The last trading day of the week kicks off with an unsettling and very odd set of market circumstances. The message is a very clear "take care out there".
Article / 08 November 2012 at 11:05 GMT

Asian Focus: A bumpy road to reform for China's new leader

Market Analyst

In this Asian Focus video Andrew Robinson, Market Analyst for Saxo Capital Markets in Singapore, looks at expectations for the all-important communist party congress in China. The key question is how free will China’s new leader be to drive growth and reform? He also looks at key Chinese macro data and the status of growth.

With the week-long National Congress of the Communist Party of China underway focus is on the leadership set-up and what announcements will be made to frame the new leader in the best light and indicate control over the world’s second-largest economy. What kind of reforms will be made in the next 10 years of rule and to what degree will the leader’s hands will be tied by conservatives and hardliners ruling the party and making reform difficult is key. Also of focus is how leadership for the next 10 years will maintain the constant steady growth that China has experienced up to now.

“The speed of reforms we have seen over the last 10 years has certainly slowed over the past two to three years as the leaders have got bogged down in a slowing economy and a global mess. Now is the time to get back on track,” says Andrew Robinson.

Key focus areas: Fighting corruption and maintaining growth
One of the key reform areas is likely to be corruption. “One of the ways they (Chinese authorities) can tackle domestic unrest is to fight corruption. That is something that really does rile the local population,” says Andrew.

Furthermore, loosening the reins of the Chinese state is another focus area with the degree to which the state-owned companies monopolise the economy being instrumental in moving China towards a micro rather than purely a macro economy.

Maintaining steady growth rates in the years to come is of course paramount to the authorities' success in managing the economy. Though growth has slowed over the past few years it is now at a more sustainable rate, says Andrew.

Macro data
In terms of the current status of growth a slew of Chinese data will be released in the next few days. This includes CPI, PPI and Industrial Production plus Trade and Retail Sales data. Inflation and import data are expected to be of most interest, says Andrew. Inflation is expected to remain steady at around 1.9 percent yoy and if it stays around this level then it might give a bit of leeway to the People's Bank of China to provide some monetary easing. The PBOC has refrained from cutting rates and the reserve ratio requirement but has been injecting cash and that is slowly filtering through into the system, says Andrew, adding that overall China seems to be performing okay. “I think things have bottomed out in the third quarter and we will see slightly better growth into the fourth quarter,” says Andrew.

Generally there is an indication that the Chinese authorities’ growth supportive steps are kicking in with last month’s data the first positives seen in a few months. “We just have to see what this month’s data is like and if it is continuing in the upper trend then possibly we can say that in the near term they (authorities) have done enough to turn the economy around and stop it from sliding,” he says.

Import data will also be eyed particularly by Australia. If there is an uptick in imports then that will probably mean that China has started to restock its stockpiles of resources. “That should be a positive for the Australian economy and perhaps vindicate the Reserve Bank of Australia in recently adopting its no change rate policy,” says Andrew.

Forex reforms
Although forex reforms opening the yuan/renminbi currency market up to outside pressure would be a step in the right direction for China there is little indication that this will happen soon. In terms of currency manipulation the pattern is not expected to change there either.

“Generally China tends to manipulate or manage its exchange rate when it or how it suits it best. Authorities look very much at the domestic situation rather than the external situation. It’s only when bowing to external pressure suits the domestic situation that they will go ahead and adjust the exchange rate,” says Andrew.


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