Anthony Bolton: Chinese Reforms Will be Good for Investors

Fidelity's star fund manager says reforms could be the catalyst to reverse the last three years of lack-luster performance in the Chinese stock market

Fidelity International 25 November, 2013 | 11:21AM
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This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Anthony Bolton, manager of the Fidelity China Special Situations fund, explains what impact recent reforms in China will have on the economy and the stock market.

After a year of waiting we finally have sight of the new leadership’s full reform agenda. Three days after the broad outlines were announced at the Third Plenum meeting in Beijing, a much more detailed document has been issued. In its breadth and boldness it represents probably the most significant reform package in China for about 30 years.

The Chinese stock market has been one of the worst-performing world markets over the last three years or so and valuations remain at a substantial discount to global and emerging market peers. At last, with the publication of the reform programme, we could have a catalyst with the potential to reverse this underperformance.

The comprehensive release covers 60 items in 16 areas. Possibly the biggest headline reform is the change to the one child policy. Although it will take many years for this to have any real effect on the economy, it has great symbolic significance.

The reforms also include measures to reduce government intervention, giving the market a greater role in areas such as the pricing of resources, the setting of interest rates and currency convertibility. They pave the way for private banks and more bond financing and promise to level the playing field between State Owned Enterprises (SOEs) and private companies by, for example, making SOEs pay out 30% of their earnings in dividends by 2020.

The proposed changes will establish more market-orientated state holding companies, reform land rights for farmers, abolish the Hukou registration system in smaller cities and give migrant worker more access to welfare and social security. They will streamline government, abolish forced labour for offenders, increase the independence of the judiciary, accelerate new business approvals and capital projects, create new success measures for government officials beyond simple GDP growth, create more open competition for government tenders and rebalance the tax system between local and central government.

Perhaps the most daring move is the establishment of a new Central Reform Group to oversee all aspects of reform. It is rumoured that President Xi Jinping himself may lead this organisation, underlining the seriousness with which the latest reforms are being taken in Beijing. As is often the case in China the full detail and importantly the timetable for these reforms is lacking at this juncture but I would expect more on the economic reforms to come out in the December Central Economic Work Conference. It would be wrong, I believe, to underestimate the long-term impact of the Third Plenum.

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