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Liberalisation by a President for life? The new paradox of China’s reform

China has cleared the way for President Xi Jinping to rule for life. John Redwood, Charles Stanley’s chief global strategist, asks what this means for China and the rest of the world.

by
John Redwood

in Features

13.03.2018

I have been a long term bull of Chinese shares. I have never believed a banking crash is imminent, that the Chinese are about to experience a hard landing or that China is uniquely over borrowed and facing a tough reckoning, though I have read many investment commentaries in recent years predicting some such disaster. I am no personal fan of single party states that exercise censorship and discourage dissent, but investment forecasting is about reading the run of economies and markets right, not about expressing personal political and moral choices.

I was impressed by what I heard and read about President Xi. Those who knew him or did business with him told the world he is a western educated new style Chinese leader with a passion for reform. When he arrived in power he was going to progressively liberalise the Chinese economy and integrate it more fully into global markets. Today we need to reappraise, as that same reformer completes his powerful grip over the communist party apparatus and makes clear his wish to be the dominant governing force for years to come. That is not quite what his western fans had in mind when they praised him in his early days.

There’s no doubting the scope of President Xi’s ambition for his country. He wants to lead China away from the industrial and export led model of growth he inherited, with much more emphasis on services and consumption. Like his predecessors he is keen to acquire the best technology from around the world, and has the money to buy some of it. The US still thinks China cheats over Intellectual Property. He wishes Chinese living standards to rise at a decent pace, and has adjusted expectations down from 10% growth to around 6% growth without any obvious difficulties. This is still a good pace of improvement, given how much larger and richer the economy now is.

He has set out his long term Belt and Road vision. China is making a series of investments, alliances and partnerships half way around the world from the east to the Middle East and on to Russia. It is busily acquiring a lot of scarce and important mineral resources, and gaining strategic positions in important transport hubs. At the same time China is expanding sandbanks and atolls in the China Sea into islands that extend Chinese territorial controls. The country has embarked on the construction of a much more powerful military, capable of acting well beyond China’s borders.

When the President first came to power there was talk of some greater introduction of democracy, with a possible greater choice of candidates for local elections. Things seemed to have changed since then, back to the idea that one unified view is preferred. President Xi has moved some way to free the market in the yuan and in Chinese shares, with the two way interconnector from the mainland markets into Hong Kong. A bit more of corporate China has been exposed to global price formation and criticism. The reform programme and the sustained growth has been a sufficient backdrop to sustain a bull market in Hong Kong shares, which have done well again over the last year. As more of Chinese activity gets a quote, and as the links between the mainland exchanges and Hong Kong get stronger, so more international investors are likely to overcome their objections and see China as a regular part of their portfolios.

The path to such liberalisation will not always be smooth, given the nature of the regime. We saw how managed capitalism in China can be badly mismanaged with the gyrations of the domestic stock markets in 2015. The authorities encouraged a bull market by telling people to buy shares, only to undermine them when they thought it had gone too far. A frothy bull market was turned dramatically by curbing speculation and condemning broker loans to clients. The government lost control of the market in both directions, disliking the extent of the rise and then worrying about the speed of the fall. I was negative about mainland China during this period, as I saw it would take time to rebuild confidence in the domestic market.

The events of the last few years have shown that President Xi is indeed a talented and capable leader in a new mould. Markets now have to adjust to the truth that he has gained more power than his predecessors and has now displaced the ten year period in office with its planned succession system in the leadership. For the time being he may well be at the height of his powers and able to get more right than he gets wrong, but this has increased China risk quite considerably. It tells us we are relying on his judgements, and the leadership team around him is likely to be more sycophantic and less challenging and collaborative than under the old system.

Meanwhile the stage is set for a further chapter in the story of how President Xi gets on with President Trump. So far China has seen off US flirtation with a more independent Taiwan by being very firm, and has taken the edge off US anger over trade by being helpful over the value of the Chinese currency. This is all about to be tested more with the US report into alleged Intellectual Property theft. Mr Xi will want to be a successful advocate of no new trade restrictions worldwide, whilst keeping as much of China’s special deal as possible.

Things have just got a bit riskier for China as a result.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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