China has set out on a reform course that is expected to structurally transform its economic landscape. Mike Shiao (pictured), Investment Director in charge of Greater China Markets at Invesco, explores the key measures taken and the new opportunities these are believed to bring for investors in China’s equity markets…
Although Chinese equities continue to be overshadowed by weak external conditions and soft domestic economic data, we believe that current valuations may offer long-term investors a compelling opportunity to invest in quality companies at attractive levels.
The ongoing reform and transformation of China’s economic model has one goal – to ensure the quality and sustainability of growth for years to come. China is actively encouraging the move from an export-driven and investment-led growth model to an economy that is driven more by domestic consumption. Key reforms to promote domestic consumption include wage hikes and improving medical and social welfare protection. As a result of accelerated wage growth in China’s urban areas, for example, per capita income has nearly quadrupled over the past decade.
Against this backdrop, we interpret the Chinese government’s recent revision of its GDP growth target from 8% to 7.5% as a positive signal that the country is determined to move from a quantitative-based target of growth at all costs to one that is more focused on the qualitative aspects of growth, which should reduce the dependence on external demand and secure more sustainable growth. I expect the reform process to accelerate in late 2012 and into 2013 following the power transition to China’s fifth generation of leaders.
Other important structural measures include financial sector and capital market reforms as well as policy programmes to encourage private sector and services industries. Among the Chinese government’s recent endeavours have been measures to lower entry barriers for foreign investors, reduce transaction costs and bring domestic equity market practices closer to those of international exchanges. In its efforts to transform from regulation-focused to service market-oriented industries, the government is also actively supporting the growth of the more dynamic private sector.
Over the short term, the Chinese authorities have reiterated the need for proactive fiscal policies in response to the recent weakness. While we expect to see China adopt proactive fiscal policy to stimulate the economy, we believe it is unlikely to be in the magnitude or speed seen in 2009 – such a response would become likely only if there is an extreme deterioration in China’s economic outlook. Continued easing of inflationary pressure is providing a buffer for the Chinese government to introduce more pro-growth fiscal measures over a longer-term horizon.