China’s leaders are under pressure to revamp the nation’s finances as swelling local-government debt highlights the risk of a buildup of bad loans and state businesses’ access to bank funding crowds out small firms. Today’s document didn’t discuss specific issues such as regional borrowing, interest rates or the one-child policy, while referring generally to giving farmers more property rights.
“It’s going in the right direction is the most you can say,” said Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc in Hong Kong. “Even though some of the phrasing is new, the ideas are not so new.”
The communique, published by the official Xinhua News Agency, reiterated the role of state ownership while saying development of the non-public sector will be “encouraged.”
That emphasis “probably precludes drastic state-owned enterprise-related reforms,” said Kuijs, who previously worked for the World Bank in China.
The announcement following the weekend’s policy summit has underwhelmed markets. This is particularly noteworthy because high level officials had taken such pains to hype the reform agenda ahead of the meeting. What is perhaps most important is that while a greater role for markets has been advocated, nothing specific has been mentioned about reform of the state owned enterprises (SEO) sector. These companies remain the personal fiefdoms of individual party cadres and represent a barrier to greater competition and efficiency. (Also see Comment of the Day on October 29th).
From the perspective of a stock market investor, this announcement has not produced the bullish catalyst many were hoping for. Further clarity on what exactly is planned may emerge in the coming days but in the meantime there remains a wide disparity in the performance of China’s stock markets.
The CSI300 is heavily weighted by SEOs and continues to deteriorate. It will need to sustain a move above 2400 to break the two-month progression of lower rally highs and suggest a return to demand dominance.
The Shenzhen B-Shares Index, which is more reflective of the private sector and does not contain banks, has been ranging below its 2010 peak near 900 for most of the year and a sustained move below 800 would be required to question potential for additional higher to lateral ranging.