As Xi Jinping and Li Keqiang look set to take over leadership of the Chinese Communist Party, Abi Oladimeji examines how they can affect the global economy
As Xi Jinping and Li Keqiang look set to take over leadership of the Chinese Communist Party, Abi Oladimeji examines how they can affect the global economy
CHINA’S NEW LEADERS will take the reins of a slowing economy. Real GDP has declined from a year-on-year pace of 8.9 per cent in the fourth quarter of 2011 to 7.4 per cent in the third quarter of 2012. While recent data have indicated a recovery in economic activity, there is insufficient evidence of a strong rebound. Robust economic growth is crucial to the ability of the new leaders to maintain social stability and sustain the broader reform agenda.
The key challenge facing China has been obvious for some time. Prime Minister Wen Jiabao summarised this in 2007 when he described the Chinese growth model as ‘unstable, unbalanced, uncoordinated and ultimately unsustainable’.
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The new leadership will have to manage the transition from investment and export-driven growth to a consumption-led model. Successful rebalancing of the Chinese economy is crucial to the outlook for world economic growth. That rebalancing process also has some notable implications for global financial markets.
A departure from investment-driven growth could result in weaker commodity prices. China’s economic rebalancing may also weaken demand for raw materials in general. That would put pressure on growth elsewhere in the emerging markets as China is the major export market for many emerging countries. The past couple of years have seen the creation of the dim sum bond market in Hong Kong. That period has also seen a steady increase in the share of China’s imports that are settled in RMB (Chinese currency).
To sustain this trend, China needs to foster a deeper international market for its bonds. If the new leadership takes concrete steps towards broader financial reform and the development of credible and stable monetary policy, then the RMB bond market could offer favourable risk-adjusted returns to investors. Finally, current valuations mean that Chinese equities could outperform international peers over the next few years.
Abi Oladimeji is head of Investment Strategy at Thomas Miller Investment
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