china's leadership transition

1

AT A GLANCE NOVEMBER 2012

This is for investment professionals only and should not be relied upon by private investors

China’s leadership transition

China’s once-in-a-decade leadership change will be announced at the 18th National Congress of the Communist Party of China, which begins Nov. 8. Xi Jinping will most likely be appointed as the State President and Li Keqiang as the new Premier, along with the election of others to the standing committee of the politburo of the Communist Party of China.

In terms of economic policy, the standing committee decides everything, from setting GDP growth targets to establishing investment policy. History has shown that following leadership transitions there is generally a pick-up in investment spending and many provinces and cities have already unveiled ambitious spending plans. The main challenge ahead for China’s new leaders will be to tackle structural economic imbalances, such as spreading wealth from the country’s affluent coastal provinces and managing the transition to a more domestic consumption-focused economy.

TIMELINE Xi is expected to take over the role as general secretary in Nov 2012,

and become head of state in Mar 2013 Li Keqiang will succeed Wen Jiabao as China’s Premier in Mar 2013

BIOGRAPHY1

Xi Jinping Born in 1953, son of Communist revolutionary Xi Zhongxun Studied chemical engineering and has a doctorate from

Tsinghua University in “Marxist theory and ideological education”

Worked as a senior provincial official in the late 1990s and early 2000s

Xi was anointed as Communist party general secretary in 2007

Currently vice-president

Li Keqiang Born in 1955 Studied law at Peking University Served as secretary of the Communist Youth League

committee when he studied in university Currently vice-premier, close ally of Hu Jintao

2H 2013Dec 2012 Mar 2013

3rd Plenary session of the Central Committee: New leadership’s long-term plan will be set

The 18th National Party Congress: The core of the Politburo and the Standing Committee of the Politburo will be selected

Annual central economic work conference: Macro policy stance and key areas of structural reforms will be determined

Annual National People’s Congress:Leadership change will take placeGrowth and inflation targets will be set, fiscal and monetary policies will be confirmed, budget will be approved

Nov 2012

1 Source: Financial Times, 28.09.2012

2




ECONOMIC CHALLENGES AHEAD The new leaders are poised to inherit the weakest economic growth since Deng Xiaoping headed the leadership three decades ago. In the wake of asset bubbles and inflation battles, the central economic issue now is for government to guide the economy to a reasonably safe

landing and then focus on spreading wealth. Major tasks: to curb state enterprises, boost access to credit for private companies, raise domestic consumption, support rural incomes. The young, cheap labour pool that has supported China’s manufacturing expansion is ending; new leadership will need to manage rising wages

without sparking another round of inflation or pricing Chinese labour out of markets amid increased competition from frontier Asian economies.

CHINA GDP STABILISES AS TRANSITION CONTINUES

Source: Datastream, data as at 30.09.2012

THE RECENT BACKDROP

Based on past experience, many China watchers are expecting fresh stimulus to accompany the leadership change to aid the “feel-good” factor and bolster certain sections of the economy. However, any such announcements will likely be carefully calibrated, particularly in the wake of recent evidence suggesting China’s economy has begun to stabilise. China’s services industries rebounded in October from the slowest expansion in at least 19 months, adding to manufacturing gains that indicate China’s economy is recovering. The purchasing managers’ index rose to 55.5 in October from 53.7 in the previous month, according to the national Bureau of Statistics and China Federation of Logistics and Purchasing2. The data followed two previous reports indicating a pick-up in manufacturing activity. In October it was announced that China GDP grew 7.4% in Q3 from a year earlier, only slightly down from 7.6% in Q2.

2 Source: Bloomberg news, 05.11.2012

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Q3 2002 Q3 2003 Q3 2004 Q3 2005 Q3 2006 Q3 2007 Q3 2008 Q3 2009 Q3 2010 Q3 2011 Q3 2012

Chi

na G

DP

(Hun

drea

ds o

f milli

ons

Chi

nese

Yua

n) .

4

6

8

10

12

14

16

18

GD

P quarterly yoy %

change

China GDP (LHS)China GDP quarterly yoy % change (RHS)

3




Key areas of the 12th Five-Year Plan: Economic restructuring

Accepting a lower annual growth rate of around 7% (from 7.5% in the 11th plan) Creating a balanced economy Shifting from the export-led sectors to increasing domestic consumer demand by increasing wages Development of Strategic Emerging Industries Industrial catch-up

Social balancing Narrowing the urban-rural income gap Regional development Improving people's livelihoods

Environmental protection Energy saving Improving environmental quality Developing new energy sources

Putting the latest economic data to one side, China’s new leadership is not expected to deviate too much from the already announced 12th 5-year plan – what we are likely to get in the next few years is some real flesh on the bone. Namely more detail on how China plans to reorient the economy from exports to consumption, how it plans to redirect spending from fixed assets (currently around 50% of GDP) to consumption, and how it aims to maintain social harmony amid rapid urbanization and increasing political awareness from a tech-savvy public. Other challenges include supporting services-oriented growth and strengthening the private provision of pensions and health care.

4




KEY POLITICAL ISSUES TO WATCH More scrutiny than ever on this leadership change as Chinese people use the power of the internet and social networking to discuss events,

question government decisions, and debate policy. Bo Xilai scandal in the run-up to election put the spotlight on alleged corruption in high places, increased the stakes and intrigue surrounding the

struggle for power among China’s elite. Increasingly complex political debate between neoliberals – who want to take China further down an economic liberalization path, neo-Maoists

– who want to strengthen the state and break the “cozy” ties between state-owned enterprises and China’s affluent elite, and so-called neo-Confucians – who would like to give China a softer, more ethics-driven voice in the modern world.

Increasingly difficult foreign policy decisions, including how to secure continued access to the energy resources needed to drive China’s rapid growth, growing tensions with Asian neighbours such as Japan and Korea over disputed islands, and how to react to the US move to strengthen its security focus on the Asia Pacific region.

EQUITY MARKET Mainland China stocks continue to trade near

historically low valuations of around 9-10 times next year’s expected earnings.

Removal of leadership uncertainty could see market rally as implementation of 5-Year Plan gathers steam.

Consumer sector likely to benefit as China continues transition away from export dependence to a domestic consumption-driven economic model.

CHINA EQUITY INDEX PERFORMANCE

Source: Bloomberg, data as at 05.11.2012

0

1000

2000

3000

4000

5000

6000

7000

2005 2006 2007 2008 2009 2010 2011 2012

Inde

x le

vel

Shanghai Composite Index

200-day moving average

5




This document is provided for information purposes only. This document is intended only for the person or entity to which it is provided. It must not be reproduced or circulated to any other party without prior permission of Fidelity.

This document does not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, an offer to buy or sell or the solicitation of any offer to buy or sell any securities in any jurisdiction or country where such distribution or offer is not authorised or would be contrary to local laws or regulations. Fidelity makes no representations that the contents are appropriate for use in all locations, or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries, or by all investors or counterparties. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisers.

This document may contain materials from third parties which is supplied by companies that are not affiliated with any Fidelity entity ("Third Party Content"). Fidelity has not been involved in the preparation, adoption or editing of such third party materials and does not explicitly or implicitly endorse or approve such content. Any opinions or recommendations expressed on third party materials are solely those of the independent providers, not of Fidelity. Third Party Content is provided for informational purposes only, and Fidelity shall not be liable for any loss or damage arising from your reliance upon such information.

Fidelity is not authorised to manage or distribute investment funds or products in, or to provide investment management or advisory services to persons resident in, the mainland China.

FIL Limited and its subsidiaries are commonly referred to as Fidelity. Fidelity only gives information about its products and services. Any person considering an investment should seek independent advice on the suitability or otherwise of a particular investment. Fidelity, Fidelity Worldwide Investment, the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited.

“China’s leadership change is an historic event, and one that I think will help further cement China’s place among the World’s great economic powers. The leadership issue and the subsequent infighting among potential candidates has been more public than ever before. This gave the impression of political uncertainty and has been a strong headwind to performance of the Chinese market this year. As uncertainty over political leadership has dragged, many local authorities have waited on the sidelines and have not implemented economic policies announced at the last Five-Year Plan. I believe the conclusion to this contest will remove the political shackles that have been holding back the markets and we will also see a pick-up in the implementation of the Five-Year Plan. Furthermore, I think the new leadership will be willing to accept lower GDP growth as it will focus on quality rather than quantity of GDP growth. This means a continued focus on the domestic consumer and further enforces structural growth opportunities in consumer-related stocks. Overall, I see this event as positive for the Chinese market, and believe that there are many companies with strong fundamentals, which have been indiscriminately punished by political uncertainty, trading at attractive valuations.

Martha Wang, Portfolio Manager, Fidelity China Focus Fund

“China’s upcoming leadership change is a hot topic, but all of the candidates have already been pre-elected and I do not anticipate any surprises. I expect more scholars to join the think tank and further financial and private sector reforms. In general, I think that this political change will be relatively gradual and nothing drastic will take place as China’s economic agenda is always guided by the Five-Year Plan. Going forward, more focus will be placed on the acceleration of urbanization and income re-distribution. Overall, I believe that a more pro-consumption policy will be in place to drive domestic demand and, as a result, consumer sectors will continue to benefit.”

Raymond Ma, Portfolio Manager, Fidelity China Consumer Fund

china's leadership transition

Documents