Markets cool on China’s new leaders

Here, unveiled on Thursday for all the world, are China’s new leaders, the seven members of the Communist Party of China’s Politburo Standing Committee, headed by Xi Jinping (top).

In the middle, left to right are: Li Keqiang, Zhang Dejiang, Yu Zhengsheng. At the bottom: Liu Yunshan, Wang Qishan and Zhang Gaoli.

While they were welcomed by the audience in Beijing’s the Great Hall of the People, the market reaction was less than enthusiastic.

With investors concerned that the line-up is even more conservative than had been expected, Chinese equities fell on Thursday, the day of the once-in-a-generation power handover. The Shanghai composite index closed down by 1.2 per cent and the Shenzen Composite by 1.55 per cent while in Hong Kong the Hang Seng was 1.4 per cent lower near the close.

Since the last trading day before the Congress started on November 8, the Shanghai Composite has lost 3.4 per cent. With fears about the US fiscal cliff, the eurozone crisis and global economic slowdown circulating around the markets, investors have had more on their minds than just China. Over the same Congress period, the MSCI Asia-excluding Japan index is down 3.6 per cent.

But it’s still telling that investors have found little to cheer in the events in Beijing. Quite the opposite. As Josh Noble wrote for beyondbrics this week, sentiment was hit by reports of new property taxes, with state news agency Xinhua saying that the Chinese government was “actively studying” an expansion of its experimental property tax programme.

However, the truth is that nobody knows what the new leaders will do – including the men themselves. Simon Rabinovitch and Leslie Hook, wrote in the FT:

One popular view is that their personal beliefs simply may not matter much. China has travelled a long way from Mao’s day, when the fate of the nation hung on the whims of one man. Today, decisions are made by consensus. As chief of the Communist party, Xi’s role will be far more akin to board chairman than dictator.

They qualify this by adding that “even in the most complex of organisations, personalities do matter”. But the point stands – no one man is going to transform today’s China – especially as the most powerful instrument at his disposal, the Communist party, may not be right for the job. As Rabinovitch and Hook say:

The bigger concern is that the system itself needs fixing – that a rigid Leninist party structure has failed to keep pace with an increasingly mobile, ambitious, opinionated and informed Chinese population.

On Thursday, analysts sought to glean what they could from the politburo line up. Citigroup’s experts said:

Future policy likely pro-stability – Among the 7 members in the Standing Committee, with an average age of 63, all hold college degrees or above and 6 of them had worked in coastal areas as provincial governors or party bosses. 4 of them had worked in the countryside in the late period of the Cultural Revolution. This is consistent with the view that new leaders are more likely pro-business and pro-stability.

Restrained growth and reform – For the first time, top leaders have imposed conditions on growth and reform mandates. It has determined to double the 2010 GDP by 2020 in real terms, subject to doubling household income over the same period of time. It also calls for political reform, but the new political model must be differentiated from principals in Cultural Revolution and capitalism. This suggests that new leaders may aim to achieve balances between quantity and quality, and between equity and efficiency.

Timely action is critical – Both the pace and time of reform matter. It is expected that the reform will likely be gradual as in the past, but the cost and complexity of reform should be positively correlated with the time that it takes. Two key areas of needed policy response are improving the efficiency of resource allocation and inventing new growth engines for the next decade.

Capital Economics wrote:

The unveiling of China’s new leadership in the Great Hall of the People today has dented hopes of economic policy reform. Of the three “reformist” candidates thought to have had a chance of joining the Politburo Standing Committee, the Communist Party’s main decision-making body, only one was promoted.

The two left out were Wang Yang and Li Yuanchao. For Guangdong Party Secretary Wang this will not have been a great disappointment. He is still relatively young at 57 and always looked a more plausible candidate for five years’ time. However Li was until recently thought a frontrunner. Li’s apparent fall from grace may signal that the hand of the reformers is weaker than previously thought.

What’s more, Wang Qishan, who was promoted, has been shunted into a role that gives him oversight of Party discipline rather than economic policy as many had hoped.

Barclays said:

There has been an extreme variance in views offered as to what economic policies can be expected after this transition, from drastic reforms to business as usual.

We believe economic policymaking in China is influenced by three main factors: political institutions; social and economic conditions; and senior leaders’ personal styles. To us, this combination implies that continuity, rather than a drastic turn, will be the dominant policy direction after the Party Congress.

If that’s right, the stock market reaction – or lack of reaction – may seem churlish, given Chinese policymakers’ track record. But with China facing multiple challenges to its economic growth model, the policies of the past won’t be the ones required for the future. Hence, the caution.

Related reading:
In depth China leadership transition
New Chinese leader gets strong mandate
, FT