Fund houses wary of China reform

Added 21st September 2015

China has been under scrutiny the past few weeks, and it seems industry sources have a growing concern over the government's economic reform efforts.

Fund houses wary of China reform

Jim McCaughan, CEO of Principal Global Investors told Fund Selector Asia that the Chinese policy makers are facing a difficult problem in regards to the labour force, which had been key to economic growth.

"The whole of the last 25 years, policies have been based on export-like growth. But the problem with that now is that [China] is no longer is the cheap labour place that it was," McCaughan said.

Cheap labour is moving to places like Bangladesh, Indonesia and Vietnam.

"[The country] needs to transition into a domestic consumer-based economy. The government has to really execute on that. And if it does execute on that, I will be quite positive. This is a kind of 'qualified optimism'," he added.

Other sources agree, noting that China's economic slowdown is a result of several factors including a demographic decline and drop in productivity gains. These factors are driving down economic growth potential.

"[China is facing] a considerable decline in competitiveness [in wages, prices, exchange rates and quality] as well as excessive lending and debt," according to an Amundi research note. The firm forecasted that China's growth rate in 2016 would be around 6%, with a possibility of a downgrade later.

State Street Global Advisors believes that Chinese policymakers face a difficult challenge in shutting down unprofitable industries and reorienting the economy, while at the same time avoiding a collapse in output and surging unemployment.

"While financial market participants are heavily focused on output growth numbers in China, Chinese authorities are more pre-occupied with employment growth," State Street Global Advisors said in a research note.

But amid these challenges, State Street Global Advisors noted that President Xi Jinping's commitment to the reform process and the change in central parity fixing procedures is encouraging. It is expected that moving forward, the daily central parity “fixing rate” will reflect end-of-market prices from the previous day, demand and supply in foreign exchange markets, and the exchange rate movement of major currencies. 

"His agenda is large and it includes further state owned enterprise reform and interest rate liberalization. The fifth plenum of 18th Chinese Communist Party Central Committee, to be held in October 2015, will discuss China’s next five year plan and announce additional initiatives," the firm noted.

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