New Leaders, Same Steady Hand on the Chinese Economic Tiller

Anthony Chan

The media spotlight is on China’s new president, Xi Jinping. But investors should be watching Li Keqiang, the new premier. It’s Mr Li who will be responsible for combating the country’s slowing economic growth and, with it, potentially the fate of the world’s economy.

The immediate risk facing Mr Li is a prolonged economic downturn if the current stimulus, launched in 2009, runs out of steam. Ironically, one trigger could be the long transition period before the new leadership takes over in March 2013. The accompanying administrative paralysis could cause a further loss of economic momentum, particularly as any new economic policy would not have a real impact until the autumn of 2013.

In fact, we don’t expect the leadership to respond to the slowdown with any repeat of the sort of large economic stimulus that we saw in 2009. Instead, we think it will focus on addressing supply-side reforms aiming at sustained long-term growth and rebalancing the economy, especially if the current drop in exports continues (year-on-year growth slowed to around 4.5% in the third quarter of 2012, compared with 20% in 2011.)

In the past Mr Li has called for coordinated action on industrialization, urbanization and agricultural modernization in order to boost domestic demand. We therefore expect investments to focus here, including, for instance, city transport systems that support a mobile urban workforce. These would have the added benefit of fighting pollution.

Further initiatives could be to tackle China’s notorious household registration policies. These tie families’ social welfare to their home town (or land), thus effectively preventing whole families, rather than just individuals, from moving into larger industrial centres to find work.

Another key economic lever for the leadership will be the exchange rate. The renminbi has appreciated by about a quarter against the dollar in the last six years. Although the pace has slowed lately, we expect the new leadership to maintain the upward pressure as part of efforts to rebalance the Chinese economy.

A stronger renminbi decreases the price of imports in domestic-currency terms, raising the purchasing power of China’s 1.3 billion consumers. It would also encourage Chinese manufacturers to move into higher-value industries and help ease the inflationary impact of rising energy prices.

The goal of making the renminbi a global currency is also set to continue under the new leadership. In the second quarter of 2012 over 10% of China’s trade was settled in renminbi, up from around 1% only two years ago. Today around 4% of global trade is now being settled in the Chinese currency and 15 central banks in Asia-Pacific, Latin America, Africa and the Middle East hold or plan to hold renminbi assets.

Overall, we believe the new leadership’s economic policy will be characterized by a steady hand rather than radical change. In pursuing this gradualist approach, we think it should be successful in fending off the current slowdown, with our forecast for economic growth next year seeing it tick up slightly to 8.1% from 7.7% in 2012. But the risk is that the inevitable lack of economic direction from the centre during the political transition could undermine the expected economic rebound.


The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Anthony Chan is Asian Sovereign Strategist—Global Economic Research at AllianceBernstein.


  1. Any comment on the 2-yr high in the price spread between Hong Kong shares and those listed on the mainland? Are domestic investors disenfranchised by poor returns or do they know something foreign investors don”t?

    • Stuart Rae

      The domestic A-Share and international H-Share Chinese markets do tend to trade differently – the correlation between weekly price movements of the MSCI China A index and the Hang Seng China Enterprises Index (HSCEI) over the last 5 years to end-Sep 2012 has been just 0.48.

      Domestic investors are more momentum driven, and typically more short-term in focus. Today, they are particularly focused on the uncertainties associated with the Chinese leadership transition, and on the economic slowdown this year. Investors in China H-Shares seem more willing to take a longer-term view, and see a stabilization and gradual recovery in China’s GDP growth as being positive for the markets.

      So while the two markets traded similarly through August this year, since then the H-Share market has rebounded considerably and left the A-Share market behind; year to date through end-November, HSCEI is now up +11.46%, while MSCI China A is down a little further at -6.58%.

      We think the economic growth will eventually win out in domestic investors’ minds as well, and think is it likely that the recent performance differential will close with some recovery in the A-Share market. However, this process may take several months, as we think it is unlikely we will see a big stimulus program or a sharp bounce-back in economic growth in the short-term, and the uncertainties over the new leadership will persist into 2013 until we have more clarity about the agenda of the new leaders, Xi and Li.

  2. Brian Fredell

    Stewart, where would I find an update on this gap? Have you published one here that I”m not seeing or has the gap remained steady over the past couple of quarters??

    • Stuart Rae

      December was a strong month for both the China A and China H markets, but China A still lagged behind China H for 2012 as a whole. The HSCEI index delivered a total USD return of +20.0% in 2012, versus +9.7% for MSCI China A. Year to date in 2013, the gap has closed a little: the total USD return for HSCEI through May 17 was -3.7% versus a gain of +4.0% for MSCI China A (all figures from Bloomberg). That could suggest that the domestic investors are seeing more positive signs of stabilization in the Chinese economy. But it’s hard to be sure about such a conclusion – an alternative explanation is that international investors have been rotating into the “hotter” markets of Japan and the USA, and that’s behind the weaker performance of the HK-listed stocks.

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