(Bloomberg) -- Global investors may have to start paying attention to Chinese politics again.
While the country was a bastion of stability in the year of Brexit and Donald Trump, Beijing's potential to surprise markets is rising in 2017. Not only does President Xi Jinping face external challenges from a combative American president and a belligerent regime in North Korea, his ruling Communist Party plans a twice-a-decade leadership reshuffle toward year-end. The run-ups to such transitions are often tense, and this one will be crucial to cementing Xi's grip on power.
The stakes are high for investors. Gene Frieda, a strategist at Pacific Investment Management Co., says this year's leadership shake-up could determine whether China becomes a market-friendly nation dedicated to reform, or one where government meddling stifles economic growth. He'll be looking for early clues on Sunday when the National People's Congress convenes its annual session in Beijing, a warm-up for the pivotal party conclave. The Shanghai Composite Index slipped 0.5 percent on Thursday, paring this year's gain to 4.1 percent.
For tips on how to navigate China's big political year, we spoke to Frieda and counterparts at BlackRock Inc., Templeton Emerging Markets Group and Weiss Multi-Strategy Advisers -- firms that oversee a combined $6.6 trillion. Here's what they said:
Pimco
- Economic growth target announced at NPC may be key signal of the government's commitment to painful reform; 15-20% chance it's cut below 6%; abandoning target would be better
- China will be reactive to U.S. moves and try to be conciliatory, except regarding Taiwan's sovereignty; risk of a trade war favors bigger weighting in the dollar, defensive investments and securities with good liquidity
- Base-case forecast of 5% to 7% yuan depreciation versus the dollar this year
- Still unclear whether Xi will use his power to enact tough reforms
“There are two camps on what the current status of leadership means, but we can't judge which camp is right until after the 19th Party Congress,” said Frieda, the firm's London-based global strategist. “One can believe this consolidation of power is the only way that China could go through all the reforms that they need to do, because you need absolute centralized control.
“The other camp believes that we are near the era when the party's role in the economy will increase again due to more centralized power, which we do not think is conducive to strong economic growth.”
Read more: Explaining the National People's Congress
BlackRock
- China will keep focus on political stability and try to create an environment “where a lot of hard work can be done”
- Favor domestic-focused companies over those dependent on international trade; higher-quality businesses can endure a pickup in volatility around U.S.-China relations
- Seek long-term opportunities tied to supply-side reform in commodities sector
- One NPC focus will be encouraging China's transformation to a consumption- and services-oriented economy
“Some consolidation of power is useful because it can get things moving,” said Jeff Shen, the firm's head of emerging markets and co-head of scientific active equity. “It is very difficult to enforce change and transformation without centrally consolidated power. Reform could go faster.”
Templeton
- Xi's authority may not reach that of former leaders like Mao Zedong or Deng Xiaoping because power has become more dispersed, with competing interests at the local and provincial levels
- China will project strength on Taiwan and the South China Sea, but may seek to appease the U.S. in the short term
- NPC will highlight China's efforts to boost the technology and environmental industries
- Wouldn't be surprised to see growth target of 6%, but not much lower because there's still need for infrastructure and anti-pollution investments
“The biggest challenge facing the Chinese leadership now is the dramatic change in the stands taken by the American leadership,” said Mark Mobius, executive chairman of Templeton Emerging Markets Group. “On one side, China must show strength when it comes to relationships with the U.S. However, this strength must be tempered by the realization that poor relations with the U.S. will probably hinder continued growth in China.
“The best dance would be to mollify the U.S. so that China can gain time to eventually equal or even surpass the U.S. in terms of economic strength and technology. Our stance therefore is to continue seeking good domestically-oriented companies in China, particularly those that have a technological edge or are moving toward high-level technology.”
Weiss
- Xi appears to be taking bigger leadership role in global trade; unlikely to back down from the U.S. on the next military issue in Asia
- China-U.S. trade tension will boost volatility in global markets
- Fears over China from debt and reserve perspectives are overblown; Chinese equities will outperform U.S. stocks
- Reduced access to U.S. consumer because of trade barriers could spur China and other nations to boost corporate productivity
“This change in the China-U.S. relationship to me will likely be the event that makes the world realize that China's GDP increased from $4.5 trillion to approximately $12 trillion during the last administration,” said Jordi Visser, the hedge fund's head of investments in New York. Weiss's main multi-strategy fund returned 9.6 percent last year and 1.5 percent in January.
“Their importance on global trade and the global economy makes this relationship far more important than before. This recognition will likely lead to an increase in volatility within asset markets, which will be impacted by events on both trade and geopolitics.”
--With assistance from Margaret Collins and Hema Parmar
To contact Bloomberg News staff for this story: Tian Chen in Beijing at tchen259@bloomberg.net, Sabrina Willmer in Boston at swillmer2@bloomberg.net, Saijel Kishan in New York at skishan@bloomberg.net.
To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Daniel Ten Kate at dtenkate@bloomberg.net, Michael Patterson, Brendan Scott
With assistance from Tian Chen, Sabrina Willmer, Saijel Kishan
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