Granted 'decisive' role, Chinese markets decide to slide

Wed Nov 13, 2013 6:30am EST
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By Pete Sweeney and Clement Tan

SHANGHAI/HONG KONG (Reuters) - China's leaders failed to impress markets with their reform agenda for the next decade and investors sold Chinese shares on Wednesday concerned with Beijing's apparent reluctance to overhaul dominant state-owned firms.

The communique following a secret leadership meeting listed several target areas for reform, but its language was more vague than some had expected and it explicitly underscored the importance of the state sector in the economy.

But rather than lift state firms that dominate major benchmark indexes in China and Hong Kong, it spurred worries that it would leave them exposed once the authorities made good on their pledge to give markets a "decisive" role in the economy.

"The increased reliance on market mechanisms is good for the economy, but bad for the equity markets. While that will force companies to be run more efficiently, more competition will hit their bottom line," said Erwin Sanft, Standard Chartered's head of Hong Kong and China equity research, who recommends underweight positions in banking, telecoms and power, key sectors dominated by state firms.

The highly anticipated gathering of the Communist Party's top brass for a four-day conclave promised "decisive results" by 2020, an unusually explicit self-imposed deadline.

To drive the process, they set up a top-level special working group, suggesting a more vigorous reform push by President Xi Jinping and Premier Li Keqiang than one seen under the previous administration.

The duo, who formally took power in March, must unleash new sources of economic activity as growth slides towards its weakest annual pace in over two decades.

"Frankly, there are a lot of questions still to be answered," U.S. Treasury Secretary Jack Lew said on CNBC during a visit to Singapore. "The communique coming out of the plenum was at a very general level."   Continued...

Employees work at a saltern in Rizhao, Shandong province, November 13, 2013. REUTERS/China Daily