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Graham Macdonald, MBE MBMG International Ltd.
Nominated for the Lorenzo Natali Prize


Broken China?

Last year China ended up, if the government statistics are to be believed, with economic growth at 7.7% year on year. This year it will reduce slightly to just over 7.0%. As regular readers of this column know, I believe there are lies, damned lies and statistics.
This growth forecast is going to be difficult to maintain as it wants to bring in a load of economic reforms whilst stabilizing growth. These two things are difficult enough to achieve separately and almost impossible when tried simultaneously. If one is more important than the other to the Chinese government then it is highly likely they will go for reforms.
At the Economic Work Conference late last year, the Chinese stated that they wanted the Free Market to play a much more important part in building and creating the economy. Initially, this will create more volatility but it should be worth riding through. The potential problems are manifold though, volatility could bring about a drop in investment, certainly over the short term, and this could affect such vital factors and sectors such as employment.
However, these are certain things that are important to take into consideration. Firstly, consumer spending will play a vital part in China’s growth plans even though it is probable that investment-driven growth will go down this year. What does “investment driven growth” mean? Well it involves such things as debt reduction, much more controlled credit authorization, and less public investing. This could, in turn, affect the property market as well as the infrastructure projects.
If they do not get things right then the economy could slow down a lot quicker than it is meant to do. It is a matter of getting things right.
The Chinese government has decided to do these reforms so as to increase growth potential and create income streams in years to come. They will also, hopefully, reduce such things as trade imbalances but also allow for the likes of excess capacity. The reform agenda includes major factors such as:
1. Deregulation - Better and easier access for private investors to previously closed sectors (oil and gas, railway, metro, telecommunications, bank, insurance, health-care services, education and culture).
2. Liberalisation - Easier access for foreign investors. E.g., to more service industries (financial sector, education, health-care treatment, culture, logistics, eldercare, e-trade, etc. But also free-trade agreements).
3. Financial liberalisation - Encouraging private investors to establish small and medium-sized financial institutions, liberalisation of interest rates, development of the bond market, etc.
4. Hukou and land reform - Ensuring better land rights and capital gains for land owners in rural areas. Initiatives to make the transition from rural to urban areas easier in terms of rights in the cities.
5. Resource price reform - Increased competition and market prices for allocation of resource prices.
6. Fiscal policy reform - The states’ expenses and income - and less dependency on selling land. VAT reform, property taxes, initiatives to reduce pollution (environmental taxes, etc.).
7. State Owned Enterprises (SOE) reform - Initiatives to differ the commercial and non-commercial parts of the SOE. Explicit requirements of larger dividend payments from SOEs.
8. Social security - Development of pension, unemployment and healthcare insurances, etc.
The implication is that the majority of the aforementioned cannot go it alone but need to be implemented together. This in itself will bring in, directly or indirectly, fiscal and socio-reform. It will also be interesting to see how they are going to finance all of this.
Should China be part of your portfolio? Yes, absolutely, but be prepared for a potential rough ride in the coming months and do not tie yourself into anything you cannot get out of quickly.

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]


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Broken China?