Structural changes in China could prove positive

China has gone, over the past two weeks, through unprecedented structural changes. The appointment of the President and the Vice-President are no longer constrained in time (even though the functions attached to these two titles remain largely ceremonial). A sweeping overhaul of the government was announced leading to the effective cutting of red tape as a number of functions (business regulations, protection of the environment, infrastructure investments among others) have now been gathered under a small number of supra-administrations. It is easy draw hasty conclusions, such as Xi becoming obsessed by power, which in so many countries (including China under Mao) has led, in the past, to catastrophic consequences. Without turning a blind eye to this worst case scenario, we are actually giving Xi the benefit of the doubt. China has a large number of structural issues that will take time to be sorted out, and certainly more than the ten years of the original tenure of the Chinese presidency. What was achieved over the past two years in terms of fight against pollution, cuts in overcapacities and deleveraging through a rebalancing of debt from the shadow sector to the official banking sector was mind-blowing, even in the eyes of China perma-bears. But it is far from being over as the debt of China remains elevated with a credit-to-GDP gap of 16.7% according to the Bank for International Settlements in its latest quarterly report. Even if the debt of China seems to be under apparent control, the risk remains the impact that a brutal deleveraging of the system would have on economic growth. Thinking that the Chinese economy could be put on the track to sustainable quality growth in less than five years was not realistic, and Xi probably did not want to see his efforts jeopardized by his successor. The fact that he just appointed his long-standing trusted advisor Wang Qishan as Vice-President “for life” is a good sign. When in charge of the anti-corruption campaign, he went straight to the heads, putting behind bars a large number of very high profile politicians when pundits were speculating at that time that he would only focus on low-level scapegoats. The fact that Liu He, Xi’s closest economic advisor and a former vice-Chairman of the powerful National Development and Reform Commission, was appointed Vice-Premier is another good sign, completing a dream team of deputies who have all built solid track records in their own fields of competence over the past five years. 

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