Markets reward China's reform ambition, await follow-up

By Clement Tan and Xiaoyi Shao

HONG KONG/BEIJING Mon Nov 18, 2013 4:07am EST

Paramilitary policemen stand in formation as they pay tribute to the Monument to the People's Heroes on Tiananmen Square in Beijing, November 17, 2013.

Credit: Reuters/Stringer

HONG KONG/BEIJING (Reuters) - Investors rewarded Beijing on Monday for its ambitious reform plan, sustaining a stocks rally led by consumer goods shares seen as direct beneficiaries of the promised easing of China's one-child policy and efforts to boost consumption.

Key onshore China stock indexes rose the most in more than two months, while China shares listed in Hong Kong were heading for their biggest daily percentage gains in almost two years in high volume trade.

A reported record spike in home prices last month underlined, however, the challenges faced by China's new leadership in charting a steady course for the world's second-largest economy and the urgency of tackling some of its inherent imbalances.

The initial outline published early last week at the end of a four-day plenary session of China's top leadership disappointed markets with its lack of detail and ambiguity, but a more elaborate account released on Friday won praise for its ambition and scope.

Leaked documents already sparked buying of mainland stocks on Friday and that rally picked up on Monday.

Still, UBS equity analysts said the real test would be whether Beijing turns its words into action so that the initial market euphoria would translate into sustained market gains.

"Our answer is optimistic," they said in a client note. "We expect the newly created central leading group of reform to deliver tangible progress within 12 months, and thus turn bullish on 2014 China market outlook."

The CSI300 of the leading Shanghai and Shenzhen A-share listings closed up 3.3 percent, while the Shanghai Composite Index ended 2.9 percent higher - their biggest gains in more than two months.

Hong-Kong's index of mainland China stocks rose more than 5 percent to its highest level in six months. It was heading for its strongest daily percentage rise in close to two years.

Besides plans to give markets a decisive role in key areas such as resource pricing or finance, the reforms also included steps to boost China's urban population. Beijing considers helping millions move to cities as an essential part of a transition to economic growth that is more balanced, less investment-intensive and more consumption-driven.

The easing of the one-child policy has already buoyed shares of stroller maker and distributor Goodbaby International and dairy products makers Mengniu Dairy and Yashili International.

Chinese brokerages and insurers saw some of the biggest gains after the central bank governor pledged soon after the reform details were released to "pull out all stops" to deepen financial sector reforms.

China's biggest-listed brokerage Citic Securities jumped more than 12 percent and was heading for its biggest daily percentage gain on record.

Analysts and commentators suggested the plans were the most significant since Deng Xiaoping's reforms in the late 1970s and the early 1980s that opened up the country to the outside world and set it on course to become the world's factory floor.

"The government will withdraw from its intervention in the market," said Ding Yifan, deputy head of the Institute of World Development, a government-linked think tank, in describing the new approach in an interview with official news agency Xinhua.

He said that while state-owned enterprises would remain the backbone of China's economy they would be exposed to more competition and less protected than in the past.

"We will try to make them compete on an equal footing, which means the government will not continue to provide some fiscal or financial advantage to state-owned enterprises."

President Xi Jinping and Premier Li Keqiang, appointed in March, also announced several breakthroughs in social policy. Besides relaxing the one-child policy, they also pledged to unify rural and urban social security systems and to abolish controversial labor camps.

Moody's Investors Service rating agency welcomed Beijing's reform plans as potentially positive for its sovereign debt rating, local government finances, plus property developers and big strategic state-owned firms.

It also welcomed greater focus on tackling social strains.

"In our view, the leadership recognizes that economic growth alone will not address China's social challenges this decade."

The 60-point plan eased concerns that Xi would need months, if not years, to take full charge of China's vast party and government bureaucracy.

But the sheer ambition of the plans and the new focus on letting market forces play a greater role bring new challenges and risks, economists say.

Beijing got a taste of that in June, when a money market squeeze engineered by the central bank to rein in overly risky lending practices, sparked a brief spell of panic and a financial market rout that spread well beyond China's borders.

Economists also point out that many reforms will take years to implement because of their sheer complexity and the need to balance the sweeping changes with the need for stability, which remains the watchword for all Beijing administrations.

JPMorgan China strategists, less optimistic than some of their peers, even said they saw no major change in policies or how markets would view Chinese shares next year.

"Our base case for 2014 is no major breakthroughs in structural reforms and thus no market re-rating."

Xi and his team gave themselves until 2020 to achieve "decisive" results - a tacit acknowledgement of the risks involved in Beijing's balancing act between letting market forces eventually take over and preserving financial and social stability and the Communist Party's political monopoly.

The experience of the past decade is also a reason why optimism about Beijing's bold reform plans is guarded.

Just like Xi and Li, the previous leadership promised to overhaul China's economy and kick its addiction to rapid, investment and credit-fuelled growth, but left it saddled with more debt, industrial overcapacity, pollution and financial strains.

(Writing by Tomasz Janowski; editing by Neil Fullick)

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China reform plans lift shares, Dow, S&P 500 at new highs

By Herbert Lash

NEW YORK Mon Nov 18, 2013 11:06am EST

1 of 8. An employee of a foreign exchange trading company looks at monitors in Tokyo November 15, 2013.

Credit: Reuters/Toru Hanai

NEW YORK (Reuters) - Global equity markets climbed on Monday, riding economic reform plans in China, while the dollar slipped and benchmark U.S. stock indices rose to record highs, buoyed by the prospect of continued Federal Reserve stimulus.

Chinese shares listed in Hong Kong posted their biggest gain in nearly two years, while the Dow and S&P 500 surged past the psychological barriers of 16,000 and 1,800, respectively. Both U.S. indices pared some gains soon after markets opened.

The safe-haven dollar and Japanese yen fell after China announced its most sweeping economic and social reforms in nearly three decades, boosting investor appetite for higher-yielding currencies such as the Australian and New Zealand dollars.

The growth-linked currencies outperformed as a flood of global liquidity and promises to keep interest rates low continue to weigh on low-yielding currencies such as the dollar and the yen.

"Risk appetite is strong... after details of China's reform prove more dramatic than expected, suggesting a focus on market liberalization and reforms in both the government role and the broader corporate structure," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto.

The China Enterprises Index .HSCE of the top Chinese listings in Hong Kong soared 5.7 percent for its biggest daily gain since December 1, 2011.

Germany's DAX .GDAXI hit a record high as European shares resumed their rally on an improving outlook for the region's economy.

MSCI's all-country world stock index .MIWD00000PUS rose 0.53 percent, while the pan-European FTSEurofirst 300 index .FTEU3 rose 0.46 percent.

The Dow Jones industrial average .DJI was up 49.70 points, or 0.31 percent, at 16,011.40. The Standard & Poor's 500 Index .SPX was up 1.66 points, or 0.09 percent, at 1,799.84. The Nasdaq Composite Index .IXIC was up 1.98 points, or 0.05 percent, at 3,987.95.

U.S. Treasury debt prices made narrow gains, supported by the prospect of the Fed's continued "easy" monetary policy, but limited by investors' clear preference for riskier assets in light of that accommodation.

The dollar index .DXY, a measure of the greenback against a basket of currencies, slipped 0.24 percent to 80.661.

The euro drew some support after data showed the euro zone's trade surplus grew more than expected in September. The euro was up 0.29 percent at 1.3534.

The Australian dollar rose 0.33 percent to US$0.9399, while the New Zealand dollar gained 0.34 percent to US$0.8369.

Brent crude oil fell toward $108 a barrel after a week of sharp gains ahead of talks between Iran and the West that could lead to an increase in Iranian crude oil exports.

January Brent crude was down 16 cents at $108.34 a barrel, while U.S. crude for December delivery was up 16 cents at $94.00.

Trading in the U.S. Treasury market was comparatively subdued, with the benchmark 10-year Treasury note up 8/32, leaving its yield at 2.6765 percent.

Bund futures rose 15 ticks to 141.78, while 10-year German yields fell to 1.69 percent.

Germany's ZEW business sentiment indicator on Tuesday and the minutes from the Federal Reserve's October policy meeting on Wednesday may provide hints to future monetary policy moves.

(Additional reporting by Marc Jones in London; Editing by Dan Grebler)

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House Republicans sharpen attack on health-care reform in two Hill hearings

Republicans on Wednesday used their new majority in the House of Representatives to hold the first of what they promise will be a steady drumbeat of congressional hearings to denounce the new health-care law.

During a hearing before the House Ways and Means Committee, two business owners and a prominent economist testified that the law imposes crushing costs that hamper job creation. Republican members also grilled Austan Goolsbee, chairman of the White House Council of Economic Advisers, for nearly two hours, charging that his rosy assessment of the law's economic impact was based on accounting gimmicks.

At a separate, nearly simultaneous hearing before the House Budget Committee, Chairman Paul Ryan (R-Wisc.) heaped praise on his star witness, Rick Foster, chief actuary for Medicaid and Medicare, who has questioned some of the Obama administration's predictions of savings through the health-care law.

"Time and time again, Rick's unbiased actuarial reports have proved difficult to square with the claims made by the law's proponents," said Ryan, adding that such analyses "enabled us to unpack the law's budgetary smoke and mirrors and reveal its true impact."

The Obama administration responded with a public relations offensive of its own, releasing letters from high-profile economists who back the law, and holding a news conference at which Secretary of Commerce Gary Locke and Costco chief executive Jim Sinegal argued that the law is a lifesaver for U.S. businesses because it will curb skyrocketing premiums.

In a White House blog post, Stephanie Cutter, a top White House official, also took on Foster's conclusions, writing that his analysis "discounts proposals that other independent experts credit with getting at the root causes of health care cost growth."

The latest round of sparring largely reprised arguments made in both the lead-up to the law's adoption last March and the floor debate preceding the House's nearly party-line vote to repeal it last week. However, the vigor with which each side jumped into the fray suggests both are determined to continue attempting to shape public opinion on an issue over which Americans have remained stubbornly divided.

"The hearing today is just our first of many," said House Ways and Means Chairman Dave Camp (R-Mich.) at the outset. "It is my intention to give the American people and employers big and small the opportunity they never had when this law was being written to testify in an open hearing about the impact the law will have on them."

Scott Womack, owner of 12 IHOP restaurants in Indiana and Ohio, told the committee that the law's mandate that he begin purchasing health insurance for his workers in 2014 is simply unsustainable. It will cost him $7,000 per worker to comply, he said, "more money than we make."

The alternative, to pay a $2,000 penalty per worker, would still eat up 60 percent of his company's earnings, Womack added. As a result, he may be forced to forfeit an agreement to develop additional restaurants, for which he has already invested $360,000.

"The goal of providing health coverage is noble, but the restaurant industry can't afford the steep fines and mandates loaded upon us," Womack concluded. "The law is one-size-fits-all for employers, and restaurants don't fit."

Joe Olivo, co-owner of a printing business in Moorestown, N.J., was particularly critical of the so-called 1099 provision of the new health-care law - which requires businesses to substantially expand their reporting of purchases to the IRS. The aim is to help the agency identify tax cheats, but Olivo said with his profits already squeezed to 3 cents on every dollar earned, the cost of complying would be "huge."

Democrats have long expressed willingness to remove the provision, and President Obama reiterated his support for doing so during his State of the Union speech Tuesday.

However, Camp was not mollified. Noting that Obama has called the provision "counterproductive," he said, "I have one simple question today: How is it that Congress passed a health-care bill that is 'counterproductive' to American employers - especially at a time when we need to be looking for solutions that encourage, not impede, job creation?"

Olivo, who currently offers health insurance to his 45 employees, also testified that - in contravention of the president's promise that people who liked their health plans would be able to keep them - his insurer has informed him that his plan will be discontinued. The reason, said Olivo, is that the plan does not offer the level of preventative care coverage required by the new law.

"After 20-plus years of voluntarily providing coverage for my employees, much of it at my own cost, I am now finding out this coverage is no longer acceptable according to the government," he said.

Rep. Bill Pascrell (D-N.J.) questioned Olivo's account, noting that many of the law's minimum requirements for plans do not apply to those already in existence before the law was passed. "It sounds like your carrier may have pulled a fast one on you," he said. "Obamacare was the perfect scapegoat before the law even went into effect."

Democrats also echoed Goolsbee's testimony that the law would prove a boon to businesses. The smallest firms can get tax credits to offset the cost of buying insurance for their workers, he said. Slightly larger companies will be able to buy insurance on state-run marketplaces that can offer the more stable premiums that big companies have long enjoyed, leveling the playing field. And all businesses will benefit from the anticipated curbing of health-care costs resulting from the drop in the large uninsured population - whose uncompensated health-care costs often get passed on to paying customers.

During the White House news conference later in the day, Sinegal said that those savings alone would make all the difference for his company. While Costco is committed to offering its roughly 96,000 U.S. employees generous health insurance benefits, Sinegal said, its ability to do so has been being seriously threatened by double-digit premium spikes each year.

"We either have to have some type of plan like this that helps us rein in costs or we're not going to be able to continue as a business," he said.

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