The 19th National Congress of the Communist Party of China is due to take place on October 18. Who is elected to the new seven-person ‘standing committee’, may determine the trading and investment policies of China and, therefore, the rest of the world for the next few years.
President Xi Jinping and premier Li Keqiang, who are not up for re-election, currently oversee a committee which leans towards conservativism and which pundits say has slowed down the big economic reform program which had been going on for nearly 10 years.
But that may be about to change.
According to Chi Lo, BNP Paribas Asset Management senior economist for Greater China, it looks like president Xi’s supporters for reform may increase from three to at least four committee members, giving him a clear majority.
The China specialist, based in Hong Kong, said on a visit to Australia last week that it was probable that the reform process would be “faster and deeper” than in the first term of the Government, although this would not be without resistance.
He expected GDP growth to slow towards 6.5 per cent over the current financial year. One of the disadvantages of structural reform, while positive for investors in the long term, was that it would likely mean slower growth in the short term.
The risks, he said, that investors should be aware of, could be clearly divided between domestic and external. They were:
Domestic
. Potential credit events in the shadow bank market due to regulatory and property market tightening
. Political risk due to transition
. Property market crash risk, due to the hawkish policy stance that might erode corporate cash flows, dent-servicing ability and, therefore, GDP growth, and
. Higher-than-expected inflation, resulting in a sharp monetary tightening and financial failures, especially in the non-bank financial sector.
External
. A full-blown trade war with the US
. Capital outflows intensifying on the back of such a war, and
. Rising geopolitical risk.
Chi Lo said that the increase in demand for imports for the services and industries which required value-add, such as high-quality foods would offset, over time, the slowdown in commodity imports.
According to Caroline Yu Maurer, the lead portfolio manager for BNP Paribas AM’s Greater China Equities strategies, the lay-offs due to the expected slow-down in growth are going to be much smaller than they were in the late 1990s, during the last slow-down following the ‘Asian Crisis’.
“There’s should not be much distress over the unemployment issue,” she said. “Most people who are made unemployed should be able to move into the services sector.”
She said that, this time around, the capacity cut in production was more structural than cyclical because of the Government’s determination to rationalise big industries, such as steel, and because of environmental pressure.
She said that there had already been consolidation among companies such as excavator manufacturers, cement and coal producers. “The top guys are getting more market share and are becoming more profitable,” she said.
In the property sector too, which has been the subject of a lot of speculation about over-development in recent years, Yu Maurer said there had also been considerable consolidation among developers. “And it’s happening very fast,” she said. “The leading ones have fewer financial problems than the smaller ones.”
She said that the firm was seeing “interesting companies” emerge in various industries which would likely develop into global players.
Greg Bright is publisher of Investor Strategy News (Australia)
