JP Morgan is optimistic about China's "capacity reduction": it will benefit the stock market, especially leading companies in new energy and real estate

Multiple Wall Street investment banks are optimistic about China's "anti-involution" policy. Following Goldman Sachs, JP Morgan has stated that China's "capacity reduction" policy may boost the stock market.

Recently, the sixth meeting of the Central Financial Committee held in China clearly required the legal governance of low-price and disorderly competition among enterprises, promoting the orderly exit of backward production capacity, marking a new signal of the anti-involution policy at the national level. Meanwhile, several industry associations in steel, cement, batteries, and plastic processing have also launched calls for "anti-involution."

On July 9, JP Morgan's latest research report indicated that if the Chinese government's policy to address overcapacity is implemented properly, it will have a positive impact on the stock market and global trade. The bank's strategist Wendy Liu stated that leading companies in China, especially those related to new energy vehicles and real estate, are expected to benefit from stronger pricing power, higher revenue market share, and healthier profit margins.

Overcapacity Drags Down Industry Valuation

JP Morgan analysts pointed out that China's overcapacity issue has already harmed the profit margins and valuation levels of related industries.

According to the investment bank's statistics, the stock prices of all overcapacity industries are currently below their peak in 2021, with the battery, photovoltaic, cement, steel, and chemical industries experiencing price declines of over 50%. MSCI China Index data shows that automotive, chemical, building materials, and metal and mining-related companies are expected to achieve better net profit margins after capacity tightening.

The Chinese government has committed to addressing the supply surplus in the solar, steel, and cement industries to resolve issues of excessive competition and falling prices. Solar glass manufacturers announced a 30% production cut starting in July, and steel companies have also received notices to reduce emissions and limit production.

Goldman Sachs Discusses "Anti-Involution": Steel and Cement Industry Profits Expected to Improve

Coincidentally, an article from Wall Street Journal noted that Goldman Sachs' recent research report also pointed out that as supply-side reforms shift from short-term production limits to long-term capacity reductions, traditional cyclical industries such as steel, cement, and chemicals in China are expected to see valuation recovery and profit improvement.

The research report indicated that the sixth meeting of the Central Financial Committee of China explicitly mentioned combating "excessively fierce competition" among enterprises, marking an upgrade of the "anti-involution" policy. The steel industry’s plan to reduce production by 50 million tons is expected to accelerate execution, with production in the second half of the year likely to decline by 6% year-on-year, and profit margins expected to expand by 200 yuan/ton. Meanwhile, the cement industry’s capacity clearance process has begun, with an estimated 22-27% of excess capacity expected to be eliminated, leading to a significant rebound in industry profits.

Policy Focus Shifts to Long-term Supply Integration

Goldman Sachs analysts believe that this policy statement indicates a shift in focus from the previous short-term measures of "anti-involution" to a more fundamental capacity exit mechanism.

JP Morgan stated that these policies could alleviate inflationary pressures and improve profit margins, while also reducing trade friction by curbing China's low-priced exports.

According to a recent report by The Paper, the sixth meeting of the Central Financial Committee held on July 1 outlined plans to promote the construction of a national unified market. The meeting emphasized that to deepen the construction of a national unified market, it is necessary to focus on key difficulties, govern enterprises' low-price and disorderly competition in accordance with laws and regulations, guide enterprises to improve product quality, and promote the orderly exit of backward production capacity.

Zhong Huiyong, a deputy researcher at the China Development Research Institute, stated that the construction of a national unified market can govern "involution" through a market mechanism of "survival of the fittest." When market barriers between localities are broken, enterprises with innovative capabilities and effective cost control can better participate in market competition, which will squeeze the survival space of inefficient and low-quality enterprises, thereby promoting the orderly exit of backward production capacity