Moderate reforms key to China’s future success

Despite lukewarm market reaction to China’s new leadership, Allianz Global Investors’ China expert Christina Chung is broadly optimistic

Chinese equities fell on Friday November 16, the day after the new seven members of the Politburo Standing Committee, headed by general secretary Xi Jinping, walked out from behind a curtain in Beijing’s Great Hall of the People.

As markets remained stubbornly low the following week, commentators noted that the line-up in this once-in-a-generation change was more conservative than widely tipped. With the country facing multiple challenges to its growth models, many saw market caution as a reflection of uncertainty that the new leadership would undertake needed reforms. It is seen that China desperately needs to rebalance its economy towards domestic consumption and reduce fixed investment from its current share of 48% of GDP.

Yet, Christina Chung, head of Chinese equities with Allianz Global Investors, believes that, amid encouraging signs of a “bottoming out and the stabilization of corporate earnings,” moderate reforms tempered with continuity with past policies will be a key to China’s on-going success. “The focus of the new government will be reform,” she commented in a conference call on the day of the leadership transition. “We believe the new leaders are keen to push forward both political and economic reforms. One area they will focus on is financial liberalization, another is product pricing.” She said there has been discussion around state-owned enterprises (SOEs) and privatization, but admitted reform there could be more difficult and drawn out. Since the transition from a centrally planned economy to a new socialist market economy, SOEs were required to rebuild operational models.

Reforms have lagged in some sectors with problems arising with the labor supply, inefficiency in cost control and pollution. A report on reform of the SOEs reportedly provoked fierce debate among lawmakers in the Standing Committee of the National People’s Congress in October. From a macroeconomic perspective, Chung, who is head of a China specialist portfolio team and has 21 years of experience in managing Asian regional and country portfolios, believes the picture for China is stable. Corporate earnings have stabilized and the monetary policy is neutral with selective increases in fiscal spending in infrastructure.

This is reflected in “pockets of strength,” for example the increased investment in railways since the beginning of the year. Chung cautions that the export sector continues to pose downside risk to economic growth. Exports have languished on the back of foreign economic woes, including the eurozone debt crisis and continually depressed consumption in the US. However, she believes on balance that economic growth has bottomed out, “although there is unlikely to be any significant pickup on growth in the short term.” This means a relatively stable macroeconomic environment going into with steady levels of consumption. As a consequence, the renminbi is expected to display short-term volatility going forward, but remain stable on a one-year basis.

For further details, listen to the call with Christina Chung.

Moderate reforms key to China’s future success

Despite lukewarm market reaction to China’s new leadership, Allianz Global Investors’ China expert Christina Chung is broadly optimistic

Moderate reforms key to China’s future success

Despite lukewarm market reaction to China’s new leadership, Allianz Global Investors’ China expert Christina Chung is broadly optimistic

China’s growing middle-class opportunities

Riding China’s asset management industry

Preparing for China’s peak aging

China’s demographic time bomb