What are the government reforms announced by China and how to profit from them

Chinese Stock Market 2013-03-13Enlarge GraphThe Chinese government has announced a new round of reforms to streamline the government and promote growth in the economy.

Since the 80s, China has had several major government reforms aimed at improving the government’s efficiency and enhancing integration among its agencies.

During the 90s a similar set of reforms led to a massive restructuring of the government that dissolved almost two thirds of governmental agencies in order to improve efficiency. The key points of the new reforms are as follow:

  • Eliminating two ministries (bringing the count to 25) and eliminating an additional two ministry level institutions
  • Improving efficiency in the approval process for i) investment projects, ii) business and operational activities, and iii) creation of social organizations
  • Establishing a unified real estate registry and unified social credit code system based based on resident IDs

Economist believe the reforms, while they are not ground-breaking, offer a fair trade off between maintaining the stability of government institutions and the much needed (and demanded) change in Chinese bureaucracy.

How investors can benefit

In the short term there is little potential to benefit from the reforms since the equities market has already increased based on the news and hype. Nonetheless, there is still uncertainty regarding the implementation of the plan, and as small successes build up, the market will likely start accreting them to the market valuations. Some analysts recommended waiting for a market dip as a buying opportunity in mid to late Q2.

Investors can access the Chinese stock market through FXI, the largest and most popular Chinese ETF, as well as other options that focus on smaller cap stocks, such as MCHI or HAO.  Another good proxy is EWH, which follows the Hong Kong stock exchange.