2013: Markets too excited on China reform.

Consensus said:

Investors anticipating major refoms from Xi Jinping and Li Keqiang following a 'lost decade'. 

We said:

  • Our biggest concern is that optimism about the speed of reform and the government’s ability to execute policy is overstated.
  • Although some plans are likely to be unveiled at the November Plenum, we do not expect radical change in the near term.
  • Instead, the immediate priority will be to clarify medium- and long-term objectives, to define the urbanization drive envisaged by Li and to continue to launch easy short-term alterations such as reform of various taxes, changes to the hukou system and factor market deregulation.
  • While reform would have positive longer-term results, it would be likely to compromise short-term growth and increase inflation, with a negative impact on equities.
  • Investors should not be too impressed by policy promises, but will have to be patient in monitoring execution and material structural improvements to produce a positive turn for Chinese equities. (China 12 July 2013)

Outcome:

Progress on reform was slow: two stepes forward, one step back. Shanghai Composite index went sideways for 12 months. 

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