China’s Election Cycle - Planning for 2012

Over half way through 2011, China looks unlikely to outperform the MSCI Emerging Markets Index in 2011, tied to attempts to slow its domestic economy and control inflation. (.) However, 2012 may be a different story.

The difference? China will hold a congressional election in 2012—and while not a true “election” in the democratic sense, it is when China’s Communist Party appoints all of its government leaders. As always, the appointments will take place in March, with the actual power handover the following year, in March, 2013. The outcome is a relatively foregone conclusion—current leadership is stepping down tied to a two-term limit, with Xi Jinping expected to become President and Li Keqiang expected to become Premier.

Despite the predictability, the leadership change is still significant for markets because to gain popularity and avoid protests, China’s policy makers typically boost economic growth during these transition years (after all, politicians will be politicians, whether in a communist country or a democracy). This can be seen quite clearly in Exhibit 1, which shows the average real economic growth rate relative to its compound average throughout China’s five-year election cycle. Exhibit 2 shows the same data but looks at the year-to-year change—again, the pattern’s clear.

Exhibit 1: China's "Election" Cycle and Real GDP Growth Relative to Average Compound Growth Rates

Source: Thomson Reuters

Exhibit 2: China's "Election" Cycle and Average Yearly Change in GDP Growth Rates

Source: Thomson Reuters

Overall, China’s 2011 slowdown looks like the traditional attempt to bring down inflation in advance of a plan to boost growth as it says farewell to current leaders and announces new ones in 2012.