Markets reward China's reform ambition, await follow-up
Investors rewarded Beijing on Monday for its ambitious reform plan, sustaining a stocks rally led by consumer goods shares seen as direct beneficiaries of the promised easing of China's one-child policy and efforts to boost consumption.
Key onshore China stock indexes rose the most in more than two months, while China shares listed in Hong Kong were heading for their biggest daily percentage gains in almost two years in high volume trade.
A reported record spike in home prices last month underlined, however, the challenges faced by China's new leadership in charting a steady course for the world's second-largest economy and the urgency of tackling some of its inherent imbalances.
The initial outline published early last week at the end of a four-day plenary session of China's top leadership disappointed markets with its lack of detail and ambiguity, but a more elaborate account released on Friday won praise for its ambition and scope.
Leaked documents already sparked buying of mainland stocks on Friday and that rally picked up on Monday.
Still, UBS equity analysts said the real test would be whether Beijing turns its words into action so that the initial market euphoria would translate into sustained market gains.
"Our answer is optimistic," they said in a client note. "We expect the newly created central leading group of reform to deliver tangible progress within 12 months, and thus turn bullish on 2014 China market outlook."
The CSI300 of the leading Shanghai and Shenzhen A-share listings closed up 3.3 percent, while the Shanghai Composite Index ended 2.9 percent higher - their biggest gains in more than two months.
Hong-Kong's index of mainland China stocks rose more than 5 percent to its highest level in six months. It was heading for its strongest daily percentage rise in close to two years.
Besides plans to give markets a decisive role in key areas such as resource pricing or finance, the reforms also included steps to boost China's urban population. Beijing considers helping millions move to cities as an essential part of a transition to economic growth that is more balanced, less investment-intensive and more consumption-driven.
The easing of the one-child policy has already buoyed shares of stroller maker and distributor Goodbaby International and dairy products makers Mengniu Dairy and Yashili International.
Chinese brokerages and insurers saw some of the biggest gains after the central bank governor pledged soon after the reform details were released to "pull out all stops" to deepen financial sector reforms.
China's biggest-listed brokerage Citic Securities jumped more than 12 percent and was heading for its biggest daily percentage gain on record.
Analysts and commentators suggested the plans were the most significant since Deng Xiaoping's reforms in the late 1970s and the early 1980s that opened up the country to the outside world and set it on course to become the world's factory floor.
"The government will withdraw from its intervention in the market," said Ding Yifan, deputy head of the Institute of World Development, a government-linked think tank, in describing the new approach in an interview with official news agency Xinhua.
He said that while state-owned enterprises would remain the backbone of China's economy they would be exposed to more competition and less protected than in the past.
"We will try to make them compete on an equal footing, which means the government will not continue to provide some fiscal or financial advantage to state-owned enterprises."
President Xi Jinping and Premier Li Keqiang, appointed in March, also announced several breakthroughs in social policy. Besides relaxing the one-child policy, they also pledged to unify rural and urban social security systems and to abolish controversial labour camps.
Moody's Investors Service rating agency welcomed Beijing's reform plans as potentially positive for its sovereign debt rating, local government finances, plus property developers and big strategic state-owned firms.
It also welcomed greater focus on tackling social strains.
"In our view, the leadership recognises that economic growth alone will not address China's social challenges this decade."
The 60-point plan eased concerns that Xi would need months, if not years, to take full charge of China's vast party and government bureaucracy.
But the sheer ambition of the plans and the new focus on letting market forces play a greater role bring new challenges and risks, economists say.
Beijing got a taste of that in June, when a money market squeeze engineered by the central bank to rein in overly risky lending practices, sparked a brief spell of panic and a financial market rout that spread well beyond China's borders.
Economists also point out that many reforms will take years to implement because of their sheer complexity and the need to balance the sweeping changes with the need for stability, which remains the watchword for all Beijing administrations.
JPMorgan China strategists, less optimistic than some of their peers, even said they saw no major change in policies or how markets would view Chinese shares next year.
"Our base case for 2014 is no major breakthroughs in structural reforms and thus no market re-rating."
Xi and his team gave themselves until 2020 to achieve "decisive" results - a tacit acknowledgement of the risks involved in Beijing's balancing act between letting market forces eventually take over and preserving financial and social stability and the Communist Party's political monopoly.
The experience of the past decade is also a reason why optimism about Beijing's bold reform plans is guarded.
Just like Xi and Li, the previous leadership promised to overhaul China's economy and kick its addiction to rapid, investment and credit-fuelled growth, but left it saddled with more debt, industrial overcapacity, pollution and financial strains.