CHINA'S REFORMS - A GREAT WALL COULD COME UP FOR INDIA

By Ruma Dubey

There is one news which appeared today - Brokerage house UBS has cut its rating on India to 'neutral' from 'overweight and while India rating went down, it upgraded China to ‘overweight’ on the bet that the dragon country is due for a re-rating.

And therein lay the entire story for India. Today, the Indian markets are celebrating China’s reforms but little heed is being paid to the direct repercussion to India or this downgrade by UBS, which could be a harbinger of things to come. A little background first…

Well, in 1980’s China unleashed the biggest economic reform, changing the entire economy of the world and the perception of China in the entire world. It’S party had then chalked out reforms to make China the factory floor of the globe, which is what China is essentially today. And with things slowing down , China is working out a slew of new reforms, just like in 1980, which many say could once again change the entire dynamics of world economics.  In 1980, the theme of the reform was investment led and this time around, it is consumption led.

The Communist Party plenum, known as the Third plenum, even before it could officially release the data, news was ‘leaked’ out, a ‘first of sorts’ for China too.

The news leak was about the one-child policy, which now stands relaxed - couples can have two children if one the parents is an only child. This relaxation is not because China has got a grip on its population but because it now has an aging population and if needs to sustain this growth momentum, it needs to have a much younger or productive population.

The Third plenum also relaxed the hukou system or the household registration system which in turn in expected to increase mobility of labor and encourage further urbanization. Under the hokou system, those migrating to cities for work, had to give up their various welfare schemes and that prevented many from migrating. Thus relaxation will mean more movement of labor.

Being a communist country, all land in China is owned by the Govt and the farmer has the right to only work on the soil but there is news that this has been changed wherein farmers will now be allowed to own, use, transfer and also use their contracted land as collateral or guarantee. . This is a landmark reform as it will indeed mean more cash now in the hands of farmers and this will lead to a consumption led growth story. Housing prices are also expected to get affected as demand for homes will now go up as urbanization takes wings. Yes, land reform will be the biggest and most significant reform, which will change the country from being merely a factory to users too.

In the financial sector, Chinese Govt plays the main leading role but the Third Plenum hopes to relax that too. It has announced sweeping changes in the financial sector, like a deposit insurance system by early 2014, privatizing the banking sector, reduce controls on pricing of water, electricity and natural resources. Most important and which could change the entire capital markets there - revamping the system for Initial Public Offerings (IPOs), which has drawn a lot of flak from foreign investors and has been dead for over a year now.

Now all these are ideal and wonderful reforms, taking China towards a more market driven economy. This is not going to happen overnight, it will be long drawn plan but nevertheless, it’s great news for the Chinese.

And that is where India needs to watch out. In the emerging markets, foreign brokerage houses will now flock to China as the country is getting more organized and opened up. Most of the reforms have come in areas where foreign investors have always complained about and citied as one of the reasons why they are queasy about going all out into China. But with these reforms, China playing as per the rules of the world, we could see a lot of money now going to China. On the other hand, India and its economy will stay paralyzed for almost 8-10 months, till elections do and appointment of a new Govt. So when the choice is between one country which is improving and promises more growth and the other which is in a limbo, with dirty politics and bad economic taking center stage, do the foreign investors really have any debate over choice here?

Yes, we could say that FIIs will now start looking anew at emerging markets and when money gets allocated to China, some will come to India too. But is that what we will get – leftover crumbs? Indeed emerging markets will look anew post these Chinese reforms and India continues the way it is presently, the ‘I’ in BRIC might very soon get replaced.  Thus India now needs to worry more when QE easing happens.

FIIs are not faithful husbands – ‘till death do us apart’ types. They are rich Casanovas and whichever market is more attractive, they will go and park themselves there. It is only Ram Leela and no Amar Prem. So does India look attractive today?