China leadership transition
The Chinese Communist Party's 18th Congress, held in Beijing November 8-14, 2012, marked a key power transition in China. A new generation of leaders, headed by Xi Jinping and Li Keqiang, took over from the previous leadership headed by Hu Jintao. The Communist Party's Politburo Standing Committee was reduced in number from nine to seven. Unlike his predecessor Jiang Zemin, Hu Jintao handed over both the Party General Secretary and Chairman of the Central Military Commission positions to Xi.
Talking Points: China Leadership Change
The once-in-a-decade leadership change in China is under way. Vice-President Xi Jinping will be named the new Communist Party general secretary (and therefore president in the spring), and Li Keqiang will be the next premier. The leadership transition this time, which was portrayed by some Western media as a fierce power struggle filled with uncertainties, turned out to be much smoother than that.
Xi and Li are quite different from their predecessors. While many of China's previous leaders were trained as engineers, Xi and Li hold doctoral degrees in social sciences. Li received one of the most prestigious economics prizes in China for his analysis of Chinese economic structures. Besides their academic credentials, Xi and Li both had lengthy experience in local governments in their early days.
Xi spent more than 20 years in the coastal regions, where the private sector has seen the strongest development. Li, in contrast, spent three years trying to revive the old industrial rust belt provinces of Liaoning, Jilin and Heilongjiang. These experiences, from far different perspectives, allowed them to develop a profound understanding of China's economic and social issues from the bottom up, which is crucial for a country such as China, where regional differences are huge.
With the new leaders in place, we expect to see growing momentum towards structural reforms in China for longer-term benefits. These reforms will probably focus on areas such as financial liberalisation, deregulation in state-dominated sectors, industry-wide consolidation and an overhaul of the household registration system. Such reforms will bring China closer to a true market economy and one with a more balanced structure.
Although some of these reforms may not generate immediate growth, their success is crucial for China's development. In addition, the new leaders are expected to continue to cut income gaps and improve the social safety net. The strong network of contacts and support that Xi and Li built up during their early years at the local level will help them to push forward reforms that are both necessary and challenging.
From an investment perspective, the leadership change will probably reduce uncertainties surrounding China. A clear reform agenda that is expected to emerge in the near future will probably serve as a positive catalyst for many China-related assets, especially equities, which have been suffering for the past two years. With the Chinese economy showing signs of stabilisation and given Chinese equities' attractive valuations, Chinese stocks could be a good candidate for outperformance in the medium term.
Dr Dong Chen is a China economist for JP Morgan Private Bank Asia