Global Investors Need to See More From China Reforms

(Bloomberg View) -- Next year will mark the 40th anniversary of China's reform and opening-up initiated by Deng Xiaoping, and it's as vital as ever that the government pushes harder and faster on structural changes. While recent announcements regarding the financial industry are encouraging, for the global investment community to more fully embrace China, progress is still needed on important areas as diverse as state-owned enterprises and healthcare.

China is at the point where it can no longer rely on monetary stimulus and fiscal spending to support longer-term growth. People's Bank of China Governor Zhou Xiaochuan recently warned that further reform and opening-up are key to proactively controlling systematic risks in the nation's financial sector.

To that end, reform announcements have picked up. Late last week the government removed foreign ownership limits on banks while allowing overseas firms to take majority stakes in local securities ventures, fund managers and insurers. The government also announced it will test a plan to allow foreign automakers to set up wholly owned electric-vehicle businesses in China's free-trade zones, as well as permit foreign companies to set up factories without a domestic partner to make utility vehicles. And, there have been other measures announced.

Going into the start of his second term as Chinese President Xi Jinping promised that China would take "big strides in reform" in coming years, and there are several areas that need further progress.

In terms of capital markets, the Ministry of Finance this week continued to waive individual investors’ capital gains taxes for trades done through the trading link between stock exchanges in Shanghai and Hong Kong. The decision should help continue to expand the two-way trading volumes between the Chinese and Hong Kong markets.

Another speculated about move could be more significant. Local media reported that Beijing is looking at some domestic firms listed in Hong Kong for the proposed non-tradable share reform. Longer term, this move could improve liquidity of the Hong Kong market, as well as facilitate closing the valuation gaps between firms listed both in the Hong Kong market and the mainland.

On top of that, the Financial Stability and Development Committee on financial reform and deleveraging held its first meeting last week. The key duty of this new committee will be deliberating major reform and development programs for the financial sector, and to coordinate financial regulation between the various regulators. With total credit in the system is still expanding at almost twice the rate of growth in gross domestic product, the pace of delivering needs to intensify.

If the reform agenda is properly implemented, it has the potential to be a positive driver of China's capital markets, given that SOEs are about 62 percent of the Shanghai Stock Exchange Composite Index's total market capitalization. I’d also note that reform periods have historically coincided with strong equity markets. Some examples include the U.K. during Prime Minister Margaret Thatcher’s reform push, the U.S. in the 1980s during President Ronald Reagan’s deregulations, and Germany in 2003 during the post-Hartz labor reform. Execution is the key, however, and for both the Chinese economy and financial markets, it's vital that further progress is made.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

David Millhouse is the head of China research and strategy at Forsyth Barr.

To contact the author of this story: David Millhouse at dmillhouse7@bloomberg.net.

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