Listen and Read Between the Lines

Chinese investors will be glued to events transpiring at this year's meetings of the national legislature and its advisory body, which begin respectively on Saturday and today in Beijing.

Deputies to the Chinese National People's Congress and the Chinese People's Political Consultative Conference may herald changes in policies affecting business and finance. These annual meetings always draw keen attention, both inside China and outside.

In the past 16 years, the Shanghai market has rallied 11 times during the meetings. Shares of companies that come under the purview of industry development plans are normally the most affected.

Watching the National People's Congress requires some ability to extrapolate statements and read between the lines. National policy directives often have a language of their own.

So what topics are likely to dominate the agenda this year?

No doubt, two nettling problems will take center stage: runaway food costs and surging property prices.

China's inflation has been rising above government guidelines for some months now, increasing pressure on Party officials to do something before social stability is threatened.

Political leaders scrambling to find solutions may fix their sights on the agricultural sector, an important bedrock of the world's second-largest economy, analysts said.

Vice Premier Wang Qishan has already talked about increasing preferential policies for the farm sector, pledging "unlimited financial support" from banks. More food production is viewed as a means for easing the skyrocketing price of food, which consumes, on average, a third of household disposable income.

Food inflation in January's Consumer Price Index, a major gauge of inflation, stood at 4.9 percent.

A nod to agriculture would benefit crop-breeding companies like Yuan Longping High-Tech Agriculture Co and would also help other agri-business companies in the irrigation and fertilizer sectors, said Yuan Jianxin, an analyst at Changjiang Securities.

China's northern region suffered its worst drought in 200 years this winter, impairing harvests of crops like wheat, making it more urgent for farmers to get spring crops in as early as possible, Yuan said.

The volume of fertilizer used in spring planting accounts for 60 percent of the amount used all year. That means companies such as Hubei Xingfa Chemicals Group Co and Yunnan Yuntianhua Co may see their biggest sales season, which comes amid rising fertilizer prices, he added.

Upgrading irrigation is another key factor in increased crop production.

China has ordered local and provincial authorities to allocate 10 percent of their massive land sales revenue into construction of water resource infrastructure. Total expenditure may climb to 270 billion yuan (US$41.10 billion) this year.

Water infrastructure companies, led by China Gezhouba Group Co, Anhui Water Resources Development Co and Guangdong No. 2 Hydropower Engineering Co, are set to reap the benefits of a more intense focus on water. That's true, too, for construction material suppliers such as Ningxia Qinglong Pipes Industry Co and pump producer Zhejiang Leo Co.

According to a report from Shanghai-based Oriental Securities Co, Gansu Dayu Water-Saving Group Co and Hebei Sailhero Environmental Protection High-Tech Co are among the other listed companies that stand to benefit.

Housing prices are another issue that will be closely watched.

The government has been trying for some time to tame "the wild horse" of the property market. It blames speculators for driving prices beyond the reach of average citizens.

Vice Premier Li Keqiang has promised to build 10 million public housing units this year in a bid to provide affordable housing to ordinary Chinese. That figure is equivalent to the entire housing construction last year.

The wheels of that ambitious construction plan are already in motion. All provincial governments are developing plans for subsidized housing in their jurisdictions.

Cement producers and the construction industry stand to benefit from the housing initiative.

Analysts have put "buy" recommendations on leading firms such as Huaxin Cement Co and Jiangxi Wannianqing Cement Co.

Xinjiang Tianshan Cement Co in northwest China's Xinjiang Uygur Autonomous Region recently came into the spotlight after officials there promised infrastructure spending of up to 150 billion yuan by 2015. That plan is expected to be further discussed at the national meetings in Beijing.

Private housing developers stand to lose. In tandem with public housing construction, more and more cities are attacking the speculative end of the property bubble by limiting new mortgages.

In Shanghai, where it's becoming almost impossible for an existing homeowner to buy additional homes, the policy has already dragged new home sales to their lowest point since 2006, according to Shanghai Uwin Real Estate Information Services Co.

The average price in January fell 10 percent to 20,625 yuan per square meter amid sluggish sales of high-end projects, according to Uwin data.

With the government crackdown on people buying homes to make money coming into full force, it's unlikely the real estate sector will show much momentum, although developers' stock prices may bounce from time to time given their current low valuations, Cao Renchao, a Hong Kong business columnist and stock analyst, told Southern Metropolis Daily.

Despite some signs that prices may be abating, housing is still out of reach for many first-time home buyers.

One proposal that may gain currency at the meetings is a rise in the personal income tax threshold to put more money into the pockets of lower-income earners. The government is working to make people feel better about their lives, Premier Wen Jiabao said in an online chat on Sunday.

This planned change in the income tax structure has some investors speculating that higher disposable incomes will prompt people to shop more.

That could be good news for home appliance makers such as Gree Electric Appliances Co, Qingdao Haier Co and Wuxi Little Swan Co. All are rated "buy" by Fang Qing, an analyst at Shanghai-based Guotai Junan Securities Co.

She said current valuations in this industry are about 20 percent lower than where they should be.

High-end consumption products such as autos are also highly recommended by analysts.

Profits of 17 major auto makers on the Chinese mainland rose an aggregate 74 percent in 2010. Sales of vehicles in January alone climbed 14 percent from a year earlier to nearly 1.9 million units.

SAIC Motor Co, Anhui Jianghuai Automobile Co, Zhengzhou Yutong Bus Co and Weichai Power Co could be good investment buys, BOC International Holdings Ltd said in a note.

Li Jun, an analyst at Central China Securities, added that companies in the fields of energy-saving, advanced machinery manufacturing and medicine are also likely to benefit from policies coming out of the annual NPC seesion.

Listen carefully and read between the lines, Chen Xiaoyang, a private-equity fund manager, is advising clients.