China Is More Capitalistic Than You Think

China's central bank recently took another step towards free-market reform.
By Robert Weinstein ,

NEW YORK (TheStreet) -- I was tired and exhausted as I sat down on the train for the ride to the Hong Kong airport.

Six days of non-stop meetings and factory tours -- while my body attempted to adjust to a time-zone opposite my own -- takes a toll. Trying to navigate four suitcases doesn't help either, but the guy sitting next to me on the train gave a very needed and welcomed helping hand.

Once the train was moving along, I asked what had brought him to China, as is standard practice for two Westerners greeting each other in the Middle Kingdom. I think he said he represented

Altria Group

(MO) - Get Report

,

Phillip Morris

(PM) - Get Report

, or maybe it was another American cigarette maker, it's hard to say. I was tired.

I commented that there are more Mercedes Benzes in the city of Hong Kong than in all of Wisconsin, and they are quickly moving north. He laughed and commented on how much different the border was when he started.

He was speaking of the Shenzhen-Hong Kong border. Shenzhen is the gateway border town to mainland China from Hong Kong. Hong Kong is part of China, but is treated as a separate autonomous area. Entering and leaving is handled as if it is its own country.

Shenzhen is a modern first-rate city, full of high-rise buildings and often called China's Silicon Valley because of its high-tech focus.

The cigarette seller explained that in the early 1980s, Shenzhen was little more than rice paddies with few buildings, and that when he crossed at night (carrying cigarettes that may not have been "fully sanctioned" for import), the guards would turn on the lights for him to cross the bridge.

You can visualize the transformation through

these photos

. The only difference between the old Shenzhen, from the Communist takeover in 1947 until 1980 and then from 1980 forward, is abandoning central planning and embracing free markets with private ownership.

China's leadership is old enough to remember the nation's crushing abject poverty before it changed course for economic reform. The greatest number of people in history has escaped the fear of starving to death more quickly than ever before, all because of the free-market reforms.

One of China's latest reforms came when the People's Bank of China announced a loosening of regulations on interest rates. While not totally abandoning control, it's another significant step towards a free-market economy.

The central bank ended all interest-rate control on discounted bills, a lending mechanism among companies. Commercial banks may now charge whatever rate they wish, and competition will determine interest rates.

Deposits remain under the central bank's control. The ceiling rate is 10% above the benchmark rate. I think deposits are a logical step towards an efficient flow of capital, but the central bank appears to be moving slowly, one step at a time.

The changes don't come as a surprise, with China's growth trajectory slowing. While any other nation would kill to have the GDP growth rate of China, it's starting from a relatively small base. China is a lot like an elephant riding a bike: Don't slow down too much, or you'll fall over.

Three of China's biggest banks trade on the Hong Kong Stock Exchange.

Industrial and Commercial Bank of China

,

Bank of China

(BACHF)

and

Agricultural Bank of China

.

Some market participants consider a move towards market-controlled pricing as an earnings headwind. I take the opposite view and believe the competitive pressures are outweighed by the flexibility to lend, plus growth opportunities from a stronger economy.

It shouldn't be hard to figure out why. After all, a 10% share of modern Shenzhen's banking market is worth a lot more than a 100% share of old Shenzhen's.

At the time of publication, Weinstein held no positions in stocks mentioned.

Follow @RobertWeinstein

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Robert Weinstein is an active trader focusing on the psychological importance of risk mitigation, emotion and financial behavior of market participants. Robert co-founded the investing blog

StockSaints

, where he writes a journal about his trading activity and experiences.

In addition to

TheStreet

, Robert also contributes to

Real Money Pro

, providing real-time trading ideas for stocks, options and futures.

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