chinese military stocks

Chinese Military Stocks - Chinese People's Liberation Army soldiers could benefit from using blockchain technology. China in the sun via REUTERS

China's Army Day, on August 1, this year coincides with the 90th anniversary of the founding of the People's Liberation Army (PLA). The climax of the celebration was a major field review involving 12,000 servicemen and 600 pieces of weapons, more than 40% of which were seen by the public for the first time. Unlike the parades of the past, which emphasized style and panache, the review was about flexing China's military muscles and striking an offensive posture.

Chinese Military Stocks

Held at Zhurihe, Asia's largest military training base, the event featured no bands, choirs or spectators. Instead of parade uniforms, all participants wore combat fatigues. Adding to the serious atmosphere, Xi Jinping gave a stern speech emphasizing China's absolute determination to protect its territorial integrity.

Chinese Military Field Compass & Map Measuring Old Unused Stock

The new format is designed to kill several birds with one stone. First of all, it is meant to send a message to China's enemies, especially India, where the PLA is currently engaged in doklam. Second, Xi Jinping's prominence in the analysis is meant to strengthen his own position and intimidate party rivals. Finally, by showing the results of China's military modernization efforts, the analysis sought to encourage citizenship throughout the party state in a time of turmoil.

While China may consider these goals well, one sector did not respond well to the Army Day review. After a nearly two-week rally, defensive stocks took a hit almost as quickly as the celebration ended.

China's defense equity market has been bearish since the second half of 2015. Defense stocks fell 18.58% in 2016 and 16% in the second quarter of 2017. Of the 93 investment funds specializing in defense, only 19 posted positive results in the second quarter. Forty-two reported net losses between 10 and 19%.

In the period before Army Day, from 18 to 31 July, the market rose by 3.31%. But the momentum was not maintained. So far this month, defense shares are down 2.52% and the downward trend is likely to continue for the rest of August.

Chinese Army Hi Res Stock Photography And Images

The track is bearish due to several reasons. The mixed defense industry ownership reform, aimed at bringing private capital into China's state-controlled defense sector, is proceeding at a slower pace than expected. But this is not surprising because the defense sector is the country that has resisted liberalization the most. Its best technologies and most valuable assets are still held by state-owned enterprises with vested interests in delaying reform as long as possible.

Lack of transparency is also an issue that affects investor decisions. Tight control over information in the defense sector increases uncertainty and investment risks. In this environment, investors without inside connections are more hesitant – ie. most retail investors – to be involved.

The military leadership was also dismayed. Xi has supported reform of mixed ownership of the defense industry in the past, but did not mention it in his much-vaunted Army Day speech, creating further confusion about the reform's future. Along with the issue of transparency, this has a negative impact on investor confidence.

The weak performance of defense stocks reflects investors' frustrations with the industry's overhaul. While Army Day's impressive field test boosted public confidence in China's military, it failed to trigger a turnaround in the equity market. Some analysts expect reforms in the ownership of weapons research institutes to attract new interest in listed weapons by defense corporations. But for now it looks like the downward trend will continue into the third quarter.

Antique Iron Cannon At The Ming Walls Of The Ancient Chinese City Pingyao, Shanxi Province, China. Old Chinese Military Facilities Stock Photo

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