Understanding the Rise of China

If the sweeping economic reforms planned by Chinese leaders during the Third Plenum can be our guide, it looks to be a promising decade for global investors. Details released recently confirmed President Xi Jinping’s concerted efforts to move China toward a market-based economy that mirrors the West.

The plan’s comprehensive nature and the level of clarity evidently pleased investors, as many Chinese stocks experienced a pop.

We believe the positive effect on the equity markets will not be short-lived or limited. A component of U.S. Global’s investment process is to closely follow government policies because they tend to be precursors to change. Xi’s policies, if successfully implemented, “will undoubtedly have profound long-term implications for the Chinese economy and society at large,” spanning economic, political, cultural, social and environmental issues, says BCA.

Some say the sweeping reforms will have an impact similar to the momentous changes following the Third Plenary Session in 1978, when Deng Xiaoping instilled the concept of free markets and ushered in a new economic era.

“Covering 15 major areas and 60 key points, the document is specific, substantial, comprehensive and actionable,” says Jefferies. The changes are so significant, it “rivals that of 1978, when Deng Xiaoping declared the opening of China,” says the research firm.

I asked Michael Ding, CFA, portfolio manager of the China Region Fund, to share his thoughts regarding these sweeping changes and the potential effects on the markets. He has fascinating insight on this subject, as Michael grew up in rural Dalian and is of the same generation as the nation’s leaders. This age group was raised in the era of severe government controls, such as food rations; still fresh in their leaders’ minds was the stagnation of the country.

Improving market inefficiencies is one significant and positive effect, says Michael. Currently, government interventions prevent companies from setting competitive prices. Releasing control should allow the market to decide what prices should be and where labor and capital should be allocated.

BCA says that three areas likely to see improvements in pricing mechanisms include money, resources and land. Changing the pricing mechanism of money influences the exchange rate and interest rates. The research firm says that “the proposed reforms involve freer cross-border capital flows, improved convertibility of the RMB and eventually a market-driven floating exchange rate system.” In addition, more liberal interest rates should allow markets to price capital based on risk and supply and demand, says BCA.

When it comes to resources, the government plans to reduce subsidies and “administrative meddling” in several sectors, including water, petroleum, natural gas, electricity, transportation and telecommunications, which should allow for more competition, according to BCA.

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The reforms affecting the pricing mechanism of land will likely allow for the equal treatment of rural and urban lands. Whereas the government formerly seized rural land, people who live in rural areas in the future could “monetize the rising value of rural residential land” and ease supply shortages in major cities, says BCA.

Included in the considerable social changes are relaxing the one-child policy and reforming the The Power Couple of the East
Americans recently reflected on the 50th Anniversary of the assassination of John F. Kennedy. His death was devastating, as it essentially ended the Camelot reign full of potential and promise for the country’s future.

Today, Chinese President Xi Jinping and First Lady Peng Liyuan are ushering in a Camelot era for China. Similar to the Kennedys, the couple symbolizes the economic and ever-advancing strength of the country.

Xi, a princeling, is the son of Xi Zhongxun, who was among the first generation of Chinese leadership. His father’s claim to fame was in creating a special economic zone in Shenzhen, transforming the area from a small village to one of the fastest-growing cities in the world and one of the busiest container ports in China.

First Lady Peng is very familiar with the limelight, as she was once more famous than her husband, singing patriotic songs in the People’s Liberation Army. Peng is very different from previous Chinese first ladies, who were typically invisible to the rest of the world. As the rest of the world gets to know her, the first lady will likely broaden the appeal of China.

Looking ahead, Xi, together with the new leaders, appears to have the “confidence and determination to lead the nation,” according to Jefferies. We look forward to watching the new leaders put their reforms in place, and agree with Jefferies when they suggest that China could be “on the cusp of a massive multiyear bull run.”

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Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Written By: Frank Holmes