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SEB report: China reforms on hold while leadership changes

SEB report: China reforms on hold while leadership changes

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Published by SEB Group
China formally kicks off its leadership transition starting next week, but this not likely to result in any radical changes in economic policy and major reforms are expected to remain on hold well into
2013 while the new Politburo consolidates power, writes SEB economist Andreas Johnson in a new research note. He says future reforms will target slower but more balanced growth.
China formally kicks off its leadership transition starting next week, but this not likely to result in any radical changes in economic policy and major reforms are expected to remain on hold well into
2013 while the new Politburo consolidates power, writes SEB economist Andreas Johnson in a new research note. He says future reforms will target slower but more balanced growth.

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Published by: SEB Group on Nov 01, 2012
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12/04/2012

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This report is produced by Skandinaviska Enskilda Banken AB (publ) for institutional investors only. Information and opinions contained within this document
1
 are given in good faith and are based on sources believed to be reliable, we do not represent that they are accurate or complete. No liability is accepted forany direct or consequential loss resulting from reliance on this document Changes may be made to opinions or information contained herein without notice.Any US person wishing to obtain further information about this report should contact the New York branch of the Bank which has distributed this report in theUS. Skandinaviska Enskilda Banken AB (publ) is a member of London Stock Exchange. It is regulated by the Securities and Futures Authority for the conduct ofinvestment business in the UK.
Muted policy response to slowdown due to morethan Chinese leadership transition
THURSDAY
NOVEMBER 1, 2012
The 18
th
Chinese Communist Party National Congress scheduled to start on November 8 will replace around two thirds of China’s most senior political leaders. However, the associated transition is not thought likely to result in any radical changes in economic policy. Major reforms are expected to remain on hold well into2013 while the new Politburo consolidates power.Future reforms will target slower but morebalanced growth.It has been suggested that the current weak policy response to the growth slowdown mainly reflects problems connected with the ongoingleadership transition. However, we believe it isalso due to authorities being less worried thanexpected by the slowdown due to resilient labour market conditions, and experience gained duringthe 2008-2009 stimulus programme.
MAJOR CHINESE LEADERSHIP TRANSITION.
In Chinesepolitics, considerable power is centralised in the nine-member Politburo Standing Committee.
The ninemembers of the Standing Committee which takes allimportant political decisions in China.
Seven of itsnine members are expected to be replaced this autumnat the 18th Chinese Communist Party National Congress,scheduled to start on
November 8
. In total, around twothirds of the country’s most senior political leaders willbe replaced.This transition takes place against a background of
increasing challenges for Chinese policy makers
.Economic growth has slowed and tension withneighbouring South East Asian countries is mounting,while the US presidential election is creating increasinguncertainty regarding the country’s future relationshipwith China.
XI AND LI TO TAKE THE MOST POWERFUL POLITICALPOSITIONS.
Currently, we know little more now than inthe spring about who will eventually fill the politicalpositions on offer. How leaders are chosen is known onlyto each other, though generally the selection of newleaders is guided by present incumbents. Still,
it is nowwidely accepted that the two most importantpoliticians involved are Xi Jinping and Li Keqiang
,both already members of the Politburo StandingCommittee.
Xi is expected to replace Hu Jintao asGeneral Secretary in autumn 2012 and President inMarch 2013. Li will replace Wen Jiabao as Premier.
 There are also rumours that the Standing Committee willbe reduced from nine to seven seats to make it easier toreach a consensus.
The leadership transition is notexpected to result in any radical shifts in economicpolicy.
Instead, Chinese policy changes tend to beconsensus-based. Further, it would be difficult for a newleadership to depart from the existing five year plan.
Future reforms are expected to target slower butmore balanced growth
driven less by investments andexports and more by consumer demand. Furthermore,the new Politburo is forecast to spend its first year inoffice consolidating power with
major reforms left onhold until well into next year and possibly longer
.(For further details concerning the leadershipchangeover and its effects on economic policy see our
Economic Insight 
, “Major Chinese leadership transitionputs reforms on hold”, March 16 and
Emerging MarketsCross Assets
, October2.)
Xi Jinping (left) and Li Keqiang
A TROUBLED LEADERSHIP TRANSITION…
So far, therehave been several indications that the presentchangeover in leadership is not going particularlysmoothly. The
Bo Xilai
scandal represents the biggestpolitical crisis in China for two decades. Bo Xilai was acontender for a seat on the nine-member Politburo

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