As an investor I track the Chinese economic scene to position my portfolio for the turns that China will put to my profits.
China’s Communist Party gathers today in Beijing to choose its fifth generation of leaders since taking power in 1949, a decision that will shape the nation’s economic and financial policies for the next decade.
Vice President Xi Jinping is forecast to replace Hu Jintao as general secretary of the 82 million-member party. Vice Premier Li Keqiang is seen taking Premier Wen Jiabao’s spot on the top Politburo Standing Committee, setting him up to assume Wen’s job next March.
The backgrounds of Xi, Li and the other successful candidates for the Standing Committee — likely all men — will give investors clues to their appetite for policy shifts that the World Bank says China must embrace to become a high-income economy. The reform agenda ranges from breaking up state-owned monopolies to deregulating lending rates and correcting under- pricing of natural resources.
“There’s no luxury to delay these reforms,” said Ding Shuang, senior economist for China at Citigroup Inc. in Hong Kong, who previously worked at China’s central bank. “The past 10 years, the economy has benefited from changes made in previous periods. Now, those dividends are used up,” he said, referring to the country’s 2001 entry to the World Trade Organization and market reforms in the 1980s and 1990s.
The 2,268 delegates to the 18th congress, drawn from the central government, military, state-owned companies and China’s provinces, will approve changes to the party’s constitution and pick the next central committee, a group of about 200 people from whose ranks comes the Politburo, now with 24 people, and its standing committee, now with nine men. The standing committee wields supreme power in China.
The party, founded in 1921, holds its congresses every five years. The new Politburo Standing Committee will be presented after the congress ends Nov. 14 and the new Central Committee holds its first meeting.
When Hu took over the party from Jiang Zemin in 2002, the men came out in order of seniority and Hu made brief remarks. When the 13th Party Congress ended in 1987, General Secretary Zhao Ziyang clinked glasses as he toasted foreign reporters and took their questions.
Analysts who follow China’s politics say that the Politburo Standing Committee will shrink from nine to seven members, reverting to its size from before 2002.
Roderick MacFarquhar and Tony Saich of Harvard University, as well as Huang Jing of the National University of Singapore, say that in addition to Xi and Li, the standing committee may include Vice Premiers Zhang Dejiang and Wang Qishan, Tianjin party secretary Zhang Gaoli, Shanghai party leader Yu Zhengsheng and propaganda minister Liu Yunshan.
Zhang Dejiang, who oversees state-owned companies as vice premier, is an economics graduate of Kim Il Sung University in Pyongyang. Zhang Gaoli presided over a surge in debt-fueled growth in Tianjin, almost twice the size of Delaware. Liu Yunshan oversaw media controls and Yu Zhengsheng is an engineer whose time in Beijing was spent in the construction ministry.
One potential candidate for the Standing Committee earlier this year was Bo Xilai, the Chongqing party boss who was fired in March and later removed from the Politburo. He was expelled from the party after his wife was convicted in August of murdering a British businessman.
Wang Qishan, China’s top official for international finance for the past five years and Treasury Secretary Timothy F. Geithner’s counterpart, may not have a position overseeing the economy. He may run the party’s anti-corruption and discipline work, according to Saich and Huang, both of whom said their forecasts were based on discussions with party officials. Zhang Gaoli might take the role of executive vice premier, working with Li Keqiang to oversee China’s $7.3 trillion economy, they said.
“Zhang instead of Wang as executive vice premier would have to be considered a setback for much needed reform in the financial sector,” said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington and author of “Sustaining China’s Economic Growth After the Global Financial Crisis.”
At stake is an overhaul of China’s interest-rate regime. The People’s Bank of China sets lending and deposit rates, and the spread between them gives state-owned banks their profit. They in turn lend to state-owned companies at preferable rates, meaning private entrepreneurs pay more for loans.
Entrepreneurs in Tianjin can obtain small, unsecured loans for 2 percent interest per month, or more than 26 percent a year, according to the 3g210.com website, which provides interest rate information.
China grew at an average annual rate of 10.6 percent during Hu’s tenure as general secretary from 2002 through 2011. Its economy is roughly half the size of the U.S. economy. China’s gross domestic product may exceed that of the U.S. by 2020, Standard Chartered Plc economists forecast in 2010.
HSBC Holdings Plc economists led by Qu Hongbin, the chief economist for China, said in a report that the new leadership may liberalize interest rates, move toward more bond financing and away from bank lending, and push to make the yuan convertible within five years.
“There are clear signs that China’s new leaders, who will take power in early 2013, will make speeding up reform top of their policy agenda in the coming years,” the HSBC report said.
To do that, they must overcome opposition from beneficiaries of the status quo. They include local governments and state-owned enterprises that enjoy preferential financing, and wealthy property owners and real estate developers who may oppose measures such as property taxes that would free up local governments from relying on land sales for revenue.
Any policy moves will have to wait for the new leadership under Xi to consolidate its power, said Tao Dong, head of Asia economics excluding Japan at Credit Suisse Group AG in Hong Kong.
“If the markets hope that structural changes could take place soon after March next year, when the new administration comes in, my advice is ‘don’t hold your breath,’” he said.
You must take all this information into account and weigh the risks to your investments. Offset the risks by having a portion inyour assets in precious metals – just as many Chinese investors are doing.
Jack A. Bass is the author of The gold Investor’s Handbook – for more detail on the ins and outs of investing in gold (click the link).
- China: Standing Committee lineup according to SCMP (chinadailymail.com)
- China’s Economic Growth at Stake as Communist Party Meets (bloomberg.com)
- Cautious reformers tipped for new China leadership – Reuters (reuters.com)