China: Politics at the forefront in 2017 - BBH

According to Marc Chandler, Research Analyst at BBH, Chinese politics will also be important next year and suggests that there is no need to confuse politics and political parties.

Key Quotes

“China may only have one political party, but its politics are as serious and intense as any place, though perhaps more subtle. President Xi has been gradually consolidating power. He is perceived as China’s most powerful leader since Deng Xiaoping.”

“While President Xi is overseeing the continued modernization of the Chinese economy, the political structure, if anything, has become more rigid. Many suspect that the anti-corruption campaign was primarily aimed at political targets. Xi appears to have tightened political control over society, including the toppling of some internet personalities, and limited civil rights expressions.”

“The 19th Party Congress toward the end of 2017 is important. The key seven-member Standing Committee is set for a complete overhaul with only President Xi and Premier Li holding on to their posts for a second term, which has become customary in China. There are two aspects that will be closely watched. First, Xi’s successor is likely to be one of the new members. Second, there has been respect for the “seven up, eight down” rule, which means that if a member of the Standing Committee is 68 at the time of the Congress, he must retire, but a 67-year-old can still become a member. If an exception is made, it could spur speculation that Xi himself may seek a third term or retain extensive formal power after the second term ends.”

“China’s economy appears to have stabilized, but the cost is increased debt levels. In addition, the powerful forces spurring capital outflows, among which are corporations paying down their dollar debt, have prompted Chinese officials to tighten capital controls. It is a precarious balancing act that does not leave much margin for error.”

“At the same time, our long warning that the past appreciation of the yuan flattered measures of its globalization is being borne out in recent data, though it is now a member of the IMF’s SDR.  The share of foreign trade settled in yuan has fallen from 26% to 16% over the past year. Yuan deposits in Hong Kong are off 30% from their 2014 peak (CNY1 trillion). Foreign ownership of domestic Chinese assets peaked in 2015 near CNY4.6 trillion and has fallen to CNY3.3 trillion as of the end of Q3 ‘17. The yuan itself has surpassed the Mexican peso as the most actively traded emerging market currency, but overall it is the eighth most traded currency, putting it between the Swiss franc and Swedish krona. In 2013, it was in ninth place.”