China’s leadership reshuffle reassures foreign investors

New names in China’s leadership and President Xi Jinping’s tightened grip of power raises the likelihood that that the country will press ahead with economic reforms and seek to instill more order into the financial market.

These are seen as welcoming signs for foreign investors who invest in or want to sell more products into a country that is grappling with several financial problems, ranging from mounting debt and asset bubbles.

The make-up of the Politburo Standing Committee, the country’s most powerful decision-making body, were confirmed on Wednesday, after the 19th National Congress of the Communist Party of China (CPC) was concluded.

The seven members of the supreme political body are, in order of seniority, president Xi Jinping, premier Li Keqiang, Li Zhanshu, Wang Yang, Wang Huning, Zhao Leji and Han Zheng.

Except for president Xi and premier Li, the rest of committee members are all new to the top political body, replacing predecessors who had all exceeded the informal age limit of 68. The committee continues to have seven members, despite speculation that Xi could cut the number to five as he continues to consolidate his grip on power.

The new Politburo members had all been widely speculated as the eventual choices by the media, but the fact there were no surprises helped to calm skittish foreign investors, Xia Chun, chief research officer at Chinese wealth manager Noah Holdings, told AsianInvestor.

In the make-up of the previous Politburo Standing Committee, only president Xi and premier Li have good knowledge of economics, while others did not play prominent roles in shaping the economy, he said. Indeed, Xi has been fairly hands-on in financial decision-making in his first five years, in an area traditionally consigned to the premier.

Economic focus 

However, the newly announced committee includes vice premier Wang Yang, who was the Communist Party’s Secretary in Guangdong province, while executive vice premier Han Zheng was previously the Shanghai party chief. Both are economic powerhouses in China.

“This is a big signal. The country will focus on economic development in the next five years, and financial development will go hand in hand,” Xia said.

One sign of Xi's increasing comfort in his position was that he had his name added to the Communist Party's constitution during the party congress. That elevates him into prestigious company; only Mao Zedong and Deng Xiaoping had previously had their names added to the party charter.

Additionally, people elevated to the committee are mostly reformists that are close to him, Karine Hirn, Hong Kong-based partner at East Capital, a fund house that specialises in emerging and frontier markets, told AsianInvestor.

Xi's success in consolidating his power is likely to mean that the reform agenda he has been advocating will proceed apace and China will further open up its economy, Hirn said.

Economic overhangs

The country is in need of more financial reforms, to ensure the longer term health of its economy. Over  the past five years, its GDP growth has slowed, while there have been asset volatility too. This included the stock market meltdown in 2015 and a currency depreciation since, while bubbles are emerging once more in China's real estate markets.

Most worryingly, the country’s debt levels are accelerating fast. The Institute of International Finance estimated that China's total debt surpassed 300% of GDP as of May 2017.

“China’s debt levels are rising and this is the biggest worry for foreign investors because most economic or financial crisis around the world are caused by rapid rise in debt levels,” Xia said.

He predicted that the new leadership under Xi would step up efforts to weed out non-compliant investment companies and fund houses and to make the market more transparent, in a bid to attract more foreign investors to invest in China.

Succession uncertainty

One longer term uncertainy for China is the next generation of its leadership. There is no obvious successor to Xi, as none of the five new members are young enough to take the mantle for a decade with Xi's second term ends in 2022, Ivan Li, research director at DBS Vickers Securities said in a report.

“That's a break with past practice which leaves Xi's options open and will stoke speculation he intends to prolong his influence into the future”, Li said.

But for now, this uncertainty may not bother foreign investors too much.

“People are speculating about why and how and so forth. But for [foreign] investors we are talking about five years of stability and accelerated reforms,” said Hirn at East Capital.