“Does it contribute to social harmony?” is the most important question that any investors should ask when investing in China, according to BofA/ML’s David Cui.In a piece this week, he wrote:
On Feb 19, at the opening ceremony of a high profile study session for the most senior provincial officials at the Party School of the Central Committee of CPC (CCPS), President Hu emphasised that the government should do whatever it can to ensure social harmony. It seems to us that the concept of “harmonious society” is back (”The visible hand”, 23 Jul 2010) and we suspect that what is happening in the Middle East has played a major role in this. In our opinion, in the foreseeable future, government policies will be mainly be drivenby their impact on.
So what do this mean in practice? Cui identifies a few ideas.
The first is that China is going to get much more aggressive about food inflation — not necessarily about price controls, which don’t work, but through more subsidies to farmers in order to expand supply. A more serious crackdown on property prices, possibly leading to a sharp drop in some places. More hikes in the minimum wage are probably coming as well.
Outside of the price sphere, things like food safety and more stable pensions will also be a priority.
And in terms of companies affected, this is interesting:
Another key complaint about the income gap in China is the high salaries being paid to many in the monopoly sectors – their profitability is often not achieved via better management and business strategy but through government protection including licence requirements. In addition,
consumers are paying unnecessarily high prices. Unfortunately, such monopolies dominate the market, another reason behind our medium term cautious view on the stock market.