China: Proposing to scrap term limits on the presidency - Rabobank

Without doubt the major development in Asia-Pacific as we start the week is the news causally released without fanfare on Sunday afternoon that China is proposing to scrap term limits on the presidency just months after Xi Jinping was reappointed for a second term, points out the research team at Rabobank.

Key Quotes

“Now the idea has been floated, it would be truly remarkable if it were not rapidly acted on, and that change would effectively mean Xi can remain in office for decades, should he so wish, the first time this would be the case since Mao died in 1976. Of course, the real power in China lies in being the General Secretary of the Communist Party, a position Xi also holds concurrently, while he is also now the Chairman of the Central Military Commission (the de facto head of the army) – a role that unlike in the US, for example, has been separated in the past. Presumably under Xi, China’s presidency will be moulded into a more powerful institution.”

“The traditional thing to write at this stage is “it will be interesting to see how markets react to this news”. However, given that so far under Xi’s presidency the trend has been towards the market’s voice being made secondary to broader socio-economic goals/targets, it’s probably unlikely that we will see any kind of sell-off on the mainland or in currency. (So far this morning CNH has shown zero reaction: by comparison, how would one think USD would react to Trump proposing to remove the two-term presidential limit?) Offshore markets are another matter, however. Will this announcement induce or repulse FDI into China, as well as from China into other markets? Only time will tell, but recall that there was a good reason that term limits were put in place in China.”

“That said, one has to admit that the multi-faceted challenges China currently faces are as momentous as the full implications of the proposed change to its constitution. Demographics remains dire despite changes to the One Child Policy; the economy is slowing again; debt levels remain worryingly high and are soaring in the most dangerous sector of all --households-- at a time when house-price data the market cooling; and there are related issues with leverage and opacity and risk-taking across the shadow financial system - last week saw the extraordinary step of the regulator taking over Anbang insurance, a close analogy to the AIG situation in the US during the GFC. Moreover, the external backdrop is getting tougher too. Fierce China trade-critic Peter Navarro has been promoted again within the White House to “assistant to the president” – does that signal an increased risk of US-China trade tensions (or trade war) ahead?”