China A-share Strategy Weekly:Draft of new rules for banks'wealth management operations to have limited impact on A-shares

　　Draft of new rules issued for banks' wealth management business

　　Last week, media outlets (eg, business.sohu.com) reported that the Measures for theSupervision and Administration of the Wealth Management Business of CommercialBanks (Exposure Draft) were issued to banks. The news negatively affected A-sharemarket prices. As of end-2015, bank wealth management products (WMP) totalledcRmb23.5trn, including equity assets of cRmb1.8trn (7.8%). Currently, wealthmanagement funds with exposure to A-shares may have fallen compared with the endof last year due to the weak A-share market performance in H1. In our view, the Draftis mainly aimed at regulating shadow banking; restrictions on allocation to nonstandardand equity assets and rules on the leverage ratio can help maintain long-termstability in financial markets. (Continued on pg. 2)

　　Continued positive growth in industrial profits

　　According to the NBS, profits at Chinese industrial companies rose 5.1% YoY in June,up 1.4ppt from May (+3.7% YoY); industrial profits rose 6.2% YoY in H116. By sector:cumulative YoY growth in coal mining, oil/gas extraction, ferrous metal smelting/rollingprocessing, special-purpose machinery manufacturing and tobacco manufacturingprofits in H116 was much better than in 5M16; cumulative YoY growth in miningsupport services, oil processing, fabricated metal product repair and waterproduction/distribution profits in H116 was much lower than in 5M16. Given steadyindustrial profit growth, we estimate A-share non-financials profit growth was flat inH116 vs. Q116.

　　Main factors determining A-share market movements unchanged

　　Although the issuance of draft rules on wealth management last Wednesday weighedon A-shares, we do not think the main factors behind A-share movements havechanged significantly. Economic fundamentals are stable, indicating a low chance ofbig macro policy adjustments. Industrial profits continue to rise, liquidity remains stableon prudent monetary policy, the bond market is stable and credit spreads are narrower.

　　A-shares as a whole are trading near the last-five-year average. We believe the A-sharemarket will stay range-bound, and we remain bullish on the performance of solidlyprofitable and defensive sectors, such as home appliances, F&B and healthcare. Wemaintain our year-end target for CSI300 at 3,200.