Nov 09, 2012, 11.34 AM | Source: CNBC-TV18
Andrew Freris, chief investment advisor-Asia at BNP Paribas Wealth Management explains to CNBC-TV18 this change in leadership and its impact on the Chinese economy.
Andrew Freris (more)
Chief Investment Strategist, BNP Paribas | Capital Expertise: Equity - Fundamental
Below is an edited transcript of the analysis on CNBC-TV18
Q: How significant is this once-in-a-decade leadership change given the current economic environment prevailing across the world, especially in China and what we know about the leaders who have been announced to take over?
A: We have to split the answer in two parts. The economic circumstances are effectively relevant because China is a nearly domestically-driven economy. So the fact that there might be a sovereign crisis in Europe in some form, the fact that President Obama is going to face the fiscal cliff are important of course, but they are not really important in terms of the politics within China.
Given this kind of change over takes place once every ten years, it is an important event. The Chinese do not have elections every three-to-four years so to speak. Now the fact that the officials who will take over are known must be tempered with the fact that the Communist Party and this is a peculiar thing to say - is a profoundly conservative institution; this is not a revolutionary institution, this is not an institution that thrives in continuous change.
It is an institution that moves incredibly slowly, very carefully and very patiently with very predetermined targets. So frankly in terms of economic policy and in terms of surprises, I would not tell my clients buy or sell Chinese equities. At the end of it, it is going to be I have to emphasise this very carefully- an economic non-event. The markets have told us that because like all Asian markets the Chinese equity markets were also down today. So it is not something that drives markets.
Q: I like to know how you assess the reformist abilities of the leaders that are announced to be taking over not to forget the three-fourth of the top leadership is about to change in the Politburo Standing Committee. So will that have some impact on the direction China is headed?
A: In a political system like the Chinese very frequently too much emphasis is being placed on individual personalities and very little on the collective. So people say that potentially the new finance minister is somebody who likes to reform and he is likely to push for financial reforms and so on. Be that as it may in the context of what is happening right now in China, I do not read it as an important event. A lot of it is a pure speculation on a system which is by nature secretive.
This is not an accusation or criticism, that is the way it is. So simply saying there is going to be a new group of people and suddenly the economic ambience in China will change overnight, is not true. They will move cautiously towards a certain direction. That is for sure, but this has nothing to do with specific change in leadership and this is hugely important.
They are not taking over in a period of crisis. If China had the equivalent of Lehman Brothers and this coincided perfectly with the change of guard at the Communist Party, my analysis might be different.
The Chinese are doing very nicely, thank you. The economy slowed down at 7.5 percent, it is slowing down. But it has almost stopped slowing down, inflation is under control, the external sector is doing nicely and the government sitting on USD 3.2 trillion in foreign exchange reserves. Basically, they do not have a huge amount of things to worry except setting a target for the next ten years. That is a huge luxury to have, unlike other elected leaders.
Q: I was wondering if I could challenge that because just this morning at the opening of the Congress, President Hu Jintao mentioned that economic developments remain unbalanced, uncoordinated and unsustainable. So yes, 7.5 percent is still a great growth rate to have, but this is the slowest pace in over a decade the China has grown at and that too when China is attempting a huge structural shift in its economy. My question is how will the leaders who are expected to take over, manage this?
A: First, China is not an export-driven economy. In the last twenty years, it has never been. For every 10 bps or every 100 bps of GDP growth about 10 to maximum 20 bps were accounted by next year's approach.
China is driven domestically. There is this new fashion that we have to shift away from exports into domestic factors. It has been doing that in the last twenty years. There is nothing they can do about it, it has already happened. However, the composition of those domestic-growth drivers is potentially changing, in other words, they want to put less emphasis on investment and much more on consumption.
So I am getting a little bit fed up with the notion that there is a new Chinese model which is not relying on exports. It never did in the last 20 years. They are adding balances within the economy, but as a matured economy. I have never seen any minor or major economic or financial crises in any economy since the end of Second World War that did not involve a large external deficit, that did not involve a very substantially overvalued currency and also a large fiscal deficit finance externally. China has none of those.
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Andrew Freris, chief investment officer of BNP Par