China Confidence Unshaken by Bo Crisis in Global Poll
China’s deepest political turmoil since 1989 has failed to shake confidence in the strength of its economy and allure of its markets, a Bloomberg poll indicated.
A 51 percent majority are confident in the policies of President Hu Jintao, the quarterly Bloomberg Global Poll of investors, analysts and traders who are subscribers showed. The share was the same as in January, unaffected by the aftermath of former Chongqing Communist Party boss Bo Xilai’s March ouster, which clouded the outlook for this year’s once-in-a-decade leadership change.
China’s economy will either improve or remain stable this year, according to 68 percent of respondents, with the share anticipating a deterioration falling to 30 percent, the lowest level since the question was first included in the poll in September. Bo’s exit may prove positive by helping to rein in the type of debt-fueled growth that drove Chongqing’s expansion, according to Redward Associates Ltd.
“Chongqing highlighted that you can accelerate growth temporarily by ramping up debt and by driving state-directed capitalism,” said Peter Redward, 40, principal of Auckland-based Redward, an ex-head of emerging markets Asia research at Barclays Capital and participant in the poll. “A growth model of less state-owned enterprise and bank-directed growth and more private enterprise and social welfare is the way forward.”
The latest survey of 1,253 Bloomberg customers was conducted May 8, eight weeks after Bo’s removal from his Chongqing post ended his campaign to join the Communist Party Politburo’s standing committee. The party is anticipated to pick its new leaders in the final months of the year.
The wife of the suspended Politburo member, Gu Kailai, is suspected of involvement in the alleged murder of a U.K. businessman. Bo’s former police chief, Wang Lijun, took refuge in a U.S. diplomatic mission in February amid the investigation into the Briton’s death.
Bo’s downfall triggered the biggest political crisis since China’s 1989 Tiananmen Square protests, with the affair shining a spotlight on influence and corruption at the top echelons of power in a nation where per-capita income ranks 121st out of 215 countries, according to the World Bank.
While as boss of Chongqing, China’s largest municipality, Bo rated a salary of about 10,000 yuan ($1,585) a month, the family amassed a fortune of at least $136 million, according to data compiled by Bloomberg.
“Even though there are some headline noises, as time goes by, it will fade away as long as China’s economy achieves sustainable growth,” said Sangwook Lee, senior fixed income portfolio manager with Shinhan Bank in Seoul and a poll participant. Lee, 42, predicted the leadership selection will proceed without disruption, as Vice President Xi Jinping “smoothly” takes over from President Hu.
Only 5 percent of respondents saw a big risk of political instability in the coming year, the poll showed.
The nation is more likely to pursue market-friendly policies without Bo’s influence, Lee said. He said he’s deeply underweight on Europe, neutral on the U.S., and overweight on China, Australia and South Korea, relative to the benchmarks he uses to gauge performance.
China’s financial markets were rated second by Bloomberg subscribers for being among the best performers over the next year, after the U.S., the poll showed.
About 72 percent of the 54 percent of respondents who have dealings in Chinese securities said neither Bo’s ouster nor the diplomatic crisis over Chen Guangcheng had affected their assessment of the nation’s investment climate. About 7 percent said they’re reducing investment.
The benchmark Shanghai Composite Index of stocks has risen 8.9 percent so far this year, compared with the 8 percent gain for the U.S. Standard & Poor’s 500 Index and a 5 percent advance in the MSCI World Index of equities. China’s yuan dipped 0.3 percent against the dollar over the period.
“Perhaps there are some schisms developing within the ruling elite,” said Nijaz Brkich, an analyst at Wellard Group in Perth, Australia, and poll participant. “But as it stands today my confidence in China isn’t affected.”
American tensions with China will remain the same as they are now should President Barack Obama be re-elected, according to 72 percent of those polled. A 43 percent plurality saw ties worsening should Republican candidate Mitt Romney defeat Obama in November, with 40 percent seeing no change.
Secretary of State Hillary Clinton said in an interview this week that the benefits of expanded U.S.-China contacts were demonstrated in working out a deal on Chen, a blind legal activist who escaped house arrest and entered the U.S. embassy in Beijing last month. China has indicated it will allow Chen to travel to the U.S. to study law, according to American officials.
“There will be more saber rattling at China” should Romney take office, said Andrew Sullivan, 50, a principal trader at Piper Jaffray Asia Securities Ltd. in Hong Kong and poll participant. “From my reckoning he’s not huge on international cooperation.”
Romney has criticized Obama for failing to press U.S. interests enough, saying he would label China a manipulator of its exchange rate and apply tariffs wherever needed “to stop them from unfair trade practices.”
Investors still are more confident in Hu’s government than Japanese Prime Minister Yoshihiko Noda’s. Only 26 percent of those polled are optimistic about Japan’s policies, compared with 22 percent in January. The outlook for Japan’s Nikkei 225 Stock Average (NKY) was also downbeat, with 31 percent expecting it to rise over six months and 24 percent seeing a drop. Sentiment toward the MSCI Asia Pacific Index was stronger, with 42 percent projecting a gain and 23 percent a decline, the poll showed.
China’s political turmoil has coincided with weaker expansion, with gross domestic product rising 8.1 percent in the first quarter, the least in almost three years. It was the fifth quarterly deceleration, as Premier Wen Jiabao maintains a clampdown on the property market and stunted demand growth in developed nations limits Chinese exports.
Data released today show China’s slowdown is deepening. Industrial production grew at the smallest pace since 2009 in April, retail sales rose less than estimated and inflation was below target, boosting speculation Wen will take steps to stimulate the economy.
Any so-called hard landing for China would present a low-to medium-threat for the global economy over the next year, according to 76 percent of those polled. Such a scenario typically has China’s GDP rising less than 5 percent, raising the danger of social unrest.
Shift Toward Consumption
China will accelerate its shift away from a dependence on export-led growth toward a greater reliance on domestic consumption, according to 45 percent of respondents. At the same time, only 13 percent expect the next group of leaders to speed up market-based reforms and increase dismantling of state-owned enterprises.
Bo’s focus on state-led infrastructure projects helped Chongqing’s economy expand 16.4 percent last year. Total borrowing in the municipality may exceed 100 percent of its regional domestic product, according to Victor Shih, a professor at Northwestern University in Evanston, Illinois, who has studied local government debt.
By comparison, China as a whole has a ratio of 43 percent, U.S. Central Intelligence Agency data show. The low level of national indebtedness gives policy makers scope to counter any downshift to a hard-landing scenario.
“The central government has a huge amount of room to adjust policy to soften the landing,” said Andrew Swarbrick, 48, head of cash trading in Hong Kong at HSBC Holdings Plc., who participated in the poll. “Data will improve by the end of 2012.”
China’s growth, even if slowing, presents an opportunity for investors, according to Leo Wong Wing Chiu in Hong Kong.
“No single event can change China’s outlook,” said Chiu, 32, head of prime brokerage at China Merchants Securities (HK) and a poll participant. “You can’t leave China if you look for the land of opportunities in our generation. You need to take risks when the market is weak.”
The Bloomberg Global Poll was conducted by Selzer & Co., a Des Moines, Iowa-based firm. It has a margin of error of plus or minus 2.8 percentage points.
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