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Stocks

Chinese market braces for Xi's policy steps following congress

Tackling reforms in earnest could put heavy drag on the economy

SHANGHAI -- Chinese market watchers will focus on economic policy as President Xi Jinping begins his second term as Communist Party leader, amid concerns that addressing the country's environmental problems and industrial overcapacity could hamper growth.

China's benchmark Shanghai Composite Index closed at 3,396 on Wednesday, topping its year-to-date high for the first time in about two weeks. But the stock index rose only 0.26% that day, signaling limited enthusiasm about the new leadership. Overall gains this year remain in the single digits, trailing the Nikkei Stock Average and the Dow Jones Industrial Average.

"General Secretary Xi's speeches during the Communist Party congress provided hints for investing," said Huajin Securities analyst Wang Gang, one of the more bullish market watchers. In an address Oct. 18, Xi touted the progress in his Belt and Road Initiative and stressed that he will make further efforts to protect the environment and promote clean energy.

Shares in leading Chinese electric car maker BYD have been rising since September in anticipation of the National Congress. A Hong Kong investment bank recommends investment in state-run energy companies, which have been merging to create industry giants, and also in rail car makers, which likely will see greater export demand thanks to the Belt and Road Initiative.

But speculation is growing that the party now will halt infrastructure investments and start slashing overcapacity in Chinese plants, leading to an economic slowdown next year.

Private-sector investments are expected to slow as well. UBS projects roughly 6.4% growth for China's economy in 2018, about 0.4 point less than the year-on-year growth for the July-September period. Guo Shuqing, chairman of the China Banking Regulatory Commission, has repeatedly discussed cracking down on financial risks, putting the market on edge.

The yuan-dollar rate "likely will not see any big movements until December," a source at Mizuho Bank says. Supply and demand are finding a balance after a series of capital restrictions by China intended to stem the outward flow of cash.

Many consider a U.S. interest rate hike the one factor that could trigger wild swings in the foreign exchange market. But if China tightens its monetary policy to prevent the yuan from depreciating too far, the economy may cool further. Xi faces a delicate task of balancing structural reforms with the market's response.

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