Value Partners' So hails plenum on prices

Louis So, co-CIO at Value Partners, Hong Kong's largest fund house, says China reforms will be important, but so will its unwillingness to confront state-owned groups.
Louis So, co-CIO at the $9.2 billion Value Partners, Hong Kong's largest home-grown fund house.
Louis So, co-CIO at the $9.2 billion Value Partners, Hong Kong's largest home-grown fund house.

Louis So, co-CIO at the $9.2 billion Value Partners, Hong Kong's largest home-grown fund house, was in Beijing during the Communist Party's third plenum. In an interview with FinanceAsia, he outlines what aspects of the reform agenda are important and where the disappointments lie.

What’s your interpretation of the announcements from the Party’s third plenum?
After the meeting the Party issued just a 5,000-word announcement, which was very broad. The details will emerge in the coming weeks. But so far there have been a few surprises.

The biggest of these is the establishment of a committee to drive a central reform agenda. It is to be headed by either President Xi Jinping or Premier Li Keqiang. The top leadership really wants this to be successful. The second thing is they also said they want to achieve certain targets by 2020. So there are specific things they want to do.

But they didn’t specify what those are.
They are speaking of targets in terms of reform. They haven’t said exactly what these are. But they have made clear they have goals.

What does it look like they will emphasise?
Fiscal reform, pricing reform and urbanisation reform, including the hukou system. This is in line with expectations in the market.

What’s not met expectations?
There’s no mention of reforming SOEs [state-owned enterprises]. That’s a disappointment. The stock market went down after the announcement was made, partly because of that, and because of the lack of detail in the announcement. But there will be more announcements.

What would you say are the things the government must really get right?
There are fewer political obstacles to financial reform and internationalising the renminbi. These things may happen before 2020. Hukou reform, except for tier-1 cities, may also be implemented, meaning cities would have to provide a social safety net to migrant workers and their families.

So the Party shied away from the harder issues?
No, some of the reforms they mentioned are difficult. For example, the plenum discussed rural land reform, giving farmers property rights and allowing the market to determine land value. There are many obstacles to achieving this. Local governments want access to very cheap land in order to develop cities in their area.

Another challenge the Party has said it will take on is to allow markets to set prices in commodities such as petroleum and coal, which would mean the government loosens control of these over the next five or six years. This will mean confronting SOEs and other interest groups, which could lose their market position and have to face competition.

What about banks? The big ones are state-run, but they are instrumental to liberalising prices.
Financial reform has been ongoing for a number of years but I expect progress will become faster. The government already loosened the top end of deposit rates earlier this year. It will address lending rates. It is using the Shanghai free-trade zone to experiment with these things. The FTZ is meant to test reforms to see how they impact overall economic stability, particularly when it comes to easing capital controls. I think we’ll see actual tests implemented in the coming months.

From a private sector perspective, what’s the point of operating in the Shanghai free-trade zone? China already has a free-trade zone, it’s called Hong Kong.
I think China is very serious about Shanghai. It needs it for several reasons. First, China is keen to be involved in the Trans-Pacific Partnership trade talks being led by the US. It needs the FTZ to participate.

Second, China wants the FTZ to enable reform to drive economic growth. Since Deng Xiaoping’s era there have been no new rounds of reforms to galvanize economic growth. For 40 years, China has relied on exports and fixed-asset investment. Today its per capita GDP is around $6,000-$7,000. Most countries, when they reach this level, fall into the Middle Income Trap. But Xi Jinping talks about the ‘China Dream’, which means transforming China into a middle-class society by 2020. He and Li Keqiang need to set the country on a path of sustainable growth.

If they don’t act now, China will struggle to achieve annualised 5% GDP growth within just two or three years from now.

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