China’s financial reform process will take time, economists warn

China’s latest blueprint for widespread financial market reforms by 2020 has boosted equities and supported commodity prices this week, but fund managers predict the rally is over for now, and economists warn the implementation of the ambitious plan will be a long and difficult process.

Among the proposed reforms is the intention to streamline the approval process for new issues and open Chinese companies to foreign investors. This will help companies sourcing funds in China’s shadow banking sector to refinance their existing debt with equity capital.

The reforms are an important step towards a more innovative and creative private sector in China, Westpac senior economist Huw McKay said.

“Attracting more foreign investors will help Chinese companies dig themselves out of a rapid growth in debt, by exchanging that debt for equity, in a market-based transaction,” Mr McKay said.

Deltec chief investment officer Atul Lele agreed the reforms should reduce the risk of corporate defaults and help China in the long term, but cautioned that they did not address near-term risks.

”Indebtedness within the corporate landscape, the potential impact of contagion across the financial system from trust products, the types of assets that they allow to be used as collateral for financing, such as commodities – there’s a long list of reforms that need to take place,” Mr Lele said.

Commodity markets heavily linked to China’s finance sector, such as iron ore and copper, were mostly higher on Tuesday as traders digested the news that China would develop commodity trading tools and also relax its capital market restrictions. Nickel surged 5.1 per cent to $US20,898 per mega tonne, but analysts said a supply shortage – following an export ban in Indonesia and Vale suspending production in New Caledonia – was the main driver.

China’s Shanghai Composite Index and Hong Kong’s Hang Seng both broke above their 50-day moving average this week after China’s State Council released updated guidelines on Friday for developing open capital markets.

The Shanghai Composite has lost 8.4 per cent over the past one year, and the Hang Seng is down 3.2 per cent amid a slowdown in growth and fears about how the Chinese economy will cope with a raft of ambitious policy reforms. Shanghai shares eased on Tuesday following disappointing industrial production and retail sales numbers. “Typically, Chinese stocks get an immediate boost when the state announces any progress with its program of financial market reforms, but this tends to be very short-lived,” Kevin Bertoli, portfolio manager at PM Capital, said.

Friday’s announcement builds on ideas posited by the state in November and plans unveiled last month to create greater links between the mainland and Hong Kong markets, and has been warmly received by economists.

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