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What’s next after Xi consolidates power?

Eric Moffett
— 1 minute read

After President Xi Jinping consolidates power at the People’s Congress this week, he is likely to turn his attention to three major economic reforms, writes T. Rowe Prices Eric Moffett.

One of the most anticipated events on the Chinese calendar, the 19th Standing Committee of the National People's Congress, begins on 18 October 2017.

This key event will mark the beginning of President Xi Jinping’s second five-year term – with the leader aiming to use the congress to consolidate his power.

While China’s authorities have worked hard to ensure positive economic momentum ahead of this meeting, the key question now is what will come after Mr Xi consolidates his power?

Mr Xi has been clear he wants to push through supply-side reform, remove excess capacity and clear up the financial system.

Some commentators are dismissing this as just rhetoric, but Mr Xi was similarly dismissed when he launched his anti-corruption campaign a few years ago and he made good on his word.

If Mr Xi can tackle China’s structural problems vis-à-vis leverage and supply-side reform, it will be positive for China's terminal value, but could be negative for growth in the near-term. What it means for markets is the next question.

Over the long-term, it could be positive for the Chinese economy but may in the near-term create buying opportunities for certain stocks.

If Mr Xi can push through reforms of state-owned-enterprises (SOEs) and change management incentives to focus on delivering shareholder value, many of the companies regularly dismissed by foreign investors may come back into focus.

The authorities are already testing reforms, with China Unicom being one of the companies undergoing significant reform. This could be a catalyst for more reforms.

Regardless of whether reform intensifies, we have in recent years seen improved management discipline in China, with businesses now throwing off a lot of free cash flow after significantly cutting unnecessary capex.

It is a complete reversal of what we witnessed five or so years ago and we believe the boom in free cash flow is still underappreciated and undervalued by the market.

Eric Moffett is the portfolio manager of the T Rowe Price Asia Opportunities equity strategy.

 

What’s next after Xi consolidates power?
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