China’s prosperity relies on painful economic reform

The Chinese economy is likely to suffer if policymakers do not embrace painful but necessary changes to deal with over-supply problems.

Decisive reform is hampering recovery in the world’s number two economy and the country’s leaders need to take action before it’s too late, argues Kunjal Gala, senior investment analyst on the Hermes Global Emerging Markets Fund.

Not making the right decisions and implementing them quick enough is a failing that runs through China’s recent economic history, he says. Now, President Xi Jinping seems to be across what action is needed. “The transition will take time, but I have visited China and can see progress is starting to be made,” said Gala.

Political direction must change

“Despite the recent spike in economic activity, driven by the property and commodity sectors, we remain cautious about the overall prospects for China. Reforms are critical and we will be looking for signs of a change in political decision making. It is increasingly obvious that strong leadership does not always translate into actions on the ground, due to differences in opinion and likely conflicts of interest.”

As a result of the momentum, Gala highlights some early investment opportunities in China based around infrastructure. “Smart cities and technology advances in people transit systems are exciting as they need cutting edge data networks.,” he said.

“Several cities outside of Beijing, Shanghai and Shenzhen are growing faster than the national average. Strong leadership is turning these growing cities into hubs of innovation and talent. Xi’an has a high tech industry zone, where Samsung has established a large presence. “

Emerging technology

“Xi’an has signed off on 23 new emerging technology projects, such as new energy vehicles, IT and advanced manufacturing that are likely to promote sustainable economic growth,” said Gala.

“Reforms in the oil and gas industry are encouraging private refining, and leading to the overhaul of the management of state-run companies,” he said.

“Restructuring of China National Petroleum Corporation will eventually result in its spin-off into three or four service companies. In addition, the government intends to reduce overcapacity and address supply-side concerns in the coal and steel industry. “All these innovations will provide a promising potential for investors.”



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