Hu’s out, but who is in?

New leaders, same old challenges. Whilst China remains an enigma for many, and the process behind the leadership transition is also a mystery, we are optimistic that the policymakers taking over in 2013 understand the requirements to stabilise the Party as well as the domestic economy. China will still overtake the US economy in terms of size in the coming years. However, we believe that the leadership is realising that it does not have to happen right now, and that short-term growth can be tempered in order to balance the medium to long term sustainability of the country.

 

China’s leadership game of Guess Who at the 18th National Congress of the Chinese Communist Party (CCP) concluded mid-November with the new leaders walking out in order of seniority. After months of certainty we finally know that the new General Secretary of the Party and future President of China is Xi Jinping, a so-called “princeling”, the privileged son of a former senior leader, moving up from his position as Vice President. Joining Mr Xi at the senior level of “the Party” is newly installed Premier Li Keqiang, a former rural labourer with a reputation for upholding the needs of those at the lower end of the poverty scale.
The Central Politburo Standing Committee of the Communist Party of China, commonly referred to as the Politburo Standing Committee (PSC), was previously led by Hu Jintao, in his role as General Secretary. As speculated, the committee has returned to being the “Secret Seven” members, with expectations that the stream-lined format will allow for greater dexterity in decision-making. It is also anticipated that it will reduce the potential for consensual stagnation of the decision-making process which some argue has been a barrier to development and entrepreneurialism since the expansion to nine members in 2002.
The once-every-decade process of “electing” officials for the PSC has again not been without its twists and turns, in drama that would not have been out of place in a Hollywood blockbuster. Bo Xilai, had been tipped by some to be promoted to a senior position on the PSC in this current shuffle. However, in 2011 Neil Heywood, a British businessman, was murdered, and subsequently Bo’s wife, Gu Kailai, has been found guilty of his murder. Questions remain over the handling of the murder investigation, and perhaps we will never truly know what happened to Heywood. The event did trigger a number of questions regarding the upcoming leadership transition, as well as greater scrutiny of members likely to be promoted to the Central Committee. Previously, rumours of corruption by officials was particularly localised, and therefore little was known about unscrupulous dealings in the mainstream media. Social media enables rapid and broad dissemination of facts and hyperbole in equal measure, another challenge for the new leaders to face in the new year and one which, should they fail, could ultimately lead to demise of the one party state.
So who are the new leaders, and what will they bring to the Party?
Mr Xi, whilst not the choice of the outgoing Hu, is known to have broader appeal across the factions within the Party, hence his promotion above Mr Li, the former vice premier, who steps up to take over the reins from Mr Wen. In a move that has surprised some, Hu stepped down with immediate effect from his role as Chairman of the Central Military Commission in order for Xi to exert his influence during internal debates right from the off. Reading Mr Hu’s “school report” delivered at the start of the 18th Party Congress it is evident that there are a growing number of challenges for his successor to undertake. His departure speech was very much a recital of the key themes that he proposed in his opening speech in 2002, with some arguing that not enough has been done in the past decade, particularly on a reform basis and those of a “green” persuasion.
Mr Li, firmly in the Hu camp, has consistently emphasised the need for a rise in efficiency within the Chinese economy with calls for reforms in a number of segments with a primary focus on both financial and fiscal reforms. Investors should be particularly interested in Mr Li’s stance with regards social housing and the much needed reform of state-owned enterprises (SOEs); however, hopes for immediate success on both fronts should be muted, as the formal transition does not conclude until March 2013.
One overriding issue that has been haunting the senior members of the Party in recent months, and that left unchecked has the potential to derail the entire political system, is that of politicians using their powers to enrich themselves, their families and their closest friends. The “Bo Xilai Scandal” has once again highlighted the shadier side of Chinese politics, and rumours regarding other senior members of the Party, have led to increased calls for the new leadership to purge those members putting their own desires ahead of the needs of the People.
The new leadership will have to act decisively in order to placate the masses and ensure social unrest does not become a headache in the opening phase of their tenure. Politicians that have enriched themselves through unscrupulous business deals should be swiftly removed as the leaders seek to stamp their authority on the Party, as well as, more importantly, re-establishing the legitimacy of the Party. Without this restoration of integrity, further unrest and ultimately the demise of the Party that has controlled China for more than 60 years, is a possibility, albeit remote.
The two new front-men have different backgrounds and political ideologies. They will have to put their differences to one side and unite a party that has come under intense pressure in the past year or so. With China’s own blend of Commu-Capitalism, the country faces a great number of challenges not limited to its unfavourable demographics, the need for affordable housing, a state-backed pension structure, as well as the cronyism that currently infects the Party. With increasing global focus on China’s economic prowess and the weight now placed by investors in China “getting it right” the new leaders will have to hit the ground running and begin implementing the 12th five year plan with gusto.
2012 has been a turbulent year for politicians within China, as one would expect in a transition period, however that uncertainty has now been removed which should give stability and confidence to the Chinese equity market. Past errors, such as the huge stimulus package of 2008, are being understood and considered in terms of future decisions. The 12th five year plan sets out definitive goals in infrastructure, healthcare, social and welfare reform amongst environmental goals and energy targets. With a clear road map and milestones to be achieved, with a new unencumbered leadership at the helm, the Chinese equity market should be of particular interest from this juncture.
The economy has been basing out, and although growth expectations have been dampened in recent years, it should be remembered that a 7% growth rate is something most other countries on the planet would die for. Further encouraging signs have been the pickup in reforms such as capital account opening and liberalisation of interest rates and taxes, indicating that the hierarchy are increasingly aware of the trade off between short-term growth and mid-term stability. So new leaders, new year, and new goals for 2013, all point to an exciting and genuine investment opportunity.

 

Simon Finch, Assistant Investment Manager – Asian Equities Team

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