Focus on China

29 November 2013

The multi-manager team that met with China’s top managers in recent days has reported back with an extremely positive outlook. Indeed, Xi Jinping’s administration has outlined an ambitious program of social and economic reform.

With respect to the former, Xi Jinping and his government have announced plans to introduce various changes giving the Chinese people greater rights. One of the most significant reforms in this area is the census (hukou) of people who have emigrated from rural areas to the cities, and who will finally be eligible for basic social services in the cities, until now reserved solely for “resident” families.

The administration has also decided to loosen restrictions on the number of children couples may have in order to remedy the issues arising from the ageing population and promote balanced population growth over time.

However, countering these signs of openness with respect to human rights, Xi Jinping is more hostile to international rivals. The recent decision to consider the air space above the Diaoyu Islands as Chinese triggered tension with Japan and the United States, but the chances of armed conflict arising as a result of this are remote.

In economic terms, the most important development has been the government’s approach to the market, with the market taking on a decisive role in the allocation of resources. In this respect, government-owned businesses will have to start competing with private companies in many sectors, except those that are strategically important. Furthermore, the government has repeated that the market will play a more important role in the determination of interest rates – which are currently controlled by the government – and the exchange rate.

In short, the reform program that the government is about to implement is extremely positive and will encourage a widespread re-rating of the market in the long term. In this context, nonetheless, managers must know how to select the sectors and companies with the best prospects, which do not always appear in the indices. Indeed, indices are increasingly less reflective of the trends playing out in the Chinese economy as it undergoes historic transformation and offers exciting investment opportunities to local managers capable of exploiting them.


by Moreno Tatangelo