Foreign investors appear relaxed about China’s proposed constitutional amendment to the president’s two-term limit, but political experts believe the move could engender more uncertainty over the longer term.
The Communist Party of China announced several constitutional changes — the first since 2004 —on February 25. While they do not directly impact economic reforms, foreign investors believe the amendments represents a further consolidation of power by President Xi Jinping.
As such, it’s an indicator that the momentum towards further financial market reforms will continue in the coming years.
Investors will keep a close eye on two key meetings in March for confirmation of the change and other possible leadership announcements: the Chinese People’s Political Consultative Conference, the country’s top political advisory body, which met on Saturday and Sunday (March 3 and 4), while the Standing Committee of the National People’s Congress begins its annual session on March 5.
Xi took over as president in 2013 and will finish his second five-year term in 2023. Under China’s existing rules he would have to step down, but the new rules mean he could continue for as long as he wishes. In principle, Xi could become president for life.
Many China observers and investors see this as a positive, arguing that Xi has been reform-minded and is conscious of the need to develop a deeper financial system, including broader investment markets.
“For investors, in the short term it reinforces the sense of stability, and increases the sense that this is a leadership that wishes to stay there for the long term,” said Kerry Brown, professor of Chinese studies at King’s College in London. “Whether they are truly able to face the [country’s] challenges and deal with them is another matter.”
REFORMS ON TRACK
Fund managers that AsianInvestor spoke to were relatively sanguine about the two-term limit drop, arguing that Beijing's will ensure more political stability and potentially deeper economic reforms for China over a longer period than just the next five years.
That could be good news for a country that is already attracting increasing international investor interest. AsianInvestor has reported that China could receive $1 trillion in portfolio flows from global institutional investors over the next 10 years.
And the potential lengthening of Xi’s leadership could extend the prospects for more market reforms, argued Jupiter Asset Management’s Charles Sunnucks, assistant fund manager for emerging markets.
Fund managers argue that the amendments could underpin longer term reforms to the country’s capital markets. Jean Charles Sambor, deputy head of emerging market fixed income at BNP Paribas Asset Management, expects the pace of China bond market reforms to continue, noting “The Xi administration is strongly committed to opening China’s bond markets”.
China is currently under consideration for inclusion by the major bond index providers and now meets most of the essential criteria required for inclusion — "no capital controls, convertibility of the yuan, the ability to hedge exposure,” Sambor said.
“As such, we believe that an announcement regarding index inclusion could come as early as the first half of 2018.”
This announcement should be a positive catalyst for inflows into the onshore renminbi bond market, he added.
Ditto for equity markets. Jupiter AM’s Sunnicks noted, US index provider MSCI’s inclusion of Chinese A-shares into its emerging market index later this year is more important to encouraging foreign investor inflows into the country.
Analysts are taking a measured view on whether the authorities' tolerance for incremental yuan flexibility will undergo any big changes following Xi’s consolidation of power.
"Capital account restrictions within what is already by some measures the largest economy in the world, and whose income levels are converging steadily with wealthier nations, are ultimately unsustainable in their current form,” said Aninda Mitra, senior sovereign analyst at BNY Mellon Investment Management in Singapore. “[The will] limit the internationalisation of the yuan, and will narrow future policy flexibility.”
Mitra said he would focus on Beijing’s willingness to gradually lift capital controls in a predictable manner that deepens onshore foreign exchange markets.
STATE CONTROL
While Xi’s indefinite rule could ensure that market reforms continue, it could also tighten the grip of the state on China’s economy—to the detriment of transparency and governance.
Over the coming decade China’s policymakers will have to grapple with a slowing economy, pollution and high debt levels, and they are likely to retain a tight grip on economic development to do so.
King’s College’s Brown noted that Beijing needs a more sophisticated financial services sector to better allocate capital and make its economy consumer-led. “But the Xi leadership strongly believes in the importance of final state control,” he added. “That won't change.”
That sentiment was echoed by Merriden Verall, director of the East Asia Program at Australian think tank Lowy Institute. “There is likely to be even lower accountability with state-driven actions and even lesser access to information,” the Perth-based expert predicted.
The proposed constitutional amendments also promote supervisory commissions (at the central and local levels) as a new part of state organs, giving the communist party of China a much tighter grip on the country’s developments, according to Alicia Garcia Herraro, chief economist for Asia Pacific at Natixis, in an update released on February 28.
While the national supervisory commission is new, its function existed earlier as part of the State Council (China’s equivalent of a government cabinet), which has oversight of the entire administration, Garcia Herraro told AsianInvestor.
The commission now stand parallel to the government’s original three state organs—namely, administrative, judicial and prosecutorial bodies. In addition, local-level supervisory commissions will also be established.
“[The new commission] could run counter to the idea of a more market-based model, in so far as it implies additional centralisation of power,” Garcia Harraro said in her original note.
UNCERTAIN SUCCESSION
Xi’s desire to stay on for the long haul also raises long term uncertainties.
Deng Xiaoping introduced the two-term limit in the 1980s, after Mao Zedong’s death and the end of the Cultural Revolution. And, since the 1990s, Chinese leadership transitions have been relatively smooth and clearly telegraphed to the public. There was predictability to the process.
But with Xi potentially staying indefinitely, that certainty may no longer exist.
This creates new risks. For a start Xi’s apparent power-grab undermines the traditions and processes of China’s political system, which leads to greater likelihood of uncertain outcomes in the country and beyond.
“If Xi chooses to stay on, it will signal to other ambitious would-be leaders that norms and consensus do not matter,” the Brookings Institution, a US think tank, said in a note issued on February 25.
Plus, the longer Xi remains as leader, the more China’s political system will increasingly revolve around his will and preferences. That risks leaving a power vacuum if anything should happen to him, according to Terence Chong, co-director of the global economics and finance programme at the Chinese University of Hong Kong.
“Unlike the past, a clear succession plan doesn’t exist, and that introduces a certain level of political uncertainty over the long term," he told AsianInvestor.
Investors should keep those longer term risks in mind, even if they are shrugging their collective shoulders at the shorter term consequences of Xi entrenching his rule of the country.
KEY PROPOSED CONSTITUTIONAL AMENDMENTS:
- Removing the statement that the president and vice president can serve no more than two consecutive terms
- Creating supervisory commissions (central and local ones) as a new type of state organ in the Constitution, which and will be on par with the other three state organs – administrative, judicial and prosecutorial
- A clearer division of labour between central and local governments for law making, which will place limits on local governments’ law-making, which could effectively centralise power even further
- A more prominent international role for China will be acknowledged. But China will use its own style of global leadership with its own characteristics. There is preference for soft power and cooperation and China aims to have a 'mutually beneficial' strategy of opening up
