China’s Structural Economic Reform (VWO, FXP, FXI, EEM)
Jim Trippon: There is often talk both within and outside of China about reform. The recent World Bank report, which was commissioned with the cooperation of China, contained blunt words about the necessity for structural economic and societal reforms. Undercurrents from within China have speculated that for leadership succession to truly be successful, the next group of Chinese leaders must embrace reform more vigorously than current leadership has. Much of the talk surrounding heir apparent Xi Jinping’s impending ascension to power has revolved around how much and how fast he will usher in reforms. None of the current threads surrounding possible reform in China is actually news any longer; what will be news is the first clear direction of where that might be going.
Recently, Premier Wen Jiabao, who’ s in his last year of power, spoke about embracing structural economic changes as well as the need for more vigorous political reform. Wen was speaking to the National People’s Congress, or NPC, at the annual meeting of the national parliament. What gained the most play in the western media, specifically the financial media, was Wen’s comment that he saw GDP grwoth for China in 2012 at a target of 7.5 percent rather than the previous 8 percent. It was the most explicit reference to the government’s acknowledgement and endorsement of the slowing growth for China’s economy. Additional comments which didn’t receive as much attention regarded structural adjustment of the economy.
Wen Jiabao, China’s Premier
More Than Easing?
Most investors are aware of China’s central government undertaking recent measures of easing in the face of slower growth. Over the last several months, these have included such things as ceasing benchmark interest rate hikes by mid-2011, then late in the year the lowering of the banks’ reserve ratio requirement, which was intended to spur lending. This was followed by another reserve ratio decrease, though the government said there’s more work to be done on the credit front. The easing moves have been an attempt to manage the economy in a gradual and incremental way, which has been the hallmark of the PRC approach. The short term effects of the easing measures seem to be working. Inflation, which peaked at an annual rate of 6.5 percent in July, has been slow to recede, but the most recent numbers indicate the government’s 4 percent target number finally may have been reached, as recent 2inflation numbers indicate the latest month’s number came in at 3.2 4 percent. The overheated property sector, which had seen rapidly spiking housing prices and rampant speculation, has been cooled some by stronger restrictive measures on real estate loans, but even the government admits more needs to be done there. Wen echoed this view regarding housing prices in his address.
Although China had been battling inflation and has seen it largely tamed, except in the important property sector, it has recently had to go in the opposite direction in its response to slowing growth. The government is trying to shift the dynamic in the credit markets to open up lending to the critical segment of small and medium enterprises, the businesses that are still a large portion of the country’s economy. With the European slowdown due to its debt crisis, along with the slow US economic recovery, export trade has fallen off. Although ultimately China wants to shift away from such heavy export dependency and markedly grow the consumer segment of its economy, in the short run, export trade cannot be allowed to fall too low.
Wen referred to other longer term objectives in more general terms, when he addressed what he said was the unfair distribution of wealth, and said that political as well as economic reform was needed. Many observers, though, aren’t sure that Wen’s address brings anything new to light in terms of immediate policy changes. The prevailing view among China observers is that there won’t be dramatic reforms, either political or economic, at least those that reach structural elements, in what amounts to a leadership transition year.So China watchers are left to guess as to whether these short term, relatively specific economic policy moves will be the harbingers of more dramatic moves. The safe bet is that we won’t begin to know until 2013, when power changes hands.
Related: Vanguard Emerging Markets ETF (NYSEARCA:VWO), ProShares Ultra Short FTSE/Xinhua China 25 ETF (NYSEARCA:FXP), iShares FTSE/Xinhua China 25 Index (NYSEARCA:FXI), iShares MSCI Emerging Markets Indx (NYSEARCA:EEM).
Jim Trippon, founder of Trippon Financial Media, Inc., is a maverick that has dedicated his investment career to helping investors make smarter financial and stock selection decisions. Trippon, an internationally recognized expert on global and value investing, has a deep passion for finding hidden value in global equity markets. Trippon started his career as a financial statement examiner with Price Waterhouse which allows him to dissect a public company’s financial picture and better identify hidden gems. Trippon’s savvy approach to investing and personal finance makes him in high demand by major media who seek his unique perspective on stocks and global economics. He has been featured in top publications both in the US and abroad including Bloomberg, Investor’s Business Daily, The New York Times, The International Herald Tribune, Stock Futures and Options Magazine, The Bull and Bear Financial Report and he regularly appears on broadcast television including as an on air contributor to CNBC, CNN, Fox Business, and Fox News.
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