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Global Top Cat

Asia 2015: The Year of Reforms

By Yiannis G. Mostrous, on Jan. 15, 2015

Growth-oriented investors with a longer time horizon should pay close attention to the reforms that some of Asia’s most important economies will undertake in the new year.

China, India and Indonesia have either embarked upon or plan to pursue changes that, if successful, could help to bolster gross domestic product (GDP) and put these economies on a more sustainable path.

Much of the focus will be on China and India, two nations that have become increasingly important contributors to the global economy.

China’s Changes

China has pursued aggressive reforms, cracking down on widespread corruption and looking to root out inefficiencies at state-owned enterprises.

Beijing’s sweeping assault on corruption has proved so successful that LVMH Moet Hennessy Louis Vuitton (Paris: MC, OTC: LVMUY) and other luxury specialists have reported a significant slowdown in sales of premium cognacs and other high-end items that have become popular as gifts among government officials and employees of state-owned enterprises.

Almost 20 years ago, Beijing sought to reduce the size of state-owned enterprises operating in the industrial sector.

From 1996 to 2005, this effort reduced the number of government-run companies to about 27,000 from 87,000, a move that also dropped the number of people employed by these entities to 19 million from 42 million. This rationalization cut the number of loss-making industrial state-owned enterprises by half and improved operational efficiency.

But over the past eight years, many of the remaining state-owned enterprises returned to their old ways, leading to a significant deterioration in profitability and efficiency—especially relative to the private sector.

Authorities have made considerable headway restructuring these bloated businesses, curbing expenses and aligning management’s incentives with performance. Now the government has set its sights on China’s so-called national champions, the largest state-owned enterprises that operate under monopoly-like conditions.

As Beijing broadens the scope of its reforms to include liberalizing interest rates and efforts to encourage the participation of private capital, Chinese companies should be able to improve their business practices while unlocking value for investors.

Passage to India

Prime Minister Narendra Modi has outlined the changes India needs to make to position the India’s economy for sustainable long-term growth. Modi’s main proposals include:

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