The Chinese government seldom lets the outside world into its thought process so when it does every word is dissected for its potential meaning not only in terms of the country itself but the global economy too.
Earlier this month, the Chinese government released a paper entitled “A Decision on Major Issues Concerning Comprehensive and Far-Reaching Reforms”, which proposed sweeping reforms including opening up state-owned enterprises to private investment and reducing its stronghold over Chinese business.
The paper was part of its Third Plenum where the great and the good of China’s powerful elite lock themselves in a room for days on end before announcing what reforms they hope to enact in the forthcoming years.
“Economic reform is key, and the core solution is the proper relationship between the government and the market, leaving the market to play the decisive role in allocation of resources and the government to play a better role,” the statement said.
The debate about whether what has come out of the Third Plenum is good or bad is characterised perfectly by one of its most bullish fund manager supporters and another big name who sits on the other side of the fence.
Fidelity’s Anthony Bolton told reporters in Hong Kong last month that the policies were a “catalyst” for foreign investment.
“What I think is really impressive is the extent of what they’re doing, and the amount of reform that they’re doing . . . When you add all this up, I think it is pretty significant,” Mr Bolton said.
“There hasn’t been a catalyst, particularly to get foreign interest back in China. I think this could be the catalyst that brings that money back,” he said. “I think this will be the new story.”
Mr Bolton who is stepping down from his £510.4m Fidelity China Special Situations fund in April next year, has famously lost investors’ money through investment in the locally-listed Chinese ‘A’ shares market since the fund launched in April 2010, although it has rallied in the past six months.
Hugh Young, managing director of Aberdeen Asia and manager of its £2.4bn Asia Pacific fund, said while the tone of the Third Plenum was positive it did not provide clarity about how investors would make money.
The manager said the issue was that while the macroeconomic picture was improving, he could still not find attractive companies on the ground.
“In principle we would love to put money in China through great Chinese companies, but as we have seen with other managers, China can be a rather tricky place when it comes to deciding on the companies,” Mr Young explained.
“...Maybe we are too long in the tooth and conservative, but we prefer a little more clarity. The tone is undeniably good but does it mean you suddenly plough all your money in? It’s not the way we do it,” he said.
Mark Williams, chief Asia economist at Capital Economics, agrees that “the problems that existed on the eve of the Plenum have not gone away”.
“Growth today is still too reliant on investment channelled through an inefficient financial sector,” he said.
“Overcapacity remains a significant threat. The growing glut of unsold, newly-built properties is a particular concern.”
David Lebovitz, markets strategist at JPMorgan Asset Management said the reforms announced in the Third Plenum would “take years to implement”.
The strategist added the Chinese government could still open and close the market for foreign investment depending on the level of inflows it felt was optimal to run its economy.
“On a fundamental level China is still an engineered economy which will work how [the government] wants it to,” he said.
Charlie Awdry, manger of Henderson Global Investors’ £381.5m China Opportunities fund, acknowledged it could take time to see how the reforms affected the economy.
“This has support and backing by the new premier, Li Keqiang (pictured), so it’s a strong document, but when the Chinese government comes up with a policy it is always extremely long term,” he explained.
However, the manager said the Third Plenum had thrown up reasons to invest, adding he regarded the moves made as “significant”.
But Tom Becket, chief investment officer at Psigma Investment Management, thinks that from a contrarian standpoint, China boasts value because most investors are bearish on China like Mr Young.
“I can see both sides of the argument but the consensus negative stance makes me optimistic,” he said. “There are few places still remaining where you can find value, but China is one place where you can.”
“With regards to financial direction and rebalancing towards consumption, these are all steps in the right direction for Chinese equities in the next three years,” he added, although before that there could be a “significant period of underperformance”.
Following this year’s rally in developed markets, many investment managers have said that companies in these regions have become more expensive, so Chinese companies can look attractive on a valuation basis.
But with the state still retaining control of the economy, and many of the businesses, which have to pay a proportion of their profit to the government, it seems too soon to claim the Third Plenum as the tipping point for increased investor confidence in China.
