Will Shift in Policy Bear Fruit?

11/27/2013 12:01 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

The reforms recently announced by the Chinese Communist Party boosted Chinese shares, but MoneyShow's Jim Jubak questions whether they'll have a lasting impact.

In the immediate aftermath, if you will, of what's called the Third Plenum of the Chinese Communist Party's central committee, we had a pretty big bounce, so that on Monday, November 18, you had about a 2.5 to 3% move upwards in the Shanghai market and in the Hong Kong market, because the Plenum announced a series of reforms to the economy and people said, “Oh, okay, those reforms really are going to make changes in the economy. They're going to get growth going.” In fact, there are specific areas, since there was talk about liberalizing the way that IPOs get done, a big bounce in securities companies, some sense that it was putting more money into the consumer system through changes in the migrant regulatory system, as well as in changes in how land can be bought and sold, so consumer stocks went up. That was Monday.

What's been interesting is that you've had second thoughts in the rest of the week, and they're not because the reforms are seen not to be working, or not to be important, the question that people are starting to ask is, “Well, do we get extra growth in China because of the reforms immediately, or is what we're going to get, in fact, a slowing of growth, as these reforms are implemented, before growth picks up somewhere down the line?” That seems to be the two opinions, and I don't know how that's going to get resolved until we actually see how these reforms work their way through.

For example, people saying, “Oh, it's really good that we're going to move, that China is going to move toward market-determined interest rates more, rather than less in its banking system,” but people have said logically after that, “Oh, that probably means interest rates are going to go up for many Chinese companies,” which means that there's a good likelihood that economic growth will slow, so the picture here is really mixed in terms of time signal. It's like, okay, we do indeed need to have China move to a market-determined set of interest rates over the long-term, that's good for the Chinese economy, it's a better allocation of capital. It will mean, it should mean, that some companies—that can't get money now in the banking system—will be able to get it going forward. All of those things are good things for future growth.

The question right now is how much, if any, hit near term growth takes because of these reforms, and that's really where the market is in its mind, think about the reforms of the Third Plenum in the days after the initial enthusiasm.

This is Jim Jubak for the MoneyShow.com video network.

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