Krungsri Securities (KSS) expects China’s plan to help local governments settle more than CNY 1 trillion (approximately $140 billion) in overdue payments to the private sector will provide market support in the near term.
The initial funding is expected to come from state banks and policy lenders such as China Development Bank, with the government aiming to fully resolve these debts by 2027.
China’s local government-related debt is estimated at CNY 10 trillion, or about 7% of GDP, much of it stemming from previous government construction and procurement spending. President Xi Jinping has previously warned, as recently as February, that delayed government payments could erode confidence and negatively impact private sector operations over the long term.
While KSS notes that the measure should ease pressure on the private sector, it may add strain to state-owned banks already grappling with falling yields and rising non-performing loans (NPLs). China’s five largest commercial banks were forced to set aside CNY 3.51 trillion in bad loan provisions in the first half of the year, up 6% from the end of last year.
The market also anticipates a possible issuance of a CNY 200 billion special government bond later this year, aimed at clearing overdue private sector debts.
The policy announcement boosted Chinese equities today: the CSI 300 index climbed 2.26%, Shanghai Composite Index (SSEC) rose 1.61%, and Hong Kong’s Hang Seng Index (HSI) edged up 0.089%.
Looking to the medium and long term, KSS sees the potential for further stimulus, particularly measures to boost domestic consumption, revive the property sector, and introduce anti-involution policies to rein in excessive price war.
The upcoming Communist Party plenum on October 4 may unveil a new policy package designed to achieve the government’s 5.0% growth target and boost confidence in the nation’s five-year economic plans, KSS speculated.
Strategically, KSS recommends accumulating stocks with “China Play” theme that stand to benefit from anti-involution policies, including:
- Indorama Ventures Public Company Limited (SET: IVL), target price at THB 24.
- The Siam Cement Public Company Limited (SET: SCC), target price at THB 175.
- PTT Global Chemical Public Company Limited (SET: PTTGC), target at price THB 28.
- SCG Packaging Public Company Limited (SET: SCGP), target price at THB 16.
For asset allocation, KSS suggests a “slightly overweight” position on Chinese equities for mid- to long-term investment horizons and recommends the following Krungsri iFund mutual funds: KFCSI300-A, KFACHINA-A, KF-CHINA, MEGA10CHINA-A, and KFCHINA-T10PLUS.
