Why Chinese Stocks Are Swooning

China and Japan are finding they have at least one thing in common: Spin seems to have become the central plank of their reform plans.
Customers watch share prices on an electronic stock board at a security firm in Shanghai. Photographer: Tomohiro Ohsumi/Bloomberg

At daggers drawn over a set of disputed islands -- not to mention leadership in Asia -- China and Japan are finding they have at least one thing in common: Spin seems to have become the central plank of their reform plans.

President Xi Jinping isn't attacking China's problems with "three arrows," of course, as Prime Minister Shinzo Abe is in Tokyo. Transforming the Chinese economy from an investment- and export-addicted mess into a balanced, innovative machine requires much more than that. But in both countries, leaders have been spending much more time talking about their revival plans than implementing them. Markets are noticing: An index of Chinese stocks JPMorgan Chase says should benefit most from reforms sank 10 percent this year through yesterday.

Investors have many reasons to be gloomy. After years of growth, property prices are starting to tank. Even those who believe the government is serious about reform worry that the necessary changes will prove a drag on growth. Punters are coming to grips with the magnitude of the task that Xi and Premier Li Keqiang are facing.

I think markets are also sensing an Abenomics dynamic in Beijing, where Xi and Li are talking lots of about epochal changes and offering very few specifics. Contrast this to sentiment last November, as the Communist Party was unveiling its biggest policy changes since the 1990s. Investment banks from Goldman Sachs to Citigroup competed to put out the most bullish buy ratings on mainland shares.

A similar excitement greeted Abe's return to office last year. Yet as I've pointed out before, we're nearly 17 months into Abe's tenure, and only one of his three "arrows" has hit its target -- the monetary one. The second, fiscal pump-priming, has barely been launched, if the impossibly slow pace of rebuilding efforts in the earthquake-ravaged Tohoku region is any guide. The third, deregulation, is still in Abe's quiver.

The whole point of the three-arrow metaphor, which dates back to the time of the samurai, is that all of them are needed if they are to succeed: One arrow alone can be bent; three together can't be. That's why the Nikkei is down 12 percent this year, while just about every major stock market is in the green.

This is a highly correctable problem for both Japan and China. Just as Abe needs to move faster to modernize the tax code, loosen labor markets and reduce red tape, China's leaders need to explain exactly how they plan to rein in state-owned enterprises and the shadow-banking colossus that enables them. They must present a detailed blueprint for how to create a vibrant services-sector to generate good-paying jobs. They must flesh out how they plan to reduce the number of smokestacks that give China's major cities a Dickensian cast. Most importantly, Xi must enlighten us on how, besides official witch-hunts and show trials, he plans to eradicate the corruption that thwarts reform and widens the rich-poor divide.

Xi deserves some time, of course. Pulling off another Deng Xiaopingis a multi-year process that will prove remarkably destabilizing for China's 1.3 billion people, as well as the markets. But investors would feel better about the prospects for success if Xi dispensed with the Abe-like spin about huge changes that aren't happening yet. On May 10, Xi thought markets would find comfort in his call to embrace a "new normal" for slower Chinese growth. Investors would be much happier if Xi stopped talking about a huge shift in growth drivers and got on with engineering it.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.