Xi Says in New Year Address China Will Make Progress on Reform
Comment of the Day

December 31 2013

Commentary by David Fuller

Xi Says in New Year Address China Will Make Progress on Reform

Here is the opining of this informative report from Bloomberg:

Xi Jinping, delivering his first New Year’s address as China’s president, said the country must press ahead with reforms in 2014 to improve livelihoods and make the country “rich and strong.”

“I firmly believe that new glories will be awaiting the Chinese people,” Xi said in a speech broadcast on state radio yesterday.

China enters 2014 facing slowing economic growth, rising environmental concerns and higher tensions with Japan over a territorial dispute that has damaged a $366 billion trade relationship. Tackling those challenges will be up to Xi, who as head of the Communist Party, military and state has amassed the greatest individual sway over his nation since former paramount leader Deng Xiaoping.

“In 2014 we will make new strides along the path of reform,” Xi said.

A key task will be overseeing the broadest economic reforms since the 1990s which were spelled out at the Communist Party Central Committee’s Third Plenum in November. Shifts include loosening the one-child policy, increasing property rights for farmers and encouraging private investment in more industries.

David Fuller's view

The world’s second largest economy is clearly undergoing an important transformation process.  An investment decision to buy or sell Chinese stocks is a bet on Xi Jinping, who now has more power than any leader since the shrewd and highly effective Deng Xiaoping.

For any subscriber interested in China, I suggest it is far better to place the bet when China’s stock market has disappointed and valuations are cheap relative to most other stock markets.  China’s Shanghai A-Share Index sells at a p/e of 10.6 and yields 3%, according to Bloomberg.  In contrast, the S&P 500 has a p/e of 17.44 and yields 1.89%, while the fashionable Nasdaq 100 has a p/e of 21.9 and yields 1.27%. 

The point is, if China feels too risky, forget it.  However, if you are interested, would you not rather buy when it is out of favour and flat on its back, and the new ruler is becoming more active, rather than waiting for relative strength on a global basis and a clearly established uptrend?  At that point the market could be at least 50% higher. 

However, the question above is academic because you have other options for China, including the Hong Kong Hang Seng Index which has a p/e of 10.57 and yields 3.32.  For instance, I continue to hold the JPMorgan Chinese Investment Trust (JMC LN) which currently trades at a discount to NAV of -8.45%.  I also hold the expensive but still rewarding Atlantis China Healthcare Fund (ATCHLTH ID).  These are examples rather than recommendations but if you are interested in China there are numerous Chinese shares and funds denominated in different currencies and registered in different countries.

For additional perspective, you may be interested to read China eases immediate cash crunch but policy still tightening, by Ambrose Evans-Pritchard of The Telegraph.  Here is a sample paragraph:    

 “Foreign investors are now scooping up Chinese stocks at bargain prices, betting that the Communist Party's Third Plenum in November will lead to a major free-market shake up -- a hotly disputed issue given the intense resistance from vested interests within the Party. Patrick Chovanec from Silvercrest Asset Management said foreign investors may be jumping the gun. "Looks cheap is not the same as is cheap," he said.”

 For me, bargain prices for stocks in the world’s second largest economy is the more interesting point.  

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