percent this year.

Fiscal Shortfall

The yield on government notes due January 2026 rose three basis points to 2.95 percent, the highest level since Feb. 6. The nation’s fiscal shortfall is projected to widen to a record 3 percent of gross domestic product this year from 2.3 percent last year, according to a report from the Ministry of Finance.

The bigger fiscal deficit ratio will ensure some key spending, Finance Minister Lou Jiwei said at a conference in Beijing, adding that the move aims to support the economy. The nation will increase infrastructure spending on big, cross-regional projects, he said.

"The government is willing to do more on fiscal, as well as they’re very clear on their monetary easing bias,” said Tony Chu, a Hong Kong-based money manager at RS Investment Management, which oversees about $18 billion. “People are generally more comfortable about China being able to manage their currency well.”

Yuan Weakens

The currency fell 0.14 percent to 6.5157 a dollar, ignoring the strongest central bank fixing in two months, according to China Foreign Exchange Trade System prices. The offshore yuan traded in Hong Kong dropped 0.23 percent to 6.5176. The PBOC raised the currency fixing by 0.26 percent to 6.5113.

The currency will remain stable against a basket of exchange rates, People’s Bank of China Deputy Governor Yi Gang said on Sunday, using a line that has been repeated by several officials over the past few months.

“This is typical China style, they are not being inconsistent,” said Zhou Hao, an economist at Commerzbank AG in Singapore. “The government thinks the market is too demanding. It’s in their interest to follow a path of gradual reform and re-anchor market expectations, and if that means repeating references to the basket of currencies or keeping the currency stable, then so be it.”

State Support

The world’s largest currency hoard dropped by $28.6 billion to $3.2 trillion in February, the People’s Bank of China said in a statement. The median forecast was for $3.19 trillion. The stockpile includes the euro, yen, pound and developing nations’ assets, in addition to U.S. dollars, the PBOC’s Yi said over the weekend. This is the first time a central bank official disclosed the sources of non-dollar assets in the stockpile.

Financial and property shares declined in Shanghai. Industrial & Commercial Bank of China Ltd. halted a three-day winning streak, falling 0.5 percent. Developer Gemdale Corp. dropped 1.7 percent.

State-backed funds bought primarily bank shares on Friday, while some local branches of the securities regulator asked listed companies, mutual funds and brokerages to stabilize the market during the meetings, according to people who asked not to be named because the matter isn’t public. Authorities have been known to intervene before key national events, with government funds stepping in to boost share prices last August before a military parade.

A gauge of Shanghai property stocks dropped 0.3 percent for the biggest loss among industry groups. Chinese regulators plan to impose new rules to end the practice of homebuyers taking out loans to cover down-payments, as they step up scrutiny of financing risk in the property market, according to different people familiar with the matter.

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