Global Markets Overview – 11/12/13

The Third Plenum

Three decades of economic and social policy is expected to be swept aside in the coming 48 hours.

The changes that will come out of the secret location in Beijing are expected to be some of the most liberal economic changes in post revolution China.

The biggest expected change could come in laws to state-owned assets, particularly the top 100 enterprises which hold virtual monopolies in their respective sectors. Several major state-owned media outlets are reporting that the new central government will change the current standing laws to allow private equity to buy into these assets.

If this is the case it will be one of the largest steps towards the liberalisation of the Chinese economy and its desire to start looking to globalisation. It won't happen overnight, it won't happen in a year, but over the next decade the changes the Third Plenum will bring to China and the region will be telling.

The expected changes will see private ownership laws extending to 10-15%; this will allow stable economic development, reduce the debt burden - particularly that of local governments - and further remove the prospect of a hard landing. The private ownership could also allow China the ability to secure global contracts across a range of industries; something it's been craving as foreign governments react to private ownership rather than state ownership.

The interesting aspect will be the reverse - foreign ownership; I do not expect this to be implemented for several years, but the willingness to change the control government enterprise is one of the single biggest moves towards a free market economy; time is now needed for changes to foreign ownership.

However, foreign ownership could be changing and other information leaks are suggesting banking regulation and banking competition could change. Premier Li Keqiang hinted in September a possible shift to allow foreign banks greater access to Chinese capital markets as the central government looks to reduce the monopolisation of the domestic banks. The current laws see foreign ownership capped 20%. Banks such as ANZ will be watching changes to these laws very closely as its looks to its Asian strategy and the prospect of a rising it presence in China.

As I mentioned yesterday the other major changes could come in the easing of the one-child policy and the encouragement of urbanisation by changing housing regulations. The advantage of urbanisation will be the translation from an exporting to a domestic consuming nation. Organic growth can therefore be harnessed and this is hugely beneficial to the region; if demand for imported goods can be consumed internally rather than being converted then exported industries from agriculture to services will find Chinese contracts flowing freely for many years to come.

Ahead of the Australian open

Ahead of the open we are calling the ASX 200 up 18 points to 5405 (+0.34%) on a mildly positive lead from light trading in the US after the bond markets where shut for Veterans Day. BHP's ADR is flat, with the lead indicator suggesting the stock could add two cents the 37.93 (+0.05%) with iron ore holding at $135.90.

I remain cautious of the index at the moment, plenty of investors are questioning their next move and where the value is coming from. When I hear these kinds of comments I think value trap.

I reiterate my call that November will be a cherry red month and see the ASX back around 5350; which is a very small move, however I just feel finding a return in the current market is becoming strained and the volumes going through are very soft. This indicates to me a consolidation is occurring. Come December the story will probably change as funds return to shareholders, but for now - be aware.

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