Investment opportunity behind income distribution reform in China

China has estimates documents about reform of income distribution recently. Once the plan is put into effect, it could represent a substantial change in economic direction.
Article from WSJ 6^th January 2013 has viewed

“Estimates of income distribution by Gan Li, an economics professor at Texas A&M University, put China in the ranks of the most unequal African and Latin American countries”.

“The income inequality plan takes aim at two of the main causes of China's weak consumption—low household income and a burgeoning divide between rich and poor”.

 Liu (2011) has viewed:

    “An efficient financial system increases saving rates (McKinnon (1973) and Shaw (1973)), reduces information and transactions costs (Gurley and Shaw (1955, 1960 and 1967)); and improves the allocation of resources.”

Latest figures from the IMF show that China’s personal savings rate has become the world’s highest. At more than 50%, it’s well above the global average of 20%. Main reason causing this higher figure is increasing price of house and inflation. The saving rate of China make large sum of money being inefficiency associated with decreasing in consumption and investment. 

How to encourage small-scale investor slide down household savings into purchase bank economic products or stock is urgency. It is general acknowledge that Shanghai stock market and Shenzhen stock market has reached Weak-Form Efficiency stock market standard. Despite some of the investors are slow or over reaction. The AL-locational efficiency would help located the resources associated with the pricing efficiency move the investors into risk-adjusted mode. As an investor, it is important to analyse the value of investment without invisible information. In order to encourage citizens reduce their household into investment, more people need to know fundamental financial knowledge.

The reform of income distribution would impact Chinese stock market. Firstly, increasing the household income would influence consumption a lot. Examples of this consumption used start with commodities consumption. It would contribution to the diverse forms of ownership fair competition, improve the efficiency of economic  market. The development of private economy will provide a new source of profit to Chinese stock market.

Besides that, the luxury industry such as car, cloth brand would be encouraged to invest in.  This sort of upgrade industrial would bring much more investment opportunities.With the acceleration of the process of economic re-structuring, social investment would become more perfect and diverse residents finance and investment activities will become more prevalent.

Thirdly, combination with the household income increasing, the requirement of living environment would be rise. Thus, to some extent, keep the development of environmental friendly industries.  From the long-term angle, the insurance industry, hotel and travel industry, entertainment, medicine and medical care industry would get advantages from this reform.  

It can be predicted that the reform of income distribution would be provided as an important reference for the future reform of the stock market. The reform of the income distribution system and the reform of the financial and taxation system would offer more public confidence to encourage investors continue invest in the stock market.

Reference:

1.       Gurley, John, and Edward Shaw, 1967. ‘Financial Structure and Economic Development’, Economic Development and Cultural Change, 34 (2), 333-46.

2.       Liu, T.S., (2011), ‘Market Efficiency in China Stock Market and Hong Kong Stock Market’, International Research Journal of Finance and Economics, 76, PP. 128-137

3.       McKinnon, R.I., 1973. Money and Capital in Economic Development, Washington: The Brookings Institution.

4.       Shaw, Edward S., 1973. Financial Deepening in Economic Development, New York: Oxford University Press.