MLC talks Chinese leadership

Funds Management

by Clive Tompkins

MLC Senior Portfolio Manager Dr Ben McCaw speaks to Cassandra Crowe, Research Manager, about the recent Communist Party Congress and what it means for the Chinese economy.

Cassandra Crowe: Hi my name’s Cassandra Crowe, I’m the Research Manager for the MLC strategies. Today I’m delighted to be joined by Ben McCaw, Senior Portfolio Manager for the MLC portfolios. Welcome Ben, thank you for joining us today.

Ben McCaw: Thanks Cass.

Cassandra Crowe: Ben I know you have a keen interest in China. It’s an area you’ve done a lot of research on and you actually very recently wrote an article, in NAB asset management’s benchmark magazine on China. In that article you touched on a number of themes, you spoke about the Power of Seven with respect to the Politburo Standing Committee and also, I think you made the observation that reform was probably likely.

Can you give us an update now as the leadership changes have come through, on your thinking around China and what it means for us?

Ben McCaw: The leadership changes that occurred in October at the Communist Party Congress are extremely important for China. Although there wasn’t a change in the two leaders of China that people often talk about, Xi Jinping and Li Keqiang, it’s the Standing Committee within the Communist Party of China, that’s important for formulating policy in China. The old Standing Committee was probably slightly divided in terms of policy. As we all know, Xi Jinping is quite a reformer. But other members of the Standing Committee, they weren’t necessarily against reform, but they were from a much more traditional type background. The new Committee, however, is much more pro reform. So I think Xi will have a much greater chance of being able to enact reform policy, with the new Committee.

Cassandra Crowe: Can you tell us a little bit now about what this means for China’s policy moving forward, and if it’s potentially likely that China might move more toward the private sector, for example?

Ben McCaw: I think it’s important to understand Cass that policy change in China started a couple of years ago. Up until say, around about 2014/2015, policy was led by the old regime that stimulated the economy through the financial crisis. But early on in Xi Jinping’s leadership term, first leadership term, we began to see policy change. It didn’t necessarily change quickly, but the change was very evident through the anti-corruption campaign, for example. And also through some of the more recent policy changes that have been clamping down on overcapacity, and trying to reduce overcapacity in the economy.

But like I said earlier, the change in the Politburo Standing Committee I think, gives Xi a bit more authority to start to implement change further on. And so yes, I do think you’ll see more participation by the private sector in China in the future.

Cassandra Crowe: Looking a bit closer to home now, what do these changes mean for the Australian economy and for the Australian investor. Do you think for example, a hard or soft landing is more likely?

Ben McCaw: I’m convinced that a hard landing in China is far less likely now, than it might have been perceived say in 2012/2013. And that’s principally because a lot of the reforms that Xi Jinping has initiated in the economy. As for Australia though, I think the important changes that within the Chinese economy for Australia, have already happened. Insofar as that there’s been a big reduction in the growth in investment rates, in China. But that’s not a new phenomenon, that’s been in place now for a couple of years and I just expect that to continue.

However, that’s not to say that Australia’s anchoring into China isn’t still important, it’s still extremely important. But one, it might be less reliant on iron ore and two, I think that the opening up of some of the trade agreements that have been struck with China, will allow other services to access markets in China, that will ultimately be important for the Australian economy.

Cassandra Crowe: Thanks Ben, thank you very much for sharing your insights with us today.

Ben McCaw: No problem Cass, thank you.