20160307-中国银河国际证券-2016_Government_Work_Report__Focus_on_Supply-side_Reform_and_Monetary_Policy_11页_706kb

2016 Government Work Report Summary

Core Content

The 2016 Government Work Report outlines a policy framework emphasizing supply-side reform and moderate monetary easing, while maintaining a prudent fiscal policy. The report sets a GDP growth target of 6.5%–7%, marking the first time a range is used instead of a single figure. The report also includes key economic indicators such as M2 growth of 13%, CPI target of 3%, and central government investment budget of RMB500bn.

Main Views and Key Information

Monetary Policy

• Loose monetary policy is expected, with a target M2 growth of 13%, up from 12% in 2015.
• The report emphasizes flexible and appropriate monetary policy, which may lead to three more RRR cuts and one or two rate cuts.
• CPI target remains at 3%, with a forecast of 2% growth for 2016, indicating controlled inflation.
• The RMB exchange rate has stabilized, but medium-term depreciation pressure remains, which could affect market sentiment.

Fiscal Policy

• The planned government deficit for 2016 is 3% of GDP, up from 2.4% in 2015, representing an increase of RMB560bn.
• Railway investment remains at RMB800bn, unchanged from 2015.
• The central government's investment budget increased slightly from RMB476.6bn to RMB500bn, suggesting relatively conservative fiscal stimulus.
• The government is reluctant to repeat the RMB4trn stimulus package, aiming to avoid worsening overcapacity issues.

Supply-side Reform

• Supply-side reform is a key theme, especially in coal and steel industries, aiming to remove overcapacity.
• Successful implementation could support commodity prices, with benefits for surviving companies.
• However, price rebounds are likely limited, as they are driven by supply reduction, not economic recovery.
• Short-term trading opportunities exist in coal and steel sectors due to low inventory levels.
• The State Council is expected to announce similar capacity reduction plans for cement, float glass, aluminum, and ship-building industries.
• Local governments may also roll out provincial-level capacity cut programs, with Guangdong, Chongqing, Gansu, and Guizhou showing more aggressive plans.

TMT-related Infrastructure

• Traditional infrastructure investment may not offer significant upside, but TMT-related infrastructure is highlighted.
• Broadband coverage will expand to 50,000 small communities, enabling more people to access digital life.
• E-commerce in rural areas is promoted, with Digital China [0861.HK] as a key beneficiary due to its logistics and rural informatization solutions.
• Continuous broadband investment will drive demand for fibre optic components, benefiting YOFC [6869.HK].

Shenzhen-Hong Kong Stock Connect

• The launch of the Stock Connect is still planned for 2016, despite market rumors of a postponement.
• TMT names and companies benefiting from government policies in the Hang Seng Small Cap Index are likely to attract Mainland investors, including:
  • TravelSky [0696.HK]
  • Kingdee [0268.HK]
  • Chinasoft International [0354.HK]
  • China Electronics [0085.HK]
  • Huaneng Renewables [0958.HK]
  • Beijing Jingneng [0579.HK]
  • CPNE [0735.HK]
  • Tianneng Power [0819.HK]
  • Sinotrans [0598.HK]

Sector/Stock Implications

• A-share market volatility is expected due to external factors like potential US rate hikes in June and RMB depreciation pressure.
• Coal and steel are highlighted as short-term trading opportunities, with companies like China Shenhua Energy [1088.HK] and Angang Steel [347.HK] noted for their low inventory levels.
• Environmental protection measures are increasing, targeting reductions in COD, ammonia, sulfur dioxide, and nitrogen oxide emissions.
• Renewable energy, energy savings solutions, building materials, water savings solutions, and recycling industries are expected to benefit.
• Companies such as Technovator [1206.HK] and China Water Affairs [855.HK] are potential beneficiaries.

Impact on Banks

• Banks may benefit from monetary easing, but local government debt concerns persist.
• Asset quality is expected to improve, but debt rollover rather than reduction may continue.
• Valuation tables for major banks are included, showing PER, PBR, and dividend yield data.

Summary of Key Figures

Figures and Tables

• Figure 1: Major economic targets in 2016 Government Work Report.
• Figure 2: Coal inventories and coal prices in China.
• Figure 3: Steel product inventories and steel price index in China.
• Figure 4: Valuation table for coal and steel companies.
• Figure 5: Valuation table for companies related to environmental protection.
• Figure 6: Valuation table for other sectors.
• Figure 7: Valuation table for major banks.
• Figure 8a and 8b: Stocks in the Hang Seng Small Cap Index.