The new “untouchables”

- Introducing our “musings on” series of reports "To move away from reactive writings on short-term issues, we’d like to introduce our new series of reports called “musings on”. In this series, we will write about long-term issues and try to think laterally. Some of our musings will have immediate market implications, but many, we suspect, may not. In our inaugural issue, we will contemplate on sectors that may face significant policy risks over the next few years as China undergoes structural reforms. We name them the new “untouchables” for effect and it doesn’t mean we won’t recommend them from time to time for other reasons."
- Untouchable No. 1 - monopolies "Many protected sectors are earning high ROEs and the government is going about changing that by capping salary growth, introducing private competition, limiting fee increases, and imposing additional taxes. Sectors vulnerable here include banks, energy and other resources, IPPs and telcos, by our assessment."
- Untouchable No. 2 – twin-high industries "I.e.,, high energy consuming and highly polluting industries e.g., steel, cement and metals. They benefited greatly from China’s investment-driven growth and have not paid their fair share of resources and environment costs. The government has rolled out a resources tax, cancelled tax rebates and concessionary tariffs, limited financing and shut down operations. It may also impose an environmental tax and a carbon tax, and raise environmental standards and charges."
- Untouchable No. 3 – property developers "Rightly or wrongly, many people in China are blaming developers for unaffordable houses and the government’s policies have turned increasingly hostile, e.g., cracking down on investment/speculative demand, expanding welfare housing programs, doubling land supply, collecting more taxes and restricting funding. Real estate taxes, property taxes and a capital gains tax may also be on the way."
- Untouchable No. 4 – public goods/services providers "The government has vowed to check their costs carefully to prevent excessive profits. This may undermine pricing power in a broad range of sectors, including fertilizer makers, drug makers, gas suppliers and distributors, IPPs, ports, airlines, airports and financial service providers."
- Untouchable No. 5 – the market "Untouchables No. 1-4 accounted for some 90% of market earnings in 2009."

Merrill Lynch China Musings on 20100813

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