Consumption boosts China stocks

By Sally Wang

Strong domestic consumption is expected to boost the Chinese stock market the rest of this year, with shares of listed companies that produce and sell consumer goods likely to be favored by investors and speculators, analysts say.

This is despite the worry that the market may soon take a downturn because it has reached a quite-high level and Beijing is expected to strengthen its macroeconomic controls to cool down the overheating economy.

Chinese share prices hit a new high on Monday despite the fifth interest-rate hike this year announced last Friday. The benchmark Shanghai Composite Index rose 109.21 points, or 2.06%, to 5,421.39. The Shenzhen Component Index was up 280.67 points, or 1.54%, to 18,494.38.

At this level, many securities analysts and investors begin to consider consumption-related shares as ideal buys as official statistics suggest strong growth in the consumer market.

The latest data released by the National Bureau of Statistics (NBS) showed that retail sales soared to a new three-year high, with consumer goods reaching 5.62 trillion yuan (US$725 billion) in the first eight months of this year, an increase of 15.7% year on year.

Analysts also expect an even higher increase in consumption during the rest of this year. Consumption, investment and exports are figuratively described as the "troika" hauling China's economic growth. Affected by Beijing's macroeconomic control and adjustment policy, the growth of fixed-asset investment is slowing down. The pressure on the appreciation and reduction of export-tax rebates would also be expected to curb export growth.

Hence growing domestic consumption is expected to become a stronger motive force for a vigorously growing economy. The rest of this year, dotted with holidays and festivals, will see a flourishing domestic consumer market, strongly supported by a large population and the growth of the country's gross domestic product (GDP).

Growth in consumption boosts profits of listed companies engaging in production and sales of consumer goods. This will, in turn, boost the prices of such shares, analysts say. In fact, some "early birds" quietly began to buy such shares even before the release of NBS statistics. And among all the consumption-related shares, prices of stocks in the food, beverage, automobile and jewelry industries are widely expected to have strong and steady gains in the months to come.

Many securities companies expect excellent performance of stocks of listed companies in food and beverage sectors as most of such companies' interim financial reports registered a strong and steady growth. The 47 listed food and drink companies reported total revenue of 62 billion yuan in their core businesses in the first half of 2007, an increase of 19.2% year on year, while their net profits have reached 4.47 billion yuan, a growth of 33.19%.

Analysts with TX Investment Consulting said that as the Shanghai Composite Index surpasses the 5,400 mark, the risk of a market bubble grows. Hence stocks of leading companies in the food-and-beverage industry are a reasonable choice to avoid market risk.

Expected inflation would be in favor of the share prices of food and beverage companies. Food and beverages are a necessity of daily consumption, hence price hikes simply boost the related companies' profits.

The sharp rise in food prices, mainly fueled by rising pork prices, which soared 77.6% in August from the same month a year ago, pushed up the annual growth rate in the Consumer Price Index (CPI), China's key inflation indicator, to 6.5% last month, the highest in 11 years.

The retail volume of food and beverages in the first eight months was up 25% year on year. With many traditional Chinese festivals to celebrate, the remainder of this year is usually a booming season for sales of meat, alcohol and drinks. The expectation of price hikes will also incite the share price of the food industry, said analysts with United Securities based in Shenzhen.

As motor vehicles have now become popular consumer goods, automobile stocks are also becoming a good investment. August saw a 42.3% increase in automobile sales compared with the same month of last year. "The automobile market is booming this year," said a report by Beijing-based Galaxy Securities.

Statistics from the China Association of Automobile Industry indicated 5.7 million automobiles were sold in the country in the first eight months, while insiders expect sales for the whole of this year could reach 8.5 million units.

The 22 automobile companies listed on the Shanghai and Shenzhen stock exchanges have reported a collected half-year revenue of 141.5 billion yuan, up 114% year on year, and their net profits of 6.2 billion yuan, a 188% increase from a year ago.

As the consumption of gold in China and India affects the price of the world gold market to a certain extent, Chinese enthusiasm in buying gold and jewelry during the the "golden week" holidays surrounding the October 1 National Day and later the Lunar Chinese New Year should also drive up gold-related stocks.

"The rise of CPI and worry over inflation make people buy more value-saving commodities such as gold and jewelry, which would push the related stocks to higher prices," said analysts with United Securities. Sales of gold and jewelry in August increased 53.3% over the same period last year.

In the meantime, shares of Shandong Gold closed at 184.39 yuan on Monday, six times the price in January, and Zhongjin Gold closed at 147.85 yuan, seven times the price in January. Stocks of gold ornaments also had a strong performance.

As the strong growth in the sales of consumer goods are reflected in the Chinese stock market, investors should take the opportunity to boost the hot market to an even higher level, despite Beijing's belt-tightening measures.