China Tea Leaves

When I was a child in the Industrial Midlands of the UK, my parents used to take us out for a Chinese meal as an occasional treat. At the end of the meal, my Mother would “read” the tea leaves at the bottom of our cups, inevitably predicting all sorts of exciting events in our futures.

I was reminded of this because today is the 3^rd Plenum of the 18^th Chinese Communist Party Congress taking place from the 9^th to 12^th in Beijing. I can already see pots of tea leaves being “read” with regards to its outcome; The FT is full of guest posts predicting all sorts of momentous things.

It is apparently during the 3^rd Plenum that the new leadership lays the groundwork for any reforms that they are planning for their 5-10 years in power. Favourable comparisons are being drawn to the 3^rd Plenum of Deng Xiaoping in 1978 where he established the reform agenda that launched China on its current growth path, and Jiang Zemin’s 3^rd Plenum in 1993 that push those reforms even farther.

Other leaders have been less bold, and missed the opportunity to advance reforms, even if they made grandiose announcements at their own 3^rd plena.

And there in lies the problem; whether in China or elsewhere, it is very easy to announced grand plans, but much harder to implement them. There is an old Chinese proverb, “The Mountains are high, and the Emperor is far away”, recognizing this.

It is also unfair of these commentators to cite any reforms by Deng as a precedent since he was such an extraordinary leader by both local and international standards. That would be like asking David Cameron to emulate Mrs. Thatcher, or President Obama to be another Kennedy.

Needless to say, I think the outcomes have been over hyped and I will be a lot more interested in any implementation of policy.

Last week when talking about Petrobras, I attempted to describe how the Government’s fortunes, actual and metaphorical, were intimately linked to its handling of the company. Since then, despite pronouncements that it has plenty of room to add more debt and is in fine shape to meet its capital expenditure commitments, the Government has introduced plans to reform the petrol subsidy that should easily add $4BN to the bottom line. Just the talk of this has reversed the slide in Petrobras’s share price, and if implemented, may go some way to preventing a possible Sovereign ratings downgrade next year.

China’s problems are arguably larger than Brazil’s, and will thus require a greater effort to change them. There is no single company in China where one can say, “if they mess that one up, they mess everything up”, so we will need to see a collection of policies rather than one single one.

Having said that, one reform that I would like to see would be to change the way State Owned Enterprises pay dividends. Currently they are too low and go to SASAC, the State Owned Assets Supervision and Administration Commission who then reinvests that money back into the companies it controls. It would be better to see that money go to the central treasury to fund many of the much needed improvements to the social safety net. Frankly, I am not that hopeful.

Either way, I will be taking any “major” announcements with a large pinch of salt.

I have a feeling that the old trader’s adage “Buy on the rumour, sell on the news!” could well be in order, followed by a nice cup of tea.