China's Upcoming Leadership Change

The commentary below is a guest post from Kevin Shi, Co-Portfolio Manager of the EP China Fund (EPHCX).

 


 

It's not just the United States that will have a potentially major leadership shake up this fall. China is set to undergo it's once in a decade leadership transition at its 18th China Communist Party (CCP) Congress. In contrast to the long, bombastic, and often indecisive American election process, the Chinese approach to regime succession is conducted behind closed doors, and can sometimes result in severe shifts in policy. This decisiveness was on view today as rising Chinese political star Bo Xilai was ousted from his remaining leadership positions.

 

While we do not believe that China is at the threshold of a sharp adjustment in its economic plans, there can be little doubt that even slight changes in outlook from Beijing may have huge impacts on the global financial stage.

 

By the end of 2012, most of China's current leadership will be replaced, including the President, Premier, and seven of the nine members of the Political Standing Committee (PSC) of the Politburo. The PSC sets the political agenda for the country and is arguably the most powerful group of politicians in China. Although the leadership transition is occurring as the economy is facing a number of challenges, we don't anticipate major changes to the political landscape.

 

Elitist vs. Populist.

 

It is generally believed that there are two informal coalitions within China's communist party, the "Elitists" and the "Populists." The elitist coalition consists of the "princelings" (younger relations of the previous generations of prominent politicians) and the 'Shanghai Gang' which is a name applied to a group of politicians that held top offices in Shanghai. The Elitist faction is generally associated by former President Jiang Zemin and his political allies. This coalition represents the interest of large corporations and the emerging middle class. Elitists generally have governing experience of advanced economic regions, where policy tends to favor economic growth and financial reforms.

 

The populist coalition refers to the political class that doesn't have a strong family background, often coming from the lower or middle classes, and often gaining political and government experience from less developed provinces of China's interior. Some of the leading figures in the populist bloc, such as current president Hu Jintao, came into the highest echelons of the Communist Party through the Communist Youth League (CCYL) system. Both Hu and Wen Jiabao are deemed as populists, who are thought to show greater sympathy to the lower classes, including farmers, migrant workers, and the urban poor.

 

Although there appears to be some strong ideological and pragmatic lines between these two factions, for now at least it does not appear that tensions are on the rise. Part of this calculation comes from the fact that the sides are evenly balanced, and neither has a strong political advantage.

 

For example, the President hopeful, Mr. Xi Jinping, is a princeling, whose father was a former Politburo Member, a Vice Premier, and one of the architects of China's Special Economic Zones. Xi had more than 20 years of administrative experience in the economically developed Fujian province, Zhejiang province, and Shanghai. It is reported that, based on his governing style in these regions, he is an open-minded, market-oriented, and pro-reform leader. In contrast, the Premier hopeful, Mr. Li Keqiang, is a populist. Raised from a low-level official family, Mr. Li had been the governor of the less developed Henan province. He advanced his early career mainly through the CCYL system and is believed to be a protégé of President Hu Jintao. Mr. Li is one of the main promoters of the social housing program and he is known to support expansive healthcare coverage, employment, inland development, and clean energy. In addition, of the 14 likely candidates for the supremely powerful nine-member Politburo Standing Committee, seven are elitists and seven are populists. Therefore, the new PSC is likely to have a balanced composition between the two coalitions, despite the recent downfall of Bo Xilai.

 

China recently released its next Five-Year Plan, which provides an important framework for Chinese economic and social development. Despite a significant turnover of key leadership positions, we do not expect major policy shifts from the policies laid out in the plan. Furthermore, outgoing leaders Hu and Wen will continue to work with the newly elected leaders until next March before they actually retire. The outgoing leaders will likely have continued political influence following their retirement and the new leadership will need a few years to consolidate power before they are able to initiate major changes.

 

In the meantime, our macro view of China remains unchanged (for an analysis of China's recent international buying spree, see our latest newsletter). We expect top level policies will continue to guide the Chinese economy away from an export and investment driven growth model to a more balanced economy. Specifically, we are focused on the following sectors: domestic consumption, healthcare, education, industrial automation and energy efficiency/clean energy.

 

Kevin Shi is Co-Portfolio Manager of the EP China Fund (EPHCX). Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.   

 

To save 35% on Peter Schiff's new book, The Real Crash: America's Coming Bankruptcy - How to Save Yourself and Your Country, pre-order your copy today.

 

For in-depth analysis of this and other investment topics, subscribe to Peter Schiff's Global Investor newsletter. CLICK HERE for your free subscription.