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Outlook for the major sectors of the Mainland China and Hong Kong

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Outlook for the major sectors of the Mainland China and Hong Kong Powered By Docstoc
					                                                                                              Issue Date: October 2009


Outlook for the major sectors of the
Mainland China and Hong Kong
Investment Summary
•   Performance of Consumer Sector was mixed in the beginning of the 4Q 2009. Since market sentiment
    was improving, investors were preferred to accept higher risk for a higher investment return
•   Future issuance of RMB onshore bond by mainland property developers will significantly improve their
    liquidity and balance sheet. China Insurance Regulatory Commission may soon release draft regulations
    on property investment by insurance companies, there could be substantial new capital and demand
    from insurers entering the commercial property market
•   HK property market is active as supported by the Capital Investment Entrant Scheme, while the loose
    monetary policy will also induce a positive carry factor for property stocks
•   The premium growth potential of China insurance market is high and it is expected that an inflation
    environment will also benefit China insurers. Under “CEPA 6”, banks in Hong Kong will be able to build
    a deposit franchise for a faster and better growth in the Guangdong, this would be a growth engine for
    Hong Kong banks in the near future

Market Review and Outlook
As the weak USD and the strong commodity price continued its trend on increasing risk appetite, the Hang Seng Index
will remain volatile to trade between 20,000 and 22,000. We expect Mainland China and Hong Kong equity markets
may not have too many catalysts, as it discounts most of the positive news into the current share prices. We expect
investors will focus on the China property sales figures during the National Day holidays and the incremental loan
growth number in September.
Hong Kong PMI fell to 51.8 in September from 52.8 in August. It indicated Hong Kong was still maintaining at an
expanding level, however, employment was contracting to 49.2 in September from 51.5 in August. Companies
maintained cautious stance in the planning of human resources and hiring new staffs. Retail sales value continued to
decline 0.2% year-on-year (“yoy”) in August, it was better than market consensus forecast of 3.5% yoy fall. The
number was also improving strongly from 5.5% yoy fall in July. Hong Kong Monetary Authority intervened to keep the
HKD within its trading band by injecting more than HK$10 billion into the money market on 8 October this year. Some
of the funds are looking for buying opportunities after the rebound of Hong Kong market.

Consumer Sector
The mainland Chinese arrival in HK rose 13.5% yoy to 547,080 in the first seven days of October. It would boost local
retail sales. China retail sales recorded RMB 570 billion, it was 18% yoy gain in the period of Golden Week holiday.
Consumer sector was mixed in the beginning of the 4Q 2009. Consumer discretionary sub-sector was doing
outperforming from the momentum on good outlook in China automobile industry and implementing solid measures.
Consumer staples sub-sector was lagging behind. Since market sentiment was improving, investors were preferred to
accept higher risk for a higher investment return.

Property Sector
In October, Moody’s has upgraded the outlook for China residential property market to stable. The investment sentiment
and mainland property contract sales improved in 1H 2009. This in turn reduced the inventory and leading to the
likelihood of property prices showing relatively greater stability. In the financing side, China Securities Regulatory
Commission approved good quality developers to issue RMB corporate bond and convertible bond. As such, it is
expected that there will be a significant improvement in the liquidity and balance sheet of mainland property developers.
In the meantime, China Insurance Regulatory Commission may soon release draft regulations on property investment
by insurance companies. It is expected there could be substantial new capital and demand from insurers entering the
commercial property market. Going forward, policy announcement along these lines would be positive for commercial
property developers.
Property market is active as there are many mainland investors participate in the HK property market on the back of
the Capital Investment Entrant Scheme (“CIES”). According to the statistics of HK Immigration Department, total
consideration of property investments made by successful CIES applicants has jumped to more than HK$1.9 billion in
1H 2009. It is noted that there is an accelerating influx of mainland buyers into the Hong Kong housing market. Local
property developers with high exposure to luxury and upper-middle housing are one of the key beneficiaries.
Central banks around the world have aggressively eased monetary policy and HK Interbank Offered Rates have dropped
amid rising liquidity. Due to price competition, HK’s mortgage rates have also fallen to between 2.00% and 2.75%
p.a. Going forward, the low interest rate environment will last for a long period of time while the low holding costs
will induce a positive carry factor for property investors. This is good for the property sector because property stocks
and interest rate have a negative correlation.
Based on the latest statistics from the Land Registry of HK, there were 14,437 sale and purchase agreements in
September 09. Of the 14,437 sale and purchase agreements, 12,285 were for residential units. The total consideration
of the residential agreements was $56.2 billion, up 37% month on month. Compared with the same period last year,
the amount grew 199.8% and it indicated a sharp acceleration growth in the 3Q 2009. In the meantime, the University
of Hong Kong All Residential Price Index recently reached 133.7. It is expected the property market conditions will
remain appalling in the near future.

Financial Sector
Central banks have been more heavily focused on stimulating near term growth and have generally yet to take any
significant steps to guard against long-term inflation. A key consequence of this is that over the next five years,
inflation will likely exceed the average of the last ten years. With investor attention likely increasing on the beneficiaries
of higher inflation, it is expected that the higher interest rates that result from a higher inflation environment benefit
China insurers. In the meantime, life insurance penetration rate is still relatively low in China at the moment. Based on
a research performed by McKinsey & Company China’s life insurance market could grow to US$160 billion by 2012
from less than US$100 billion last year. It is expected the premium growth potential is high and China insurance
market will remain appalling in the long run.
In October, Central Huijin Investment has increased its stakes in three largest listed mainland banks: 30.07 million A-shares
of ICBC, 16.14 million A-shares of China Construction Bank and 5.13 million A-shares of Bank of China. Based on market
consensus, it is expected Huijin will continue to increase its holdings in the three banks in the next 12 months.
Subsequent to the supplement VI to the Mainland-Hong Kong Closer Economic Partnership Arrangement (“CEPA 6”),
China Banking Regulatory Commission eases sub-branch requirement for HK banks and will allow them to open sub-
branches in Guangdong province. Under the CEPA 6, banks in Hong Kong that established branch outlets in Guangdong
may set up sub-branches within the province in any municipality without the need to first establish a branch in the
same municipality, as previously required. With this new provision, the capital requirement for setting up a sub branch
in Guangdong will be significantly reduced. Banks in Hong Kong will also be able to build a deposit franchise in
mainland, for a faster and better growth in the Guangdong. Prior to that, the approval process for setting up a branch
would last for, at least, 2-4 years. In view of the close integration between Hong Kong and the Pearl River Delta region,
this would be a growth engine for Hong Kong banks in the near future.

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