No 'undue stress' despite concern over China’s oversight of private sector

China’s oversight of the private sector in the past weeks has raised concerns and panic.

The monetary system did not detect any heavy impact resulting from the growing concerns over China’s increasing oversight of the private sector, Jefferies reported.

“The past few weeks has seen the equity market driven by panic over increasing China government oversight of the private sector, worries over the structure of listed companies and the PBOC’s actions to limit systemic risk,” the report read in part.

“It is unfair to extrapolate one or two weeks as a trend but ultimately the monetary system did not detect any undue stress.”

Moreover, Jefferies said it remains bullish on the Hang Seng Index (HSI), which is currently undergoing an overhaul with 80 constituents by mid-2022 and 100 stocks divided into seven industry groups.

The firm noted it expects Li Ning, China Resources Beer, Nongfu Spring and Hansoh Pharme to be added with no deletions in the next rebalancing of the index. The said companies are non-variable interest equity (VIE) structures and are forecast to have a ~3% weighting.

Four VIE structures, meanwhile, account for ~27% of the HSI market presently.

“Hong Kong ought to see earnings growth this year ~25% with double-digit earnings growth next year putting the forward Price/Earnings to Growth ratio on ~0.5 to 0.6 times. Monetary conditions remain loose,” Jefferies also reported.

“The sharp drop in Enterprise Value to sales for the large cap, VIE-related stocks have contributed the most to the underperformance of the index. We remain Bullish on the HSI within our global asset allocation and expect the index to reach 32,500 unchanged from our earlier estimates.”

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