How will China’s new leadership team under a more powerful Xi Jinping impact Australia and the world? I’ve outlined five key points below based on my (so far) correct observations of Xi.
And with all humility aside, I must confess I have something in common with each of the seven Politburo Standing Committee members appointed yesterday.
This commonality is something we do individually, in private and monthly.
I will reveal this secret* at my 20 Nov Aus-China Property Developers, Investors and Financiers lunch
Registrations are currently tracking at 40% above my Significant Investor Visa lunch earlier this year so I am
• expecting closer to 300 delegates
• who will gain insights into what the RBA thinks about financial stability impacts from property markets, about a UHNW developer’s past 40 years of dealing with property cycles, and about the strategies Chinese-Australian developers are now deploying
• while enjoying a two-course gourmet lunch, with coffee and petit fours
• before networking with drinks after.
*PS, If you are the third person to correctly guess this secret, I’ll buy you lunch and give you a hard-copy of my novel Thy Fiefdom Comes (think Mad Max meets Jurassic Park meets Wagons West meets Lords of the Rings). when we meet. (hint: google photos of the 7)
Five coming impacts from the next five years
The governance of China
Rule of law will be enforced and the crackdown on corruption will broaden from ‘tigers and flies’ right down to maggots. (see my newsletter for explanations of these terms).
Xi has successfully taken down political and military warlords ( see my article last year on Warlords, dissidents and democracy in China). He will increasingly focus on corrupt businesses
He will deploy the Singapore model of governance, on a scale 250 times larger using ‘observation technology’, media and education channels for effective implementation. The model comprises:
- political stability under one long-term and powerful leader, (Xi will remain leader indefinitely –something commentators are saying now which we predicted last year; see same Warlords article)
- China Inc. (like Singapore Inc.) where powerful State Owned Enterprises continue to dominate in their field and exert collective influence on global affairs
- brook no dissension (even actively suing international publishers over disputed articles like Singapore’s leaders did…winning court cases or out-of-court settlements from New York Times, International Herald Tribune, Wall St Journal, Bloomberg and The Economist)
- develop an efficient public service to improve quality of life for the masses and to promote domestic business will sufficient regulatory checks and balances but without ‘red-red tape.’ (to be explained on 20 Nov)
He wants entrepreneurship to flourish outside SOE areas, with a level playing field where guanxi will diminish over time and rule of law takes over.
The morality of China
Xi will seek to establish ‘socialist moral values’ so that wrongdoers will find it harder to do wrong, become more fearful of doing wrong, then eventually become unwilling to do wrong (due to higher moral standards).
This will take decades to achieve and starts from the top, hence the crackdown on corruption on the upper echelons of power.
The past 170 years of humiliation ( see my China psyche article) has created a survivalist mentality. Xi will change this, beginning with the re-education of wealthy urbanites. The rich will be expected to become generous philanthropists (or get taxed). They will be expected to show compassion to the under-privileged, to exhibit humility, frugality and self-discipline and tone down ostentation.
This re-education has already started with the crackdown on conspicuous consumption by government officials. The 19th National Congress last week reportedly served home-style buffet meals rather than feasts of previous National Congresses.
Leadership by example will be essential amongst political, SOE and business heads. Their activities will be monitored. More than 300,000 officials have been punished for violation of this rule.
However, this rule also needs to be balanced with allowing ‘aspirational consumption’ of the growing middle classes, so they are incentivized to achieve and enjoy a better life.
One inaccurate description of Xi that I often read is that Xi is a princeling, born to one of the elite families. Well, not quite so. He and his family spent years in political exile during the Cultural Revolution. As a teenager, he was sent to work amongst the poor in rural China. This period would have shaped him very differently to the princelings of China who did not suffer.
As an outlier prediction, I’d even suggest Xi will enforce and lengthen military conscription (technically its obligatory but not enforced) for 18-year-old male city dwellers. No more effete pretty-boy Korean boy bands with their eye-liners as role models. It’s now Leng Feng, the Chinese Rambo, of Wolf Warrior 2 fame, China’s recent and by far its biggest movie blockbuster.
His social conservatism will be implemented, starting with fostering family values and civility as mentioned in his 12 December 2016 speech.
The capital-flows of China
Capital restrictions on individuals (US$50,000 annually per person) will continue, despite a strengthened currency and rising FX reserves.
It’s like jaywalking in Australia. Many do it although it’s unlawful. Taking in excess of US$50,000 is also unlawful but until late last year was not enforced. It is now and will continue to be enforced as a message to China’s citizens (see rule of law and morality comments above).
Financial regulation will be toughened (pyramid and ponzi schemes are being shut down before they cause systemic risks and social unrest) to channel capital into legitimate needs. The funds management industry will expand as regulations are improved to provide alternative investment avenues for retail investors, and to discourage over-investment in domestic residential property.
However, SOE capital flows to global markets will continue, particularly portfolio investments from China’s sovereign wealth funds and pension funds. Capital will also flow into ‘encouraged’ global sectors –e.g. Belt and Road related investments, agribusiness, technology, culture, while ‘restricted’ areas (property, entertainment, hotels) will be permitted after verification. ‘Banned’ areas, such as casinos and other gambling related investments will continue to be banned.
So Chinese capital will still flow out, but not in the amounts seen in 2016. This makes Chinese capital already out of China more important as a source of funding.
Still, by sheer population alone, the US$50,000 limit per person adds up. Mum, dad, and 2 sets in in-laws makes it 6 people or US$300,000 per year. Add a couple of friends or uncles and aunts (fast disappearing as the 1 child nation ages) makes it US$400,000 per year (A$520,000). Note, that a document needs to be signed by the investors that they are not taking out the money to buy overseas property. Perhaps it’s lent to someone else who will buy a property in their own name, with legal caveats to protect the ‘lender’…hmmm ..but then see my comments about Xi’s new morality of China
Next week, I will be discussing the final two of the five impacts….The Foreign-relations of China and the Economy of China under a more powerful Xi.
The impact on Australia is enormous, simply because Australia has a huge part of its trade (goods and services) eggs in the China basket…with no alternative trading nation large enough to replace that basket.
In the meantime, I would like to thank my corporate table supporters, Jirsch Sutherland, Lefand Group, PIVOT, and Doltone House and the many individual and small group registrations to date for my property lunch next month.
Aus-China Property Developers, Investors and Financiers lunch 20 Nov Sydney… click here.