Reforms Could Unleash China’s Growth Potential

On Nov. 15, Chinese authorities issued the “Decision on Major Issues Concerning Comprehensively Deepening Reforms,” a package of extensive, aggressive reforms that focus predominantly on socioeconomic issues.  This document — which mandates definitive results by 2020 — represents the largest expansion of economic freedom since the 1990s and may significantly raise China’s growth potential. 

‘Decisive’ role for market

The underlying rationale of the proposed reforms is to let market forces take a “decisive” role in resource allocation in as many areas as possible, with the exception of strategic industries. In our view, the most profound economic implications for China will result from proposed reforms of: 

  • State-owned enterprises to improve operational efficiency and develop a mixed ownership structure by allowing more private participation.
  • Resource pricing to make the cost of water, oil, natural gas, electricity, transportation and telecommunications more market-oriented.
  • Rural land rights to provide farmers with greater protection of their property rights and more freedom to sell their land.
  • The housing registration system (hukou) to promote construction and improve social benefits for migrants, which may boost consumption.
  • The one-child policy to enhance China’s long-term growth potential by slowing the decline in the working-age population. In the near term, this reform will likely boost child-related sectors such as education.
  • Fiscal policy, specifically value-added taxes on high-pollution industries and a property tax rollout.
  • The financial sector to accelerate interest rate marketization and renminbi capital account convertibility, allow  private capital to set up small- and mid-cap banks, establish a deposit insurance program, liberalize the treasury yield curve, and change the initial public offering (IPO) mechanism significantly.
  • The social security program to improve the fairness and sustainability of the pension system.

Implementation is key

While this ambitious plan gets China moving in the right direction, the key is successful implementation. Because these reforms affect many stakeholders, implementing them will take time, but the stated goal of achieving definitive results by 2020 establishes a definite timeframe.

Looking ahead, we expect to have clearer perspective about the urgency and priority of these reforms as detailed implementation plans are announced by relevant ministries over the coming months.  In addition, we anticipate the sentiment boost spurred by the reform package will be a major driver of select sector performance over time.

About risk

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

The performance of an investment concentrated in issuers of a certain region or country is expected to be closely tied to conditions within that region and to be more volatile than more geographically diversified investments.

Joseph Tang

Investment Director

Joseph Tang is an investment director for Invesco Hong Kong and a portfolio manager for Invesco Chinese equity products. He has been specializing in the China A-shares market since he joined Invesco Great Wall, Invesco’s China joint venture, as head of investments in September 2006. In August 2007, he joined Invesco Hong Kong to manage QFII portfolios investing in China A-shares.

Prior to joining Invesco, Mr. Tang was a vice president and greater China equity strategist at Credit Suisse Private Bank from December 2004 to August 2006. He was the head of research at Sun Hung Kai Securities from September 2000 to November 2004. Prior to that, he spent six years in Asia ex-Japan fund management, managing portfolios at Daiwa Investment Advisors (HK) Ltd., East Asia Hamon and BZW Investment Management (HK) Ltd.

Mr. Tang graduated with an MS degree in finance from the University of Lancaster, UK.

 

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