China’s positive policy directions

CHINA’s focus on high quality and sustainable development, as indicated at its ongoing party congress, will benefit global markets and economy.

“The focus on high quality growth suggests further efforts to remove imbalances in the economy without jeopardising economic growth too much,’’ said Nor Zahidi Alias, chief economist at Malaysian Rating Corp.

“China’s shift into higher quality growth will benefit the world economy as most countries now have substantial trade with China,’’ said Thomas Yong, CEO at Fortress Capital.

“Investors welcome the broad economic policy directions which are expected to ensure a sustainable Chinese economy in a new, normal environment.

“These include a greater role for market forces, the push for mergers and acquisitions of state-owned enterprises and expansion of market access for the services sector,’’ said Lee Heng Guie, executive director at Socio Economic Research Centre.

China has begun its 19th national congress meeting which will last a week. Its core plan involves moving into a new era of a great, modern socialist country by 2050.

“There should be no major surprises as China has reassured that it will deepen economic and financial reforms, and open its markets to foreign investors,’’ said Yong.

Deepening of financial reforms included market-oriented reform of exchange and interest rates, noted Lee. “Although slower than in the previous year, growth will likely remain stable at 6%-6.5%. The continuing move towards a consumption-based economy is also positive.

“The deleveraging process will likely continue as corporate debt of 170% to gross domestic product (GDP) remains a threat to the economy. However, there will probably be no extreme reforms as policymakers do not wish to see turbulence in the financial market,’’ said Zahidi.

For the third quarter, China recorded GDP growth of 6.8%. “The economy is still looking steady,’’ said Lee, noting that China’s central bank governor had, on the sidelines of the congress, warned of excessive optimism.

Corporate debt levels are still relatively high and household debt is rising too quickly.

“A combination of stable growth in China and the US, as well as a recovery of European economies, will benefit the global economy in the near term. Asian export-dependent economies will also benefit from stronger global trade,’’ said Zahidi.

The balancing act by the Chinese authorities will be closely watched. “In particular, the movement of the yuan will be of interest to financial markets,’’ said Zahidi, noting that it has appreciated by about 5% against the US dollar, year-to-date.

“While weakness of the greenback has removed the fear of a depreciating yuan, a strengthening of the US dollar, on the back of higher US interest rates in the near term, may again exert downward pressure on the yuan.

“Rising interest rates in the US may also lead to higher borrowing costs in China, which will have some negative ramifications on corporates that are already saddled with high debt,’’ said Zahidi.

Last Thursday was the anniversary of the great stock market crash of 1987, following which circuit breakers were introduced to halt huge collapsing trades when sell orders overwhelmed markets lacking in liquidity. Can such a situation re-occur especially in view the current rich valuations?

“The Dow Jones is trading at a price-earnings (PE) ratio of 18 times, considered high compared with the historical average. This is partly due to encouraging economic growth and expectation of tax reforms.

“The International Monetary Fund has projected the world economy to grow by 3.6% (from 3.2% last year), and 3.7% for next year.

“Asian markets are comparably cheaper; the MSCI ex-Japan is trading at 14 times 2017 PE. The run-up of the markets has been largely supported by strong corporate earnings,’’ said Yong.

Analysts predict US companies in the S&P 500 to report a 3.1% increase in profit for the third quarter; JPMorgan expects earnings for European companies to rise 6%.

In Asia, earnings per share have jumped 21% at 43 companies in the MSCI AC Asia Pacific index, according to data compiled by Bloomberg.

Among industry groups, technology is expected to see one of the biggest jumps in profit, according to data collected by Bloomberg.

With a projected increase of 10%, only the energy sector in the S&P 500 is forecast to see a larger rise.

Will the passing of President Donald Trump’s tax cut plans by the US Senate fuel world markets into another round of partying?

“The tax cuts will boost US corporate profits, which will drive equity prices. Indirectly, the risk-on sentiment will have a positive impact on other parts of the world,’’ said Danny Wong, CEO at Areca Capital.

“This is the first step and there are hurdles ahead. Investors will monitor the progress while the market has partly priced in the effects,’’ said Lee.

Columnist Yap Leng Kuen feels the excitement and caution of hot markets.