Monday, November 19, 2012

On China’s New Leaders

China’s unveiling of new leaders has not equally received warm reception from her domestic markets. The Shanghai index dropped 2.63% this week. The weekly losses account for 31% of the accrued year to date losses of 8.43%. 


Many have speculated on the whether currently selected leaders are “conservative” or “progressive” and of their possible policies when they assume their positions in 2013.

What has been known is that the current appointments by the top party leaders and retired officials[1] had been based on the rival factions of retired President Jiang Zemin, who seem to have prevailed over faction of outgoing President Hu Jintao (as noted by the table above from Merk Investments[2]).

What has also been a fact is that incoming President Xi Jinpin has a daughter studying at the Harvard University since 2010 (under a pseudonym and under 7/24 protection from bodyguards[3]) and that many of the contenders for China’s premier political power positions like Li Yuanchao (although he failed to get appointed), as well as with many incumbent bureaucrats and state officials, have been trained by or has affiliations with Harvard University. In short, perhaps the Harvard connection[4] may play an important role in China’s national and international political and economic affairs.

The reality is that we can never say what policies these people would assume in spite of their personal, academic and political backgrounds.

As a side note, US Federal Reserve Alan Greenspan comes to mind. Thought to have been influenced by free market leader Ayn Rand[5], upon the assumption of the chairmanship of the US Federal Reserve in August of 1987, Mr. Greenspan turned out to be a serial inflationist or bubble blower.

Once in command, the political environment will differ from their past experience since these leaders will have to deal with variegated political pressures from competing interests from every corner of China’s territorial borders.

Yet political pressures will not emanate solely from domestic front. External relations will be an ongoing concern too where China’s geopolitical and international economic interests lies.

In other words, the incoming leaders may or may not be influenced by the values or priorities of their benefactors or by their political parties, aside from the influences exerted by people surrounding them.

One thing that can be assured is that such leaders will operate along their self-interests. And that they would work under a mixture of limited knowledge, their perspectives and interpretations of events will be shaped by how information has been framed on them, their academic or ideological or cultural orientations, time preferences, value scales and the varying degree of influences from their networks will also matter, and lastly how all these political issues will harmonize or synthesize with their career (or even financial) interests or ambitions.

So far, following a series of record injections by the People’s Bank of China[6] (PBOC), the last of which has been made last month, credit activities appears to have picked up. The PBoC has made injections lately but has pulled back[7] from last month’s record highs

While the growth in new local currency bank loans has been weaker than consensus expectations, other credit measures such as corporate bonds, has shown marked advances[8]. Some say that this is bullish. Maybe. But perhaps the bulk of such improvements may be due to politically directed credit channeled through State Owned Enterprises (SOE) rather than from private sector. If this is true, then artificial stimulus may likely have a short term effect. Again everything depends on the feedback loop between the market’s response and the attendant policies adapted by the PBoC to address them and vice versa. 

Also part of China’s transitional government will involve PBoC Governor Zhou Xiaochuan departure or retirement. Albeit Governor Zhou says that the PBoC’s direction will work for the convertibility[9] of her currency the yuan, that would allow market forces to determine its value aside from opening China more to financial reforms.

I do hope that his successor will indeed push through with this reform agenda.

[2] Axel Merk and Yuan Fang China's New Leadership: Progressive, Not Conservative Merk Investments, November 16, 2012

[5] Alan Greenspan

[6] Wall Street Journal PBOC Injects Record Amount of Liquidity November 1, 2012

[7] Wall Street Journal PBOC Continues to Trim Fund Injections November 12, 2012

[8] Danske Bank Political events take centre stage Weekly Focus November 16, 2012

[9] Bloomberg Businessweek China’s Next Step on Yuan Is Convertibility, Zhou Says, November 17, 2012

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