"For all the grand talk of far-reaching reforms when China's leadership meets early next month, foreign investors have refused to become carried away, with most choosing to shun the country's mammoth state-owned enterprises (SOEs)".
"The new leadership has been in place for a year, and investors are keen to see its strategy to keep the world's second largest economy growing, as it enters a more mature phase of slower expansion.
But investors harbour doubts over how far China's leaders will go to shake up SOEs in desperate need of reform.
"They have been long on talk and short on execution," said Dilip Shahani, HSBC's Hong Kong-based head of global research.
"They have highlighted industries where there are excesses, but such consolidation requires takeovers, liquidations and these are difficult to achieve in China."
Some, like those in the oil and gas sector, are considered prime candidates for an overhaul because they are simply too big. Others may be spared drastic action.
But investors are reluctant to take positions until Beijing's intentions become clearer.
SOEs dominate market capitalization in almost every sector, and global investment managers cannot duck taking a view on them altogether. For the past two years that view has been overwhelmingly bearish.
There are some early signs of a divergence, however. While investors remain cool to Chinese SOE debt, some appear to be warming up to opportunities in equities.
Large bond supplies from SOEs and prospects of the U.S. Federal Reserve withdrawing its multi-year campaign of quantitative easing are deterring buyers of Chinese corporate debt.
Bond issues by China's SOEs have notched a record, with more than $25 billion issued since the start of the year, accounting for a fifth of total new issues in Asia, excluding Japan, according to Thomson Reuters data.
But in terms of equity values, China's SOEs are starting to become attractive even though its state-owned banks, which dominate this space, have been riven by concerns over bad debts, shadow banking and growth in wealth management products.
Investors have begun taking notice of a big valuation gap - in some cases at multi-year highs - between SOEs and private companies, such as those in the technology and gaming sectors.
The gap between the price-to-earnings ratio for a basket of the biggest private companies in Hong Kong/China and for the SOE-heavy MSCI China index is at its highest in more than five years.
The top three most underweight stocks in global fund managers' Asia-focused portfolios are China's state-owned firms - ChinaConstruction Bank , ICBC and China Mobile , according to Bank of America Merrill Lynch".
Source: Reuters
