Beijing rains warn investors about political climate

July 26, 2012

By John Foley

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Beijing’s weekend floods inflicted an unusually high human cost for a modern city. Attempts to squash criticism of the response made matters worse. The lesson isn’t just that Beijing needs better drains, but that anxiety is acute ahead of next year’s leadership change. For investors, the equivocal way China handles crises alters the political risk premium.

An official put the damage at $1.6 billion – half a percent of the city’s GDP in 2011. The death toll has been more contentious. By July 26, the count hadn’t moved from the initial estimate of 37, to the disbelief of many Beijingers. Critical posts were swiftly deleted from social media, and Beijing’s police chief warned on July 24 that web users who attacked the country or the system would be severely punished.

Stepping back, the disaster doesn’t invalidate China’s achievements, even if the human tragedy proves worse than stated. Beijing’s drainage is bad, but China’s urbanization has done much good. Cities have helped lift millions out of poverty, and without the slums seen in India or Brazil. Freak rains aside, Beijing’s usual problem is too little water. In most years, the city gets less rain than Dallas.

But officials are anxious, and that means investors should be too. New rulers will be announced in Autumn, and the shocking ouster of Chongqing party chief Bo Xilai in March raised the worry that the process could be less than smooth.

That is already having an economic effect. Decisive policies have been lacking in recent months. While cross-border deals still happen – witness oil producer CNOOC’s $15 billion bid for Canadian rival Nexen – the property and IPO markets are in limbo. Modern China no longer reads natural disasters as a sign the emperor has lost his “mandate of heaven”, but it is telling that President Hu Jintao pointedly called for “unity” in a speech on July 23.

Uncharacteristic levels of anxiety, indecision and defensiveness in Chinese officialdom don’t make for an investment-friendly climate. It already shows in the benchmark Shanghai stock index, which is at its lowest since early 2009, despite two cuts in interest rates. Foreign investment too slowed in June, year on year. The floods receded quickly, but China’s political risk premium is still rising.

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