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