ETF Securities Research Blog

Strongman emerges out of China

The two-term limit on China’s president has been abolished. That paves the way for Xi Jinping, the sitting president and General Secretary of the Communist Party of China to become a strongman. While not so good for the country’s institutional framework, “more of the same” could bode well for commodity demand in the short to medium term.

As we wrote about in China Congress: The making of a strongman, Xi Jinping has been using the past few years to purge his competition. Partly under the ruse of a war on corruption he has been frequently replacing officials with his cronies. We predicted that he will try to bend the rules to extend his power beyond his two terms. However, we expected a more subtle placement of one his protégés in the Politburo Standing Committee (the top 7 politicians in the Communist Party), so that in 2022 when his term completes he could rule from behind the scenes. Instead, he has taken the more brazen step of abolishing the two-term rule altogether, so that his indefinite presidency could go unchallenged.

We believe that this significantly weakens the institutional framework in China and presents a hurdle for reform. As we stated in China Congress: The making of a strongman, maintaining the status quo could place too much emphasis on cyclical economic growth, neglecting the structural reform the country needs. Arbitrary growth targets have led to debt levels in the country rising, making the country vulnerable to a shock.

On the flip side, “more of the same” could mean that weaning itself off construction and infrastructure-led growth will be slow, painting a bolder demand picture for commodities. So the short to medium term outlook for commodities may improve. Sustainable growth and a larger role for the market economy – some of tenets of the much-vaunted Third Plenum of the 18th CPC Central Committee in 2013 – may once again be postponed.

For now, the strength in demand for metals – notwithstanding the temporary disruption due to winter curtailments of manufacturing to improve environmental outcomes – is likely to continue. Meanwhile supply of many metals is likely to remain constrained following several years of subdued capital investment in mines. We expect base metals such as copper, nickel, zinc and lead to remain in a supply deficit in 2018.

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