Chinese investors face bumpy ride from reforms

Rapid swings in Chinese financial markets in response to ambitious reform plans herald a white-knuckle year for investors, as speculation on the direction and tempo of policy pours petrol on an already volatile market.

The conclusion of a key Communist Party conference on economic policy last week put Chinese markets on a roller-coaster ride. Stocks dropped 2 per cent the day after the plenum concluded, only to change their mind and jump 3 per cent just two days later.

Money and debt markets experienced the opposite reaction, with bankers hoarding cash and bond auctions going undersubscribed as investors worried that plans to liberalise interest rates will mean higher borrowing costs.

The sweeping reforms announced last week, touted as the most significant since Beijing first began opening its economy in 1978, risk making already twitchy Chinese markets even jumpier as people try to guess which companies and financial products will benefit – or suffer – from 60 distinct proposed areas of reform extending to nearly every corner of financial markets.

Will loosening restrictions on the one-child policy boost profits at manufacturers of baby products?

Will implementing a property tax scheme pull money out of real estate into bonds? Stocks? Cash?

What’s going to happen to listed state-owned companies as they are exposed to greater competition?