Analysts wary as reform euphoria sweeps China markets Trading on a loosening of China's one-child policy would seem relatively straightforward: buy all things baby-related. Investors did just that on Monday, sending shares in milk formula producer Yashili up almost 12 per cent in Hong Kong and adding 6 per cent to crib manufacturer Goodbaby International. After almost a week during which investors lamented the lack of reform detail from China's gathering of the Communist party leadership, Chinese equities appear to have regained their mojo. A sweeping policy package, announced late on Friday, has lifted China's post-plenum depression. Though the easing of the one-child policy was the most headline-grabbing change, the Decision - as the document is called - included a wide variety of amendments to economic, social and financial policy, in what Stephen Green, Standard Chartered's chief Asia economist, calls the "most significant wave of market reforms in two decades." Chinese stocks listed in Hong Kong, or H shares, responded with a 5.5 per cent rally on Monday morning, building on a 3 per cent jump last Friday. Mainland brokerages, a popular reform play, were the biggest movers, with CITIC Securities adding 12 per cent and Haitong advancing 10 per cent. Not a single stock on the index fell, while its poorest performer - Yangzhou Coal - still managed a 1 per cent rise. But amidst the euphoria and the flurry of buy orders, analysts have been quick to point out that what is good for the economy in the long run may not be good for the stock market. Wendy Liu, China equity analyst at Nomura, describes Friday's announcement as a "sentiment-uplifting event" as investors take heart from the idea that China's leaders have finally grasped the nettle on challenging economic reform. "The reform package is a good thing, and there's a lot of conviction behind it to make it work," says Ms Liu. But "we're in the excitement of the good news. As people digest that, they will start to see some of the pain coming. Investors" biggest cause for concern is likely to centre on the impact on companies" profitability. About two-thirds of profits on the Chinese equity market come from sectors that have benefited directly from the system of price controls - now slated for reform - such as banks, utilities, and telecoms. The rest of the listed market has seen profits dwindle and debt levels rise. It's a trend that's been under way for a number of years, and possibly explains the de-rating of the market as well. That is the stock market telling you that there's a problem with profitability," says Nick Ferres, investment director at Eastspring Investment. From an investor perspective, the reform is not necessarily positive for profits. Eastspring's regional funds closed their long positions in the Chinese market earlier this month, based on the belief that slowing growth and structural economic reform, though beneficial over the longer term, would weigh on equities. "If you're deploying capital at the index level, then it's probably not cheap enough," adds Mr Ferres. There are probably better markets to put your capital in from an asset allocation perspective. The other question facing investors is how much of the good news has already been priced in. Anyone sifting through the pile of analyst reports earmarking potential winners and losers from the plenum will have spotted a number of repeat themes, such as the healthcare sector and dairy producers. One popular stock pick is Biostime, a Hong Kong-listed baby milk producer that saw its share price rise more than 5 per cent on Monday, taking its year-to-date gain to almost 180 per cent. It now trades on a price to book ratio of almost 12 and a price to current earnings ratio of about 32, compared with an average of just 8.2 times for the wider H-share market. In the healthcare sector, shares in Shandong Weigao - maker of single-use medial devices such as syringes - have leapt by more than 40 per cent since Wednesday, also aided by better-than-expected third-quarter earnings. The MSCI's China healthcare index now trades on a price to earnings ratio of 22 times, compared to just 9.7 for its broad China index. Nevertheless, Ms Liu says that right now, such popular sectors are "still the right places to be."