Politics and policies in China

It very much looks that the new Chinese Politburo that will take office in March 2013 will be primarily composed of acolytes and allies of former President Jiang Zemin, who was probably the ultimate power in China throughout much of the 1990s and early 2000s.

We can suspect that these ‘new’ policy conservatives are unlikely to conduct a major structural reform of the economy and instead we would expect them to offer some form (rightly or wrongly) of economic and political policy continuity in China, with the more reformist technocrats appearing to have lost out in the appointments.

As to what impact on Chinese economic policymaking and economic conditions this will have is not that easy to discern at this stage but we would suggest that there may be some attempt to support economic growth next year (along the old lines of heavy infrastructure spending) but also the authorities will likely remain wary over the outlook for inflation given their experiences in the late 1980s (which will have been formative years for them).

Consequently, we do not expect them to pursue a ‘growth at all costs’ strategy but we do expect reported growth of circa 8% next year and actual growth of around 4–5%, with both numbers likely to represent a 100-200 bp improvement on 2012’s outcome.

With regard to the RMB exchange rate in the short term, the resolution of – or delay in – the shift in power base may lead to some moderation in the rate of capital outflows from China in the near term which might support the RMB a while longer but we would expect the Politburo’s need for better growth, and more fundamentally the fact that China will have to undergo some form of political dynasty change before 2020 (since most of the new appointees will be too old to stand for the 2017 reshuffle) will likely to undermine the capital account and the currency next year.

Overall, we suspect that despite the noise, the recent political changes in China will see the current status quo broadly maintained for another five years. We certainly would not expect a major shift in agenda to favour reform – and we suspect that the centre will continue to attempt to re-assert its control over the provinces, albeit at perhaps a more moderate pace than might have been the case if there had been a more profound change in regime.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla