State-owned enterprise reform 'key' for China

State-owned enterprise reform 'key' for China

Efforts by Chinese authorities to "unlock" the value in state-owned enterprises (SOEs) could boost the country's equities market, says JP Morgan Asset Management.

In a recent paper entitled China: Reform unlocks the value of state-owned enterprises, JP Morgan indicated that SOE reform will be a “key investment theme for Chinese equity markets in the coming years”.

JP Morgan chief market strategist Tai Hui said: “SOE reform will continue to be one of the key re-rating drivers for Chinese equities in the medium term.”

The paper argued the importance of SOEs to the Chinese economy, and noted the investment opportunities that extensive reform would provide.

“SOE reform will also yield rich dividends for those longer-term investors who understand and recognise the importance of this key investment theme,” Mr Hui said.

“Furthermore, as SOE reforms curb excessive lending and reduce credit default risks of local governments, SOEs and financial institutions, the risk premium of SOE stocks and hence their cost of capital will shrink.

“We believe that not just the SOEs per se but eventually the whole economy will reap the reform dividends. The winners will be those SOEs whose potential is being unlocked amid the reforms.

“This also means a lot of good bottom-up opportunities for active managers,” he said.

According to the paper, reform would also increase dividend payments to state shareholders in the effort to “bolster” local and central government revenues.

It would also encourage private investment in selected enterprises in order to increase productivity.

Mr Tui said that since China’s state-owned “monopolies” are the largest and among the most profitable in the world, any “news flow” about the reform process should draw the attention of investors.

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