Delay in recovery and acceleration in Reforms
Comment of the Day

May 29 2013

Commentary by Eoin Treacy

Delay in recovery and acceleration in Reforms

Thanks to a subscriber for this report by Jun Ma and colleagues at Deutsche Bank. Here is a section
Due to a few reasons, we believe that credit policy will likely be more relaxed than we previously thought. 1) Growth has been weaker than expected. 2) Inflation has been low in recent months, giving more room for monetary expansion. 3) 7m college students will graduate in June, but the % of them who have found jobs is substantially lower than that of same time last year. This puts pressure on the government to boost the pace of job creation. 4) Difficulties in getting additional fiscal expansion approved imply that credit easing is a more convenient option. 5) The recent acceleration in social financing has so far not translated into a visible impact on the economy, raising doubt on whether non-bank financing can truly substitute bank loans.

Reforms to be announced in autumn
We expect the government to announce a major economic reform package in September or October, involving a few dozen reforms in areas such as deregulation, fiscal, financial, resource pricing, capital account, rural land, and social security. Many reforms will help lift the quality and potential rate of long-term growth. We believe that deregulation and fiscal/resource pricing reforms will benefit railway/subway, gas, water and wind; social security reform will benefit insurance; capital account liberalization will benefit FX banks and brokers. On the other hand, coal will likely be hit by reforms.

Eoin Treacy's view China has been a relative wallflower so far this year when compared to the fireworks in other Asian markets. The pace of reform has been disappointing and has weighed on the stock market over the last number of years. However Xi Jinping's ascension to power increases the likelihood that China will progress towards the consumer oriented economy necessary to fuel the next cycle of GDP growth.

Valuations remain attractive and the new administration is still laying out its policy agenda for the next decade. Over the weekend Mr Xi announced that China would no longer sacrifice the environment for economic growth. If this is in fact true, it could represent a significant benefit to international steel producers who have had to contend with massive oversupply by Chinese mills.

The banking sector remains by far the largest weighting in the Shanghai A-Shares Index and found support in April near the 200-day MA. It has held a progression of higher reaction lows since and a sustained move below 9000 would be required to begin to question medium-term recovery potential.

The Shenzhen B-Shares Index does not include banks and is comprised of shares foreign investors can purchase. The Index found support in the region of the 200-day MA from April and has rallied to test the January and 2010 peak near 900. A clear downward dynamic would be required to check momentum beyond a brief pause.

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