After playing a terrible spoiler for all of last year, the Shanghai Composite finally started inching ahead in the final days of 2012. Chinese investors battered by underperforming stocks are hoping for better gains this year, as expectations of economic recovery and reforms gain ground.
The Shanghai index remained one of the worst performers in the world and online surveys indicated that individual investors lost more than 5 per cent of their stock investment in 2012. The silver lining is that many sense a turnaround this year with authorities perceived to be more reform oriented.
These reforms will be pushed across a broad spectrum - from high finance to farm product pricing to logistics. So far, China has adopted a market-based interest rate policy for all financial transactions, except for banks’ benchmark interest rates. For interest rates too, a float margin has been allowed to banks, indicating an unusual determination towards financial marketisation. This year, it is expected that Chinese monetary authorities will further widen the float margin for banks’ benchmark interest rates and finally suspend such control. Regulators have also reduced their interventionist role in other areas. Since September, China’s central bank has rolled back its interventions into the yuan’s central parity interest rate, which has led to its exchange rate against the dollar continually touching highs, raising hopes for further reforms soon.
This time, reform and restructuring measures will focus on plugging serious loopholes. While the entire focus of the regime is now on coaxing Chinese citizens to take consumption to its maximum, the basic pricing of goods remains chaotic at best. From vegetables & eggs to computers, mobiles or even internet connection, pricing within China remains arbitrary and fluctuates wildly within and across regions. Agricultural products and goods developed and manufactured in China often cost much more in Mainland cities than they do in Hong Kong — causing great anger and frustration among local consumers.
Pricing irregularities have been attributed to the numerous fees and charges levied by regional and local governments. The problem is compounded by profiteering arising from an inefficient market where pricing is not always transparent.
In the past couple of years, the Shanghai municipal government has tried to address the issue by eliminating, in stages, a host of levies by various government offices, expecting vendors to pass on the resulting cost savings to the consumers. The move has made the biggest impact on prices of fresh produce, but unequal pricing remains an endemic problem. Adding to the trouble is the non-transparent pricing policies of State-owned monopolies, affecting millions of consumers of power, phones and internet. Analysts studying consumer behaviour note that Chinese consumers are constantly dogged by worries that they are not getting their money’s worth and in such a situation they are likely to spend less.
Logistics & consumption
Pricing reforms, however, will not be easy to carry out as various levies and taxes on goods are sources of massive revenue for local governments. The centralised government therefore is attempting a parallel process that requires distribution costs to be reduced. The high costs of circulation and distribution have not only caused prices of many products, farm products in particular, to rise, they have also resulted in rural goods producers not benefiting from the high urban prices. Complicated distribution chains are said to be working against rural growers, so much so that Chinese farmers are unwilling to grow vegetables and grain or raise livestock because of shrinking profits.
The government well realises the vital link between logistical efficiency and the need to increase income, purchasing power and finally domestic consumption. In the last week of the year, the state cabinet announced a range of measures to lower logistics costs, including cheaper electricity and water for agricultural product processing and lower fees at farm produce markets. All these steps will be essential to generate new sources of consumption growth in rural areas and smaller towns.
It remains to be seen now whether all these steps, along with an expectation of 8 per cent growth, translate into positive sentiment for the stock markets.