Analysts believe the ongoing transition has been badly hampered by the ouster of charismatic politician Bo Xilai, whose wife was given a suspended death sentence last month for the murder of British businessman Neil Heywood. Before the murder scandal broke in February this year, Bo had been seen as a candidate for promotion to China’s top ruling body, the party’s Politburo Standing Committee. Current Vice President Xi Jinping is now slated to replace Hu Jintao who will step down as the party’s general secretary – the top party post – at a party congress expected to take place sometime in the autumn and resign from the presidency at a parliamentary meeting next March, ending his 10 years as China’s top leader.
“The authorities are not desperate to keep the growth above 8%,” says ING Investment Management emerging markets strategist Maarten-Jan Bakkum. “This makes investors nervous, but slightly less growth is not necessarily a big problem for China. It is more of a problem for commodity and mining companies in Brazil and Australia that participated in the boom.”
The more pressing challenging is the structural reform that the country will have to undergo “China needs to transform its economy from investment-led, which accounted for 40% to 50% over the past four years, to domestic consumption which contributed 35% to 40%,” according to Yao. “This though will take a long time – probably five to 10 years or even longer – and the tricky part for the government will be how to make a successful transition with social stability and low unemployment.”
Navigating the landscape
For investors, this means the landscape will be harder to navigate. Five years ago any stock tinged with a China connection was a winner, but today past darlings such as consumer staples are looking pricey despite the de-rating taking place while many are avoiding cyclical such as commodities, financials, real estate and construction-related stocks. These segments were the main drag on the performance of emerging markets in the first half of the year, and this is likely to continue for the rest of the year.
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