On the rocky road to change in China

May 11, 2012

One thing investors in China thought they could rely on was a steady, if unelected, hand.

Now Chongqing’s political head Bo Xilai has fallen, and in pretty spectacular fashion too. His wife has been accused of murdering a British businessman and his brother had to step down from the board of Everbright Bank. There are rumours the handover of power in the Politburo scheduled for this autumn, when seven out of nine of Chinese leaders are going to retire, could be delayed as the intrigue unfolds.

So what does this mean for investing in the Middle Kingdom? Xi Jinping is tipped for the top, and presuming he makes it to the transition unscathed, one of his tasks will be continuing the internationalisation of the renminbi. 

Xi has something of a reputation as a reformer, but that doesn’t necessarily mean he’ll let China’s currency float freely.

John Adams, director of HR China and former manager for China at the Bank of England, said this about Xi at a talk in London this week:

He’s a safe pair of hands and one wonders whether he will take these risks to go ahead with letting the renminbi become internationalised…My intuition tells me he will go for a safe option, which may in fact put China on the wrong track.

Xi also has to sort out China’s financial sector, burdened with bad debt, and make sure an international board is finally installed in the Shanghai stock exchange, Adams said.

Let’s not forget geopolitical risks posed by the Chinese drilling in the South China Sea and  Beijing’s diverting of water from the Himalayas. And while potential for conflict brews abroad, runaway inflation at home isn’t off the table yet.

So where can an investor go from here? Kerry Brown, head of the Asia programme at Chatham House in London, said at a conference this week that we should look at new leaders’ provincial records, especially as some officials have governed over Chinese states bigger than European countries:

They’ve all been very economically liberal…there will probably be more economic reformers than hardliners.

And Adams has two pieces of advice for anyone looking to invest in China. This, from Fidelity fund manager Anthony Bolton, whose China fund lost 26 percent in 2011:

Not being able to rely on figures in an official prospectus was a new experience..

And Adams reminds us of this gem from an adviser to former Prime Minister Zhu Rongji:

The stock exchange in China, it is completely wrong to call it a casino. In casinos, there are rules.

(Writing by Clare Kane)

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