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The complete detail is still missing however most of the leaked changes over the past month will now come into law.
The four biggest changes are the changes to the one child policy, the hukou policy (housing registration legislation), private investment and fiscal and tax laws.
Depending on your point of view the first two points are key changes to labour laws.
The easing of the one child policy will allow parents to have two children if both parents are only children. China, like the rest of the world, is under strain from an aging population and this policy is designed to ‘slow the speed at which the country’s population is aging and boost labour’. This is a very long-term policy as only child parents are not as common as most people would believe, so this will take almost two decades to be felt.
The urbanisation policy change with the relaxation of the hukou policy is, according to some China watchers, the biggest reform since 1958. The act was designed to limit labour mobility and kept farmers on the land and workers where they were needed, the act was one of the pillar of Mao’s revolution however the new changes will scrap this program and allow internal migration into towns and small cities. The largest city’s such as Beijing, Shanghai, Guangzhou and Shenzhen will still have strict rules applied to it, however it will mean a more mobile labour force and an increase of workers into factories struggling with the demand of work needed.
Private investment will also see sweeping changes, however not as significant as some had wanted. Private equity will be allowed into State-Owed Enterprise (SOE) however the communique from last Wednesday clearly stated the intention of the new government that ‘state run enterprise will always be the fabric of the social policies of the republic’ and private equity will remain capped.
This was slightly disappointing, however the fact that a special economic committee has been set up to review private ownership and further liberalisation to economic policies suggests a consensus hasn’t be reached and that further changes will come.
The plan also sets out fiscal and tax reform describing the changes as a ‘foundation and important pillar of the country’s governance and which guarantees long-term stability’. This will be one of the tougher points to implement. Currently the alignment between localities and the central government are quite different. The localities are very powerful and have differing priorities to the central government when it comes to lending and fiscal planning.
The Bao Xilai case illustrates this and this is where new changes will be felt over the coming years. Corruption will be clamped down on localities will see the ability under take corrupt activities severely hit. The programs will be designed to make budgeting more transparent, improving the transfer of funds internally and externally, setting up risk-warnings from central and local governments, improving debt management (to reduce money market spikes and the mass dependence on debt from local governments) and finally speeding up legislation around property tax to cash in on the planned increase in urbanisation.
From a regional point of view the changes to fiscal policy and tax laws will be the biggest short-term market movers. The clamp down seen through April to June is likely fare a few more times. The repo rates in Shanghai will move over the coming months as the central government set this policy in motion.
The reforms are needed for long term prosperity, however in the short term it will cause a few shock waves. Be prepared for the odd month to be hit on the ASX and other risk market exchanges.
What I can see coming from the 60 point plan is several key overriding themes: notably self-sufficiency, a consuming nation, not just an export nation. This will be the single biggest change to how China operates and how they do business with the world.
The other point that comes out is consumption demand will remain; Australian resources will remain a consumption target of Chinese users along with Australian services and agricultural goods. The hard landing some are predicting will most likely be a bump.
Ahead of the Australian open
Ahead of the open we are now calling the ASX 200 up a handful of points to around 5402 to 5406, however judging by moves in risk currencies and Japanese futures it should be a pretty strong day having seen the US markets finish strongly on Friday night.
Having seen the market come back to below my 5350 mark last week, the slight consolidation expected in November could be at an end and the pickup of the asset classes that have waned over the last three weeks should continue today.
The banks and the larger resource names should benefit from this bounce as we head into Christmas, historically the most investors start to ‘set and forget’ positions in their portfolios as they head off for the festive season.