Kim Catechis, Head of Global Emerging Markets at the Legg Mason affiliate Martin Currie
China’s 19th Party Congress marks the start of a new political and economic cycle for the country. Over the course of the week, President Xi Jinping will introduce his new leadership line-up to the world, consolidating his powerbase and setting out the shape of his vision for the next five years.
We expect to see a leadership more unified and effective than in Xi’s first term and some key hallmarks of Xi’s economic policy will be further engrained into China’s plans, forming his legacy:
Xi’s goal since coming to power has been a ‘national rejuvenation’ which will see China become more prosperous, take a bigger role in the world and provide a better quality of life to its citizens.
Air quality and water quality are the top priorities for China – in a country where a large portion of the population still lacks ready access to clean water and air pollution is one of the worst in the world, the imperative is easy to understand.
The removal of inefficient and polluting capacity in heavy industry is likely to continue, along with the reduction of support for many debt-laden ‘zombie’ companies. This is viewed as a necessary step in moving China from a manufacturing to a service-led economy.
China has grown its overall debt exponentially in the last decade; the administration is very aware of the risk this represents and there will be a consistent focus on obliging companies to sell assets or back out of costly (mostly international) M&A. Wherever possible, foreign investors willing to inject capital will be made to feel welcome.
The flagship policy of reviving the historic Silk Road, investing hundreds of billions of dollars on core infrastructure in more than 60 countries, remains a key focus for China. As well as effective use of spare capacity in the country’s infrastructure-related industries, this plan is a projection of ‘soft power’ expanding China’s international influence. If successful, it will challenge transatlantic trade in importance.
SOE reform will continue, but ultimately disappoint the more-optimistic foreign observers. The focus is set to remain on ensuring the ‘national champions’ are financially strong and under the control of the Party. At the margin, the injection of capital from private sector players will be welcome as a useful way of reducing debt, not diluting control.
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