The “people risk” behind Xi Jinping's eternal presidency

Without much fanfare, President Xi Jinping closed China’s rubber-stamp parliament on Tuesday (March 20), starting his indefinite term as China’s paramount leader in a “new era”.

News publications, Chinese Communist Party officials and analysts have talked at length about Xi’s power consolidation. Xi, who is 64 years old, could end up ruling for another 15 years or more. Many foreign investors seem to think this is good news; unchanged leadership should mean top-level policies like China’s market reform agenda and Belt and Road ambitions stay on track.

Additionally, Xi’s hold on power means investors may have more accurate forecasts on factors such as interest rates and renminbi value in their financial modeling, as monetary policy directions are less likely to dramatically change direction based on political considerations. 

Most institutional investors want stability in their investments. They are not typically eager to have to navigate black swan events like Brexit and Donald Trump’s US presidency, even if they can throw up shorter term opportunities.

But while Xi’s leadership continuity offers a greater level of certainty for the coming few years, that could come at the expense of greater risks further out. Some investment experts warn about long-term uncertainty associated with key-man risk—or the danger of too much power in a political system being centred around one individual.

The danger is that Xi repeats the same mistake made by most previous dictators, becoming increasingly reactionary and intolerant the longer he rules. Added to that, complete centralisation of power around one person creates systemic difficulties when their period of rule ends. The longer that person remains, and the more direct power they wield, the greater the instability of the political system when they finally depart.

But to AsianInvestor’s understanding, these longer term risks do not appear to be deterring foreign fund managers’ ambitions to expand their footprints in China. In fact many seem to be mesmerised by the leadership’ reiterated pledge to open up its market. 

Eastspring Investments, for example, was approved to set up an investment management wholly foreign-owned enterprise (IM-WFOE) in Shanghai earlier this month and is planning to apply for a private fund management (PFM) licence.

The response is understandable. Worst-case key-man risks appear to be years away, and it’s difficult to quantify the potential investment losses they would create. Meanwhile, many international fund houses have to meet the needs of their yield-hungry customers and their earnings-obsessed shareholders. Tapping the fast-growing retail and high-net-worth segments in the world’s second-largest economy could turbo-charge their businesses.

China’s asset management market is growing fast, along with its economy. Assets under management for professional managers in the country look set to grow from Rmb48 trillion ($7.58 trillion) today to Rmb90 trillion in five years’ time, according to a March 20 report by global consulting firm Oliver Wyman. That’s too great an opportunity for most to risk missing.

CHOOSE YOUR SIDE

But international investors eager to enter China will need to heed a rising risk as Xi continues to consolidate his power: the danger of siding with people who fall out with him. 

Xi has already stamped down upon potential rivals in his climb to become China’s most powerful leader since Mao Zedong. In his first five years of power he vowed to crack down on both "tigers" and "flies"—powerful leaders and lowly bureaucrats—in his anti-corruption drive.

True to his word, he has shot many tigers. They include Zhou Yongkang, a former member of the all-powerful Politburo Standing Committee of the Chinese Communist Party, former chief of China’s biggest oil firm (PetroChina) Jiang Jiemin, former Chongqing chief Bo Xilai, former insurance regulator head Xiang Junbo, and more recently, former chairman of insurance giant Anbang Wu Xiaohui.

All were arrested because of charges related to corruption, economic crimes or bribery. In China’s political circles, speculation is rife that Xi has used anti-corruption charges to purge political enemies.

Former Anbang chairman Wu was not wrong in his overseas investments, but in siding with the wrong political camp, Iris Pang, Greater China economist at ING Wholesale Banking, told AsianInvestor.

Through the anti-corruption campaign, Xi has been consolidating his control since he rose to power (so the anti-corruption campaign actually helps little in reducing corruption). 

The power consolidation culminated when Xi removed the term limit and enshrined his own ideology “Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era” in the constitution. This means Xi's name is now written into the country’s constitution, elevating him to the level of Mao and Deng Xiaoping, whose names were also entered into the document.

LONGLASTING UNCERTAINTIES

Of couse, western powers have experienced their own existential dilemmas of late. The rise of the authoritarian-inclined Trump and the political malaise created by Brexit have caused a great deal of anxiety in the US and the UK, for example.

But these countries have the advantages of being able to throw out bad leaders in elections every four or five years. China has just made this a lot more difficult. And over time that’s likely to raise political frustrations and tensions.

For foreign investors, the danger is that relationships and partnerships forged today don’t remain sacrosanct next year, let alone in five or 10 years’ time. The longer Xi stays around, the greater the chance that carefully cultivated relationships with local government officials or regulators are rendered worthless amid a sudden purge or factional infighting.  

China is a lucrative market, but it’s not an easy one to understand. Increasingly, it's a country in which people risk is as important as market risk.