China: bear hunt

In an era of performance chasing and "tactical trading," holding on to a buy rating for seven and a half years shows commitment. But even loyal Morgan Stanley has downgraded China's stock market. Other brokers are making cautious noises, too. A flurry of capital raisings and initial public offerings suggest that companies also think this is a good time to sell. Worries about speculative froth are focused on high levels of margin debt in retail trading accounts. And in the past three days China's markets have swooned.

Bears have the momentum, then. But they should be careful. The authorities are against them. Central and local governments do not want a market collapse added to the list of threats to growth, and as major holders of financial assets, will act to protect their own balance sheets.

So official Beijing mouthpiece Xinhua recently said that financial reforms and easing measures would keep the bull market going. And fiscal measures have been added to the liquidity tools already employed in stimulating the domestic economy.

Healthcare - on which China's government spends less than 6 per cent of gross domestic product versus about 10 in most major economies, on World Bank data - is one example. In recent weeks the government has announced drug price deregulation. Research-driven companies such as Hong Kong-listed Sino Biopharm and Shanghai-listed Jiangsu Hengrui, are potential winners. To offset concerns around rising costs to consumers, the government will help subsidise the elderly and critically ill. On Wednesday, China's State Council announced a pilot tax incentive on private healthcare insurance. Individual savings of $77-$174 a year should bolster health insurance products, Bernstein points out. Last year these grew at 41 per cent to account for more than a tenth of the life insurance market. China Life, PICC and Ping An have about a fifth of that market each, reckons Credit Suisse.

Other measures aim to lift domestic consumption. Small and medium enterprises, which create most new jobs in China, will receive tax breaks on new hires and lower income tax rates. Restrictions on duty free shopping have been loosened, and import tariffs reduced.

Do not fight the Fed, investors are told. They should also think carefully before taking a swing at Beijing.

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