What China's Elections Tell Us

11/27/2012 8:30 am EST


Benjamin Shepherd

Analyst, Breakthrough Tech Profits, Global Income Edge and Personal Finance

China just held its once-a-decade leadership transition and Japan will hold elections in December, so what can we learn from the political tides in Asia? Benjamin Shepherd of Investing Daily explains.

Elections in the US, the world's largest economy, have concluded. Now it's the turn of the world's second-largest economic power to solidify its choice of leaders.

The Chinese Communist Party (CCP) recently announced that Xi Jinping has taken the reins as the party's general secretary as expected, and will also, unexpectedly, be taking charge of the military.

Much has been written about Xi over the past few months, as Westerners handicap the odds of political reform in the wake of the Politburo Standing Committee's changes. The reality is that scant concrete information is available on him or any of his colleagues. While the Chinese have released what amounts to broad-brush resumes for Xi, none of us know anything beyond what the CCP has told us.

In fact, the CCP has worked hard to build images of Xi and Li Keqiang, who will be the country's next premier, as men who understand both the internal and external challenges China faces. Within China, economic growth is slowing and corruption is a growing problem; externally, China is still locked in a territorial dispute with the Japanese and working to project its influence throughout the developing world.

But even given that backdrop, most China watchers agree that there's never been a public relations campaign of this magnitude in advance of a Politburo transition. Both Eastern and Western media have dissected nearly every aspect of Xi's policy experience and leanings, relying largely on unnamed sources-which is a pretty good indication that they've been told what the CCP wants them to hear. While the Party might be loosening its grip on some aspects of the country's economy, it's tightfisted with information and intent on maintaining control.

But just because the Party is controlling the information flow doesn't mean that we've been sold a bill of goods as to its policy direction. The CCP has obviously painted an image of Xi as a moderate, cautious reformer to buy itself time to deal with internal problems, such as protests against corruption and the recent Bo Xilai scandal. However, it clearly understands the challenges it faces as slowing economic growth and wealth inequality hit at the heart of its political legitimacy.

And by placing Xi at the head of China's military-the CCP rarely vests that much authority in a single man right off the bat, for fear of creating a demigod-the Party is clearly concerned about maintaining its hold on the military. As a rule, when these transitions occur, the outgoing Party Chairman remains atop the central military commission for a year or two before the current Chairman takes over.

However, as the People's Liberation Army has become more confident and assertive over the past several years, it seems that the Party wants to ensure that it doesn't have too much influence in shaping foreign policy. With the current Party chairman at the head of the central military commission, the Party is sending the message that it is firmly in control.

Another interesting development is that the Politburo Standing Committee has been reduced from nine members to seven. While that consolidation most likely occurred to smooth the decision-making process, it's interesting that two leaders-Wang Yang and Li Yuanchao-who favored a faster pace of reform and were top contenders for Politburo spots didn't make the committee.

Where China goes from here remains uncertain. While it's clear that some measure of political reform will be necessary to ease public tensions, the question is just how far that reform will go. One thing is certain, though: Xi and his colleagues will strive to rebalance China's economy.

In his first remarks as Chairman, Xi said that the Chinese people want stable jobs, better social security and health care, and more "satisfactory income." Given his clear focus on material wealth, we should look for the Party to work towards bolstering domestic consumption.

While that doesn't bode particularly well for China's export sector, it's a positive signal for retailers, makers of consumer goods, and health care-related companies.

So while we don't know just how quickly political reforms may take hold in China based on its latest leadership transition, we do have some idea of how to position our portfolios.

Read more from Investing Daily here...

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