China’s government met over the course of four days in the third plenary meeting of its reign earlier this month, and Chinese stocks gained roughly 5 per cent in the days following the end of the meeting.
The government announced a raft of plans aimed at reforming state-owned enterprises and opening up financial markets. It also said it would relax its long-standing policy of restricting families to having only one child, as well as bringing an end to labour camps.
But Asian and emerging markets fund managers have played down the immediate impact of the announcement, saying it may take years to have a meaningful impact on the investment case for China.
Samir Mehta, manager of the £66.2m JO Hambro Asia ex Japan fund, said: “The broad economic reforms are not going to be as relevant until the government addresses the cost of credit.
“Rates in China are controlled by the government. Until they change this, any other reforms will be peripheral.”
Although the government did state its intention to “liberalise” interest rates, it did not give details about how this would materialise.
Mr Mehta said the “significant effects” of rate rises in China – including rising unemployment and businesses going bankrupt – could put off the government from pushing through real changes.
Newton’s star Asian equity manager Jason Pidcock said he had put a little bit more money into China but was maintaining his underweight position in the country in his Asian Income and Emerging Income funds.
“In the short term it is not going to make a big difference, but in the long term it will improve things,” he said, adding that unlisted stocks “may do better” than many listed companies.
Richard Titherington, manager of the £110m JPMorgan Emerging Markets Income fund, said the changes being made “over time should benefit markets”. But he added: “By way of actual, immediate investment opportunities, there is nothing significant for the moment because we are looking at individual companies and nothing has immediately changed.”
China equity managers reacted more positively to the reforms, with Henderson’s Charlie Awdry saying the reduction in the government’s influence in sectors such as water, oil and gas, as well as state-owned companies, could “spark a drop in the risk premium applied to the Chinese market”, as indices are often dominated by government-owned businesses.
“We will be looking to add value stocks if our assessment of the industry outlook brightens as a result of these policies,” he said.
Jupiter’s Philip Ehrmann, who runs the £182.5m China fund, said the government’s statement that market forces would be “decisive” in determining its allocation of resources was significant, and suggested greater access to the Chinese stockmarket.
The manager said his initial reaction had been that the plenum had been something of a damp squib.
However, he added: “My view remains that the tone – and ultimately the detail – provides further support for maintaining a strategic preference for the ‘New China’ stockmarket sectors of consumption, information technology and healthcare.”
Market will play more decisive role
The Chinese government pledged to let “the market” play a more decisive role in how its resources are allocated, as it prepares to open up the direct market to more foreign investment.
Although the wording was vague, with the government pledging to “improve financial markets”, the document set out many areas of change including “liberalisation of interest rates”.
Among the market reforms mentioned in the plenary document are a unified “entrance system” to the stockmarket, making it easier and fairer for new companies to be established. The exit system is also set to be reformed “to promote the survival of the fittest”.
The government also stated that “any price that can be affected by the market must be left to the market”.
This restricts the areas where the government will intervene in pricing to “public utilities, public service and areas that are naturally monopolised”, meaning water, oil and natural gas trading will be opened up.
State firms face tougher competition
One key element of market reform is the government’s move to increase competition in areas dominated by state-owned companies.
The plenary announcement stated the government’s desire to “support the healthy development of the non-public economy”, which it said would help boost growth as well as supporting employment and tax revenues.
The government also promised to “encourage” state-owned firms to reform themselves and open up to external investment, as part of a new emphasis on a “diversified ownership economy”.
It said it would reform the laws governing who can pitch for franchises to make sure state-owned enterprises do not obtain an unfair advantage over other companies.
Arthur Kroeber, founding partner at research company GaveKal, said although the reforms would not result in a widespread sale of state-owned assets, such companies are now set to face “far more competition, far more pressure to perform and a far less cozy regulatory environment”.
