December Insight– Leadership Changes Impact on Business

The change in leadership in China that was confirmed during the 18th Party Congress is, to most Western corporate executives, the equivalent of someone who is not a football fan reading about the NFL college draft picks.


Everyone understands that Xi Jinping is to be ratified as President and Li Keqiang as Premier. The formal changeover will transpire at the National People's Congress in March, 2013. What is not easily understood is the impact a new leadership roster will have on China's economy and the operating climate for international business.


This round of leadership change is significant because China stands at the cusp of becoming a modern nation. To fully complete that process, China's main political party -- The Chinese Communist Party -- openly admits it must complete its own goals: to create a government driven by the rule of law; to eliminate administrative corruption; and to successfully launch over the next five to 10 years a new form of political pluralism.


While many media reports echoed Reuters headline "Don't expect dramatic change from China's new leaders," for international business leaders to accept this overlooks a number of key economic and commercial policy shifts that will take place starting in June 2013. They need to start putting in plans now to respond to these changes in order to capture the upside and insulate themselves from the downside of China's next generation of leadership.


The first thing to watch will be the policy balance struck between economic stimulus and structural reforms that aim to ensure state enterprises operate totally on market principles. The second will be what steps are taken to curtail non-performing loans and prevent the need for a Chinese version of TARP. Finally, how government spending is managed, both to control deficits and to control corruption, will have a major impact on growth. The key question is what policies and attitude will be struck to support the rekindling of the private sector in China.


The current economic strategy, under the current leadership, is best labelled as "trickle-up." Infrastructure projects, capital and consumption are directed to state companies at the expense of the private sector. Starting in mid-2013, the shift will be to private sector growth, divesting state assets and on creating consumer demand. This will have a major impact on demand and pricing across a number of sectors and to earnings from China.


Intercedent predicts a softening of the iron and steel sector, a softening of the luxury goods and real estate market and a decrease in goods and services that are part of infrastructure projects such as subways, airports and rail projects starting in 2014. On the positive side, these policy shifts will result in increased demand for imported agricultural products and mid-tier consumer products that will appeal to the political shift that will start under Xi geared towards improving the lives of the middle class.  As well, as state subsidies decrease, there will be greater opportunities domestically and internationally for multinationals to compete on price against Chinese state companies.


The most important change in operating mentality that international companies must accept is that, from a Chinese government perspective, being foreign owned is neither good nor bad. The days of the semi-concessional mentality that coddled international companies are coming to an end. The next leadership of China will be objective and open as part of its strategy to further globalize China's markets. The driving factor will be reciprocity -- and reciprocity within China will ultimately be defined by China especially if existing multi-lateral trade agreements are undermined by the false promise of bi-lateral ones.


What is not in doubt is that as the world's second largest economy strives to become the largest, it has a new team in place with new rules. If international companies in China aim to maximize earnings, they may need to develop a new game plan.

© 2010 Intercedent | Site by ChinaNetrix