Alexander Abramov: “The water of the Kuban River flows where the Bolsheviks order”

Now this is a song about the stock market, at least the Chinese one.

As the WSJ writes, hulking Chinese state-owned companies have become the stars of the Hong Kong stock market.

At the CPC Congress in October, President Xi Jinping said that state-owned enterprises should “become stronger, perform better and grow.” Investors are listening. Public developers are beating their debt-laden private-sector competitors. Shares of the largest domestic semiconductor manufacturer rose by more than a third.

Among the latest winners are China’s ten-year-old national telecom operators, which are ahead of the country’s well-known Internet and technology companies. At the end of February, China announced a national plan for the development of the digital economy, which included building up the construction of 5G networks. All this is intended to be implemented, first of all, by state-owned telecoms, which have become leaders in the Hong Kong stock market.

Investors now like such stocks because the companies are in line with China’s national targets and trade at a low price. ZTE, another telecommunications giant partially owned by the state, has also shown significant growth recently.

Previously, China tried to reform its SOEs and make them more competitive. This year, that goal has become even more urgent as Beijing has made economic growth a priority and has also focused on technological self-sufficiency in key industries.

“The market is betting that SOEs can improve efficiency and benefit from tailwinds from regulators,” said Ming Chen, head of China at Somerset Capital Management in Singapore. He added that the recent momentum is helping stocks in the short term, but how they perform in the long term will depend on whether companies can improve their return on equity. According to him, telecommunications companies, for example, will have to grow faster than China’s GDP. Even after recent gains, major Chinese telcos are trading at 8x to 11x forward price-to-earnings ratios, according to FactSet.

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