The bank believes that China will transform from the largest emerging market into a separate asset class in its own right as authorities seek to internationalise the renminbi, abolish capital controls and increase the number of companies listed on the Shanghai Stock Exchange.
BNP expects China’s economy to surpass Japan’s in size next year and to match that of the US within the next 15 to 20 years. During that period, it says China’s global equity weighting will catch up with its share of the global economy.
China’s economy grew at 8.9% in the third quarter this year after gaining 7.9% in the second, easily surpassing rates in other regions of the world that are still suffering the repercussions of the global financial crisis.
“China’s asset classes are still tiny compared with the size of its economy,” Erwin Sanft, head of China and Hong Kong equities research at BNP Paribas, said at a media briefing in Hong Kong today (November 23). “The next decade will be exciting for China investors as China’s equity market will enter into adulthood.”
However, for China’s financial markets to develop fully, the government must relax capital controls and make its currency fully convertible, adds BNP Paribas.
The firm forecasts that China will de-peg the renminbi from the US dollar in the second half of next year, and make it fully convertible within the next five years.
Chinese authorities are also likely to increase the number of listed companies in Shanghai as well as merging its A and H share markets, which will result in the second largest equity market in the world behind the US.
“This will not only close the price gaps between domestic and overseas-listed shares of the same companies, but also lift their valuations to a premium over global markets because of flush liquidity in China,” Sanft added.
BNP Paribas upgraded its rating on Chinese equities from underweight to overweight in October last year as it forecast that the country would transform from an investment-led economy to a services-led economy.
As a result, the French bank expects stocks in the consumer, health-care, IT, auto and capital goods sectors to outperform within the domestic market as they are presently much smaller than their global counterparts and have the most room to grow.
Still, in the short term before China fully opens up its domestic markets, Hong Kong will remain the largest beneficiary of China’s growth, notes BNP Paribas. China will continue to use the city as a laboratory for capital account convertibility of the renminbi and as an offshore financial centre.
The French bank is especially bullish on Hong Kong’s financial sector and property assets and predicts that the Hang Seng Index will rise to 30,000 points in the next year and property prices will increase a further 30% to 40%.
BNP Paribas’ top stock picks for Hong Kong include HSBC Holdings, Bank of East Asia, Sino Land and Hang Lung Properties.