Carmignac’s Haiyan Li Labbé provides China outlook

Haiyan Li Labbé, analyst on China at Carmignac Gestion, believes recent political decisions have set the stage for a decade of improvements in the country.

Over the last few weeks, emerging market prospects have picked up in a context of delayed return to normal by US monetary policy makers and an improving Chinese economy.

Indeed, the Chinese slowdown and robust monetary tightening undertaken by monetary authorities had added to the market’s gloom caused by the announcement of a change in US monetary policy. Emerging markets’ consequent mini-crisis in May/June showed that the emerging world is split into two groups.

On one side we have the countries with cash to spare (China, South Korea, Taiwan, etc.) and, on the other, those heavily dependent on external funding (e.g. India, Brazil, Turkey, South Africa, etc.), whose exchange rates and fixed income markets remain weakened by the threat of scarcer liquidity. The delay in bringing US monetary policy back to normal and the improvement in the Chinese economy have brightened general prospects for emerging countries.

Structural reforms to come

In China, leading indicators of industrial activity, industrial production itself and lending have picked up in recent months. Additionally, the third session of the 18th Communist Party Conference held this November put forward major reforms intended to contribute positively to structural improvements in the economic outlook as well as political, legal, administrative and social improvements in China. It seems that the government is determined to implement these reforms which, according to plans, should be completed in 2020.

We are convinced that these reforms will have a decisive impact on the country over the next ten years. Among the main measures planned, the creation of a committee tasked with overseeing the development, coordination and implementation of the reforms is in our view very positive. It is highly probable that Xi Jingping will lead this organisation. If this happens, it will be the first time since the 1980s that a Party Secretary General plays a decisive role in the implementation of a programme of reforms.

From a fiscal standpoint, the current tax system should undergo extensive changes, resulting in the roles and responsibilities of local governments and central government being redefined. For example, a greater percentage of tax revenues should reach central government, which could develop its social policy and encourage consumer spending rather than excessive savings. In a similar vein, reform of the Hukou system for population registration and monitoring set up during the Mao era could also mean further changes. It would allow the 230 million migrant workers to obtain a proper status in the region in which they work. This would give them the same access to public services as other inhabitants of the region and boost their potential consumer spending. Another reform relating to agricultural land aims to offer greater protection to farmers with regard to their property rights. They should benefit from greater freedom and better financial compensation when selling their land. Furthermore, the highly popular anti-corruption campaign may be stepped up, helping to improve economic efficiency.

Lastly, two major topics, the one-child policy and State-owned businesses, will also see changes in the coming years. In fact, the law may allow families to have two children, if at least one of the parents is an only child. With regard to businesses owned by the State, the measures envisaged will aim to increase their efficiency, e.g. by bringing in professional management teams and increasing dividend payments. However, we are still awaiting further clarifications on this point.

We also believe that the strength of the yuan compared with all emerging market currencies during the crisis this spring could add credibility to China’s plans to establish a trade and reserve currency that instils confidence in the region’s various players while consolidating China’s position.

 

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