China: Reform story still intact

Financial reform is still the big story for China, says Michael Lai, investment director, GAM…

While the slide in China’s mainland stock market is dominating headlines, investors should remember that the long-term story for China is reform. Despite short-term policy errors that triggered the market sell-off, actions by the state reflect China’s desire to implement financial and structural reforms to boost long-term growth. This is occurring at a much faster pace than anyone could have anticipated.

State intervention to halt the slide in the A-share market was wrong. Although the market stabilisation measures had the desired effect, it came at the price of an un-investible market, undermining the state’s own plans for market overhaul. On a positive note, levels of margin financing, which had seen a rapid increase preceding the sell-off, are finally being brought under control.
The government now needs to step back and let market forces determine the fair price at a sector and individual stock level. History has shown us that government-built ‘artificial floors’ never work long-term. While in the immediate future this could see the A-share market resume its fall, if it reflects the will of market forces such a move should not be viewed in a negative light.
Given that the sell-off was more to do with forced liquidations rather than fundamentals, we believe that value has now returned to the market. This is creating plenty of opportunities, particularly in the H-share markets which suffered a less acute sell-off following the partial closure of the A-share market.
While China’s economic growth is still considerably better than the growth of developed markets, we expect further monetary easing is on the cards. China’s monetary policy behaviour remains highly accommodative and policy makers have plenty of firepower still available.
Financial liberalisation and capital market reforms are the only way for China to rebalance its economy away from reliance on external investment in favour of consumer services and domestic demand

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