Commodities | Nov 15 2012
As we know the Chinese Communist Party (CCP) is the party responsible for the Peoples Republic of China. It was founded in 1921, however came to ultimate power in 1949. It is responsible for maintaining a unitary government, which apart from ruling 1.3 billion people looks after the process of trying to centralize the economy. It is the world’s largest party compromising 80 million members or 6% of the population. The key to the Chinese economy is in the ability of the Party to practice economic reform whilst working in an open democratic form of centralism. In other words it operates a socialist market economy. Every 10 years the leadership of the Party changes. Apart from just normal Membership to the Party, it is made up of four essential ranks. The Congress which comprises of 2213 delegates, then the Central Committee with 371 members, the Politburo with 24 members and lastly the Politburo Standing Committee (PSC) in which there are currently 9 members. The Politburo has the ultimate responsibility for mandating change and it is to this group of men that we look to see change occurring. This is where it becomes interesting.
One of the interesting aspects to the CCP is that if you are in the Politburo you have to retire at the age of 67, and this makes way for more progressive thinking leaders. The only current members retaining their seats are Xi Jinping (the new President) and Li Keiang, who both will make up the base of power for the party. Xi Jinping will want to establish his mark on China, he is known for his “tough stance on corruption and frank openness about political and market reform”. His father was a former Vice Premier, a founding member of the communist guerilla movement in province of Shanxi, which was purged when Jinping was 10 years of age. So he is of good Party stock. In addition, by listening to speeches and reading commentary about the Leader we conclude that his leadership will bring stability, efforts to defeat corruption and promote transparency/growth, whilst looking to close the gap between the rich and the poor. It would be a great challenge and with 10 years up his sleeve it is important for us to try and grapple with his philosophies in order to get a glimpse of the future policies and how we can interpret these and future trends for the markets.
The past has taught us that China cannot support herself, that it is import for her stability that economic growth is maintained at around 7.5%. This number looks to balance both the internal and external economies. Reform needs to be ongoing to ensure that this occurs. Concerning the economy we feel that new policy will be shaped to reduce government enterprise by selling state owned companies (SOEs) into private ownership, increase the numbers of small to medium sized enterprises (SMEs) by offering incentives and encouraging foreign direct investment. This may take sometime to unfold, however it would be policy that will help set the stage for the next 10 years. Xi will not ascend to the presidency until March next year so by then we should get a good understanding of the direction he will be following. If we are correct then the market response should be supportive of commodities in primary imports sector such as copper, oil, iron ore and coal. A policy that will help promote the long held feeling we have had towards the commodity boom; we are amidst a pause only in the commodity bull market only.
So, in conclusion we feel that the change over in leadership will ultimately be positive for the number two economy in the world. We feel that they do not have a choice, other than to adopt expansionary policies. This we feel should look to underpin the growth for commodity-based economies.
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