November 16, 2012, 12:41am
After months of policy paralysis, certainty over leadership will be good for markets in the short term. The new leadership can focus on pushing through policies once its power base is consolidated. Xi Jinping will head a Politburo standing committee that is pro-reform, which has to be positive for investments. For the past decade, political and economic reforms in China have gone backwards. The new leadership realises the importance of structural changes to maintain longer term economic growth. The role of the state needs to be pulled back to avoid crowding out of private entrepreneurship. There has certainly been more talk of reform – to deregulate industries and introduce more market-driven policies. These reforms may not be positive for large companies, like banks, but will be positive for the economy longer term, as well as for the private sector. The main risk here is one of execution.
Gigi Chan is manager of Threadneedle’s China Opportunities Fund.
Three challenges face China. Firstly, maintaining economic growth, which has slowed from 12 per cent to 7.4 per cent over the last two years. This isn’t a problem, so long as its recent stabilisation efforts continue. Second, rebalancing its economy from export and investment towards domestic consumption – currently, only a third of China’s GDP is made up of domestic consumption. Third, to begin the process of political and economic reform – particularly reducing the dominance of state-run enterprises, and curbing corruption. It isn’t clear whether the new leadership can retain China’s place at the world’s top table. The main challenge is to introduce sweeping reform, but evidence of the last ten years is not encouraging. With a new, possibly more conservative leadership now in place, more questions have been raised than answers given.
Tom Stevenson is investment director at Fidelity.