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China may not have announced bazooka-like stimulus at its annual parliamentary meeting this past week, but it made clear which sectors it will support. Beijing announced a GDP growth target of around 5% and an official fiscal deficit of 3%, matching last year’s goals. Authorities announced plans for “ultra-long” bonds for special projects, while hinting they could still deploy other stimulus tools . “While the level of fiscal stimulus may be unimpressive and the underlying property risks remain, we believe the strategic focus on nurturing new productive forces, developing the digital economy, promoting domestic consumption, and continuing opening-up should be positive for earnings growth and create structural opportunities in the A-share market,” HSBC China equity strategists Steven Sun and a team said in a report Wednesday. In the past week, China’s top economic planning agency talked up how a push to upgrade equipment will create annual spending of more than 5 trillion yuan — that’s about $700 billion a year in corporate capex. The Ministry of Finance said that this year it would spend tens of billions of yuan on manufacturing and vocational education development. China’s annual report on the work of the government “once again emphasized the high-quality development of the digital economy and specifically mentioned ‘AI+’ initiatives to promote digitalizing traditional industries,” the HSBC analysts said. “Therefore, we believe industries related to the digital economy will benefit, including those related to AI servers and network hardware, as well as software applications (AI+) such as cybersecurity,” they said. The broader market has yet to be impressed. After a volatile start to the year, the Shanghai Composite rose by about two-thirds of a percent in the last week, with gold and power generating-related stocks among the biggest gainers, according to Wind Information. The new securities regulator, Wu Qing, made his first major press appearance in the role on Wednesday, sending mostly “positive messages” that included greater investor protections, attracting long-term capital, and encouraging dividend payments, according to Morgan Stanley Equity Strategist Laura Wang. However, she pointed out in a separate note that sentiment around mainland Chinese stocks, known as A shares, “came down notably after peaking last week” due to the lack of announced policy support. “MS’ Economics team believes that the announced fiscal package is insufficient to boost the economy as fiscal package remains supply-centric,” Wang said. ‘New productive forces’ Amid the success of Chinese-made electric cars — and U.S. tech restrictions — Beijing has been pushing for domestic tech and industrial capabilities. Thanks to high-level mentions by Chinese President Xi Jinping, one of the popular political terms that’s emerged is “new productive forces” or drivers. In an example of how the phrase has trickled down, last week officials from the giant city of Chongqing — population around 32 million — made an effort to show how they were prioritizing digitalization and high-end manufacturing. They described the new “forces” as referring to greater tech innovation, higher efficiency and better environmental friendliness. “Policy support for developing advanced production capacity will lead to increased capex in associated value chains like the industrials and IT sectors,” the HSBC analysts said. Here are some of their buy-rated stock picks, the first two for exposure to “new productive forces” and the following two for a play on AI-generated content. All four stocks are listed in Shenzhen: Inovance — as a seller of factory automation components, Inovance should “benefit from the recovery of the discrete automation market in 2024,” the HSBC analysts said. They have a price target of 83 yuan a share, for nearly 24% upside from Friday’s close. Naura Tech — the chip industry stock right now only has a 3% upside to HSBC’s price target of 309.7 yuan based on Friday’s close. But the analysts expect “NAURA Tech will benefit from increased capex by [third-party integrated circuit-packaging and test services] due to its extensive product offering in advanced packaging.” Innolight — the fiber optic company provides the network infrastructure for cloud computing and artificial intelligence. The HSBC analysts expect Innolight to increase its sales of its most advanced product, and introduce an even better product in the fourth quarter. The stock closed about 5% above HSBC’s price target on Friday. Sanqi Entertainment — HSBC analysts expect this gaming stock can nearly double to 36 yuan a share. “We like Sanqi given its solid strength in mini-games and strong pipeline,” the report said. However exuberant any industrial growth may be in the near term due to top-down policy, many analysts warn that problems for China’s economy overall remain unresolved. “With Beijing remaining reluctant to provide a much stronger stimulus, we struggle to see how the ongoing deflationary spiral could be effectively reversed,” Clocktower Group said in a March 5 report. “What worries us the most is that escalating overcapacity issues in the industrial sector may start to force manufacturing companies to slow down both production and capex, potentially causing a sharp decline in domestic credit demand,” the report said. “In other words, if the credit demand from the private sector retreats further, Beijing’s obsession with fiscal prudence and deleveraging local governments will prove to be a suicide.” — CNBC’s Michael Bloom contributed to this report.
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