Whatever tablets fund managers use, information is open to much interpretation and debate, and so in that respect the grand Third Plenum of the 18th Chinese Communist Party Congress has not disappointed.true
The pronouncements may be vague, but investors do at least have some changes to excite them – reform to the Hukou policy, for example, does seem to be happening, though not straight away. Added to this was the news late last week that China is to relax its one-child policy, which would have profound implications on the demographic picture.
Mark McFarland, global chief economist at Coutts, is thus far disappointed by the lack of concrete plans coming out of China.
“There was a candid statement that no changes are imminent to curb the dominance of the state sector, despite the private sector employing the majority of China’s workforce,” he said.
Old guard wins out
“This could be a sign that either the reformers felt overwhelmed by the sheer scale of necessary reforms and left the politically difficult ones to later, or that the conservative old guard won out.
He concluded: “From a macroeconomic perspective, there isn’t much to take away from the communiqué other than the need to wait, and the more medium-term implications of a greater emphasis on free trade zones, and better accountability and reporting of fiscal / banking statistics.”
So what can investors learn from China, and will we get what is needed to stimulate productivity and so boost the fortunes of its equity markets?
Dean Cook, investment research analyst at Duncan Lawrie Private Bank, noted the promise that whilst state ownership would remain at the core of the economy, markets would be allowed to play a more influential role.
“In previous sessions it has been left to provincial Governors to interpret and implement, however this time it looks like there may be a move to reduce the freedom of the provinces and drive reform from the centre,” he said.
Time for real change
“This will give the potential for real change some significant impetus.”
However, as with other emerging markets, Cook warned China cannot overhaul its long-established institutions overnight.
“Reducing the dominance of state-owned enterprises going forward should give non state-owned companies space to flourish. Compared to the larger, less efficient SOE’s, smaller companies are more likely to ‘innovate’ and drive China up the value chain,” he added.
“If China is committed to these reforms, then foreign investors can also think more seriously about committing to investment in the region. Real economic growth and investment opportunities can present themselves, but only if these statements of intent are translated into action.”
