According to a recent analysis by JPMorgan Chase & Co., China’s policy to reduce excess industrial capacity can be a positive factor for its equity markets as well as global trade if the measures are implemented effectively.
These policies, according to the bank’s strategy, could lead to stronger prices, higher market shares, and better profit margins among key industry players.
In a note released on Wednesday, JPMorgan strategists led by Wendy Liu argued that companies at the forefront of their sectors–particularly those involved in new energy vehicles (NEVs) and property-related industries–are well-positioned to benefit from the government’s crackdown on oversupply.
The strategists noted that “China’s excessive capacity hurts margins and value,” pointing out that the national capacity utilization rate is approximately 74%. This figure trails both behind the United States as well as the European Union.
The industrial glut is a major factor in the falling price and fierce competition, which can often reduce margins.
JPMorgan believes that by reducing this excess capacity, policies could effectively reduce domestic deflationary forces and enable leading companies to increase their profit margins.
This could also have an impact on the global economy by reducing China’s exports at low prices, which are a source of friction for its trading partners.
Strategists cited data from MSCI China Index GICS-3 which indicated that companies in the auto, chemical, construction material, metals and mining industries are likely to experience higher net profits as production is tightened.
Solar, steel and cement industry production to be cut: policy in action
China has pledged that it will address the supply gluts of several industries including steel, solar and cement.
In these sectors, excessive price competition has led to a dramatic drop in prices. Solar glass producers have made plans to reduce their production 30% beginning in July as a tangible sign that this policy is taking effect.
Steel mills also received notices from the government to reduce their emissions and their production.
After a long period of overcapacity, the industries have suffered a significant amount.
JPMorgan’s strategists pointed out that all sectors with overcapacity problems are currently trading below the 2021 peak.
Specific sectors affected include the chemical, battery, steel, cement and solar industries. These corrections have exceeded 50% in some cases, resulting in a significant loss of value.
Sector consolidation: identifying the winners
JPMorgan has identified specific companies which may benefit from sector consolidation.
Included are mainland and Hong Kong listed shares of firms like Contemporary Amperex Technology Co. and Baoshan Iron & Steel Co.
As smaller and less efficient players disappear, market leaders are expected to gain a greater share of the market and be able command better prices, leading to an improved financial performance, and an increase in stock values.
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