Seeking Alpha

Stocks fall in China as investors cautious on Third Plenum

  • "While the [Plenum] communique may have disappointed some, it is normal practice for the post-event statement to cover only broad principles," a Barclays economist quoted by CNBC says, regarding investors' reaction to the conclusion of a four-day meeting at which China's leaders sketched a forward-looking plan for their country's economy.
  • Shares are nearly 2% lower in both Shanghai and Hong Kong as the 5000-word statement that followed the meeting struck analysts and investors as too vague and borderline contradictory.
  • Some expect a final document (called the "Decision Document") due out next week to provide more detail on specific reforms.
  • ETFs - Stocks: FXI, GXC, PGJ, YAO, FCHI, PEK, CAF, YXI, XPP, FXP, MCHI, YINN, YANG, TCHI, CHXF, KFYP, HAO, ECNS. Bonds: DSUM, CHLC. Currency: CNY, CYB, FXCH
Comments (5)
  • samuel_liu
    , contributor
    Comments (2794) | Send Message
     
    BAM!!! Shows the confidence Cn traders have in its government.
    13 Nov 2013, 05:21 AM Reply Like
  • samuel_liu
    , contributor
    Comments (2794) | Send Message
     
    http://on.wsj.com/1fAPUfR
    13 Nov 2013, 05:34 AM Reply Like
  • samuel_liu
    , contributor
    Comments (2794) | Send Message
     
    http://ti.me/1gJaL3u
    The big meeting ended with a big whimper, a declaration of reform that had some bright spots but overall showed that China’s leaders don’t believe their economic system is in need of drastic repair or reformation.

     

    Xi and his team are downplaying the major problems China’s system is spawning. The economy is plagued with excess capacity and is poor at supporting entrepreneurship. Rule of law is practically nonexistent and bureaucratic interference heavy-handed. Debt is rising to dangerous levels. Fitch figures that total credit will surge to 216% of GDP this year from 129% in 2008. That’s scary. And as China’s costs rise, the economy needs a major upgrade in order to compete with the U.S. and other rich economies.
    13 Nov 2013, 06:48 AM Reply Like
  • samuel_liu
    , contributor
    Comments (2794) | Send Message
     
    Which rich economy is gonna bust 1st from their stimulus'. I doubt it is Cn. The last 2, one started in SE Asia, the 2nd began in the USA!
    13 Nov 2013, 06:53 AM Reply Like
  • Mike Holt
    , contributor
    Comments (1464) | Send Message
     
    The CCP advertised that the Third Plenum would introduce reforms of historical significance even greater than those introduced by the Third Plenum in 1978 when Deng Xiaoping unleashed free market forces that launched China onto one of the largest, fastest economic growth trajectories that the world had ever seen.

     

    These advertised reforms were believable for many reasons, with these two being chief among them:

     

    Previous reforms were never fully applied to those living in rural areas and, together with a hukou system that essentially segregates the population into the haves and the have nots, this makes it nearly impossible to establish coherent government policies and banking practices, which in turn prevents private enterprise from taking hold. How do commercial banks compete against quasi-commercial banks that double as "policy" banks and are therefore entitled to special subsidies and backstops from the government? With a population that has been split into two, this is inevitably a recurring issue and it is often not clear when the loans qualifying for special treatment were made for commercial reasons or public policy purposes.

     

    Those living on farms did not have the right to freely sell their interests in the land they farmed since it was owned by communes. This allowed local government officials to "acquire" the land for dirt cheap prices and then sell it to real estate developers who would then use the land as collateral for loans for magnificent projects that often make very little economic sense but they create jobs and allow the local government officials to satisfy the GDP growth targets mandated by the Central Government. The CCP's Central Committee was unable to control this activity because when the state-controlled banks stopped making these types of loans, creative new financing vehicles sprung up that became quite popular since they were funded by high-yield Wealth Management Products offered to "priveleged" investors, thus allowing them to circumvent the overnment set limits on deposit rates that banks could offer through normal channels. These loans were also not required to be held on the balance sheets of banks, or could be converted into inter-bank loans subject to much lower capital requirements than commercial loans made directly by the banks, so issuing Wealth Management Products (WMPs) could also serve as a way to offset growing capital requirements for Non-performing Loans (NPL's) or to jettison bad loans from their balance sheets entirely. At the same time, those investing in these mostly short-term high-yield WMPs believed they enjoyed the same implicit government guarantee as regular bank deposits even though neither is explicity backed by depositor insurance or other forms of protection. As such, even though these WMPs are grossly mismatched with the long-term projects of questionable economic merit that they have been used to finance, they have been tremendously popular and believed to have accounted for 1/3 of new lending over the past five years. Nobody even knows how much of this debt exists, but it is guesstimated to equal between $2.5 to $5 trillion--and still rapidly growing, outside of the Central Government's control.

     

    Faced with the problem of how to sustain its targeted 7.5% GDP growth while reining in Fixed Asset Investment spending that now accounts for over 50% of China's $8 trillion GDP without causing a credit crisis, its clear that the CCP must implement some type of reforms. But how? This may explain the confusing and seemingly contradictory language announced upon the conclusion of the Third Plenum yesterday that market forces will now play a "decisive role" in the capital allocation process and the government will play a larger role to ensure that this is the case. There are a number of required reforms, but some can't be implemented for years and those that could be implemented quickly pose a risk of disrupting an already fragile financial system. For example, providing farmers with greater ownership rights over their land could pop a real estate bubble for homes in big cities where, as non-residents of those provinces they are not allowed to own property. And, it could also make it more difficult for local governments to sell farmland to real estate developers to build more empty cities. But, since land ownership was not allowed in the past, its not clear who would own what and it could take years to establish this through land surveys, etc.

     

    This may also explain why the CCP Central Committee announced that they would be forming a special committee to determine what exactly their historic reforms might be. In other words, other than recognizing the urgent need for huge reforms, they don't yet know what to do. That's a growing problem with Command and Control style systems as an economy grows and develops into a more complex array of activities that are best dealt with through the discipline of natural market forces. Like a motorist who just whizzed past their exit on the NJ Interstate Highway, they've suddenly come to realize that speed doesn't matter if you're traveling in the wrong direction. We must now wait to see what they plan to do, when they plan to do it, and where they may wind up.
    13 Nov 2013, 09:23 AM Reply Like
DJIA (DIA) S&P 500 (SPY)
ETF Tools
Find the right ETFs for your portfolio:
Seeking Alpha's new ETF Hub
ETF Investment Guide:
Table of Contents | One Page Summary
Read about different ETF Asset Classes:
ETF Selector

Next headline on your portfolio:

|