China’s ongoing policy efforts to curb excess industrial capacity could serve as a significant positive catalyst for both its equity markets and global trade, provided the measures are executed effectively, according to a new analysis from JPMorgan Chase & Co.
The bank’s strategists believe these policies could pave the way for stronger pricing, higher market share, and healthier profit margins for key industry leaders.
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.
“China’s excess capacity has hurt margins and valuation,” the strategists wrote, highlighting a national capacity utilization rate that sits at approximately 74%, a figure that trails behind both the United States and the European Union.
This industrial glut has been a primary driver of falling prices and intense, often margin-crushing, competition.
By reining in this overcapacity, JPMorgan suggests, the policies may effectively ease domestic deflationary pressures and allow leading companies to improve their profit margins.
Furthermore, this could have a positive knock-on effect on global trade dynamics by curbing the volume of China’s low-priced exports, a major point of friction with its trading partners.
The strategists pointed to data from the MSCI China Index GICS-3, which indicates that businesses related to autos, chemicals, construction materials, as well as metals and mining, are expected to see better net profit margins as industrial output is tightened and consolidated.
Policy in action: solar, steel, and cement industries face production cuts
The Chinese government has already pledged to tackle supply gluts in several key industries, including solar, steel, and cement.
These sectors have been grappling with the consequences of excessive competition and plummeting prices. In a concrete sign of this policy taking effect, solar glass makers have announced plans to cut their production by 30% starting in July.
Similarly, steel mills have reportedly received official notices to lower their emissions and limit their output.
This policy-driven consolidation comes after a period of significant pain for industries plagued by overcapacity.
The JPMorgan strategists noted that at present, all industries with identified overcapacity issues are trading well below their 2021 peaks.
Specifically, the battery, solar, cement, steel, and chemical sectors have all experienced share price corrections exceeding 50%, wiping out a substantial amount of market value.
Identifying the potential winners from sector consolidation
As the industrial landscape shifts, JPMorgan has identified several specific companies that may stand to benefit from the ongoing sector consolidation.
These include mainland and Hong Kong-listed shares of prominent firms such as Contemporary Amperex Technology Co. (a leader in electric vehicle batteries), Baoshan Iron & Steel Co., Shanghai Putailai New Energy Technology Co. (a key supplier in the battery component space), Aluminum Corp of China, LB Group Co. (a major producer of titanium dioxide), and Hengli Petrochemical Co.
The expectation is that as smaller, less efficient players are squeezed out, these market leaders will be able to capture greater market share and command better pricing, ultimately leading to improved financial performance and higher stock valuations.
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