Investing in China: Is this the country’s Thatcher moment?

Investing in China: Is this the country’s Thatcher moment?

But can this really happen in China, a vast, diverse country riven with vested interests? How long will the process take? And how should investors react now?

The answer lies in the detail of the reform package. The Telegraph went to China to get a feel at first hand of the challenges facing the country and to ask experts based in the region, both Chinese and Westerners, what they expected the proposed reforms to mean for investors.

The Chinese government’s announcement of its plans, which came at the end of a top-level meeting, or “plenum”, ran to 16 separate changes. The most eye-catching was the pledge to scrap China’s “one-child” policy, which was designed to prevent the population growing so high that it couldn’t be fed. However, the effects of this change, which should stave of China’s ageing crisis, will take time to be felt, while some of the others should bear fruit much sooner.

One proposed reform that has a Thatcherite pedigree is a plan to liberalise China’s restrictions on capital controls to make it easier for foreigners to invest. Mrs Thatcher abolished these controls in her first year in office in what was seen as a bold statement of intent, given fears that a run on the pound would result. The likely outcome should be more overseas companies operating in China, boosting expertise and competition.

The Chinese government also intends to speed up the deregulation of interest rates, which should lead to lower borrowing costs for companies and therefore higher profits. The two reforms were described as “really significant” by Anthony Bolton, the legendary Fidelity investor who now runs its China Special Situations investment trust.

Much attention has been on the proposed change to the one-child policy

China also intends to reform its huge array of state-owned companies. Under the proposals, the government would step back from day-to-day involvement, allowing the companies to focus more on returns for shareholders and less on politicians’ own agendas. This should make them more efficient.

While there are no plans for full-blown privatisations along the lines of BT and British Gas, the plans would lead to these companies becoming more like their private-sector rivals.

Currently, what we would recognise as normal privately owned businesses are allowed in China, although they are subject to onerous red tape. As part of a levelling of the playing field between the state and private sectors, the Beijing government plans to abolish some of the regulations affecting privately owned firms and make it easier for them to borrow, either from Chinese banks or by issuing bonds. At the moment, state-owned companies tend to get preferential interest rates on loans from the banks, which are mostly state-owned themselves. Again, lower borrowing costs and better profitability should result.

Another reform would make it easier for privately owned banks to be set up, although one emerging markets fund manager said the process could take 20 years.

As part of a crackdown on corruption, competitive tendering for government contracts is proposed – another echo of the Thatcher agenda.

Moves to simplify the system of regional and local government and centralise some of their functions should also discourage corruption and speed up decision-making.

Something that is more uniquely Chinese is the sharp division between the countryside and the towns and cities. Chinese farmers do not own their land; they simply have the right to farm it. One change would be to allow them to sell these rights to bigger farmers, potentially leading to more efficient agriculture.

Already large numbers of rural dwellers migrate to towns and cities to find better-paid work in factories and offices. But they are treated by the local officialdom as second-class citizens. For example, they have no rights to state-funded health care or education unless they go home. The reforms envisage ending this discrimination by centralising the benefits system, although it is likely to be a gradual process .

This change could bring several benefits to the economy. First, it would encourage these migrant workers to spend rather than save, boosting China’s push to encourage consumption. Second, they are more likely to settle permanently, giving companies a more stable workforce and cutting their recruitment costs.

Moves to liberalise the stock market could encourage a culture of private share ownership and at the same time give companies another way to raise money that does not involve borrowing. Currently, firms that want to sell their shares to the public effectively go on a waiting list operated by the regulator, with only a few given the green light every year. The reforms envisage simply requiring companies to meet the rules before floating on the market at a time of their choosing. These changes could start to be implemented within months.

China’s one-child policy has been significantly relaxed so that couples can have two children as long as at least one parent is an only child. “This is very important – it was a terrible policy,” said Ting Lu of Bank of America Merrill Lynch, an economist who specialises in China, although he added that the change had been expected for a while. Shares in some companies – such as those that make milk powder or prams – rose by as much as 8pc when the decision was announced.

What did professional China watchers make of the reform package as a whole?

“We believe the current leadership did a great job in delivering such a comprehensive collection of reform plans,” said Mr Lu. “Given all the social, economic and political constraints, this decision is perhaps the best reform package we can get at the moment.”

But he added: “Some of the messages in the announcement may conflict with each other, some reform goals are still too vague, some reforms might be just intermediate steps towards a truly appropriate system for China, and some reforms might not be effectively carried out.”

Mr Bolton said: “Add it all up and it’s pretty significant.”

Hugh Young, who runs Aberdeen’s popular Asia Pacific fund, said the reforms offered “a clear, considered path” to a more market-oriented economy. “They are all steps in the right direction, but as always the devil is in the detail and implementation will be a matter of time. I won’t be doing anything different immediately.”

How should investors react to the reform package? A look at the graph on the previous page shows how extreme the ups and downs of the Chinese stock market can be, although there are other ways to get exposure to its economy, such as via companies listed in Hong Kong, or even in the West, that are less volatile.

Also, a good stock picker should be able to produce more consistent returns. One problem in China is that companies are less open than in the West, with links to the government or other companies not always disclosed. A manager who can avoid these traps will produce better returns than the index.

Even so, investing in emerging markets takes a certain amount of nerve.

It’s impossible to predict what the future holds for China’s economy and stock market, so it’s better to be prepared for whatever it might throw at you. Selling out completely would, if China gets its reforms right, deprive you of the chance to share in the growth of an entrepreneurial and dynamic economy.

But investors should not bet more than they could afford to lose, or put more than a small percentage of their portfolio into China. Don’t be surprised if the market falls by 50pc – or doubles – but, if you trust your fund manager, hang on through the ups and downs.

Buying a fund with a more flexible remit to invest across a wide range of emerging markets should also cut your risk. Two of the most experienced emerging market managers are Mr Young of the Aberdeen Asia Pacific fund and Angus Tulloch, who manages the First State Asia Pacific Leaders fund. Aberdeen’s New Dawn and First State’s Scottish Oriental Smaller Companies offer investment trust alternatives.

Andrew Summers, a fund expert at Investec Wealth & Investment, tipped Fidelity’s offshore South East Asia fund, run “admirably” since 2001 by Allan Liu, and the Prusik Asia fund, managed by Heather Manners since 2005.

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