The start of 2017 saw some solid gains to mainland China stocks. The Shanghai Composite Index posted a weekly surge of 1.7% last week, as there was a general sense of optimism about the performance of blue chip A-shares in 2017.
A-shares may be a magnet for market liquidity as the Chinese government adjusts its foreign exchange policies and the real-estate sector cools. There is strong upside potential for Chinese stocks, as valuations for blue chip A shares are lower than most other major markets globally, with P/E of 14 times compared to 25 for the Dow Jones Industrial Index.
In 2017, there will be limited room for further depreciation in the yuan, and the exchange rate may even rebound slightly. As U.S. President-elect Donald Trump prepares to take office, his new administration will favor a stronger yuan to weaken Chinese exporters. The yuan is likely to face reduced downward pressures this year.
Ahead of the Chinese New Year, investors should build positions in blue chip A-shares in sectors including pharmaceuticals, liquor, One Belt One Road and military for stronger long-term gains.