08thOctober 2012
Impact on stock market under handover of China's new leader
Investment and Research
2012 Week 40
Impact on stock market under handover of China's new leader
The upcoming 18th National Congress of the Communist
Manufacturing in the eurozone has contracted for 14
Party of China (CPC) will convene on November 8 in Beijing.
consecutive months though the reading was already the
It is a major political event held once every 5 years. A new
highest in 9 months. Recession in the peripherals has
party will emerge and a transition of leadership will take
affected the cores such as Germany and France. Germa-
place. By then, many new members will enter the Politburo
ny September composite PMI recorded 49.2, a consecu-
and Standing Committee of Politburo. These newcomers will
tive contraction for 5 months. France September com-
determine the direction of China's future political and ideo-
posite PMI recorded 43.2, a historic low in 3 years and
logical direction as well as economic, diplomatic and military
consecutive contraction for 7 months. The Manufactur-
policy.
ing sector is imposing a great resistance on the recovery,
The official Chinese manufacturing PMI climbed 0.6% from
greatly increased the chance of the Eurozone to be back
last month to 49.8 in September. This was the first expansion
into recession. Eurozone unemployment rate recorded
since May. Despite the PMI still remained in contractionary
11.4% in August. Unemployment hit a record 18.2 million, the highest ever recorded since 1995.
and improvement. The slowdown of economic growth began
to improve. The market awaits the possible implementation
of bailout policies after the 18th National Congress in hope
to restore PMI to the 50 level.
US manufacturing sector also expanded. The final reading
of US manufacturing PMI rose to 51.5 in September. It was
the first expansion since May. Sub-index also performed well.
Figure 2: Market breadth 3x20 (GET Research)
However, due to a decrease in commercial and industrial
construction spending, construction spending unexpectedly
dipped 6% in August. Michigan final sentiment index recorded
78.3 in September, lower than expected. This indicated the
level of consumer confidence in economic activities is not as
expectation.
Eurozone September final composite PMI recorded 46.1.
Figure 3: Market breadth 3x60 (GET Research)
Figure 1: yield of Spain 10-year Gov bond (Bloomberg)
Figure 4: Market Momentum Analysis (GET Research)
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08thOctober 2012
Impact on stock market under handover of
China's new leader
It is an election year in 2012 with the US quadrennial
presidential election in full swing and the once every five
year 18th National Congress of the Communist Party of
China (CPC) convene in November. The political cycle
of China and US coincide this year. However, the
difference in economic system will create different
economic cycles, hence imposing a different impact on
the financial market.
smooth transition of leadership and handover of power.
The transition of leadership is held once every decade at
Congress is held every five years. Standing Committee of
the National People's Congress will determine future
policies. The transition of Political bureau (Politburo) of
the CPC Central Committee and leadership transition
will also take place at the Congress. This is to determine
members of the Standing Committee of the Politburo.
This significantly affects the future development in China
for the coming decade. The main duty of each Standing
Committee member of the Politburo and there
speculated successors are as follows:
President of the People's Republic of China: Head of
state and the General Secretary of the CPC Central
Committee
Xi Jinping is widely speculated to be the president.
His father, Xi Zongxun, once served as the ViceChairman of the NPC. Xi Jinping was born on 1 June
1953. After experiencing Cultural Revolution "up to the
mountains and down to the Countryside" in 1969, he
was nominated to study chemical engineering at Tsinghua
University. In 1979, he worked at the General Office of
the State Council and Central Military Commission.
Since then, he had a successful career, promoted all the
way to the top.
Premier of the State Council: Administer the State
council on the economic and social development,
institutional establishment etc.
Li Keqiang is widely speculated to be the next
Premier. He was born on 1 July 1955. He was in the first
batch of university students after the Chinese Cultural
Revolution, who entered the School of Law at Peking
University. In 1993, he became the First Secretary of
the Communist Youth League of China (Hu Jintao was
also a member). He then worked in Henan and Liaoning
Other main positions in the Standing Committee of
the Politburo include:
Chairman of the Standing Committee of the National
People's Congress: Entrust to be temporarily responsible
for the central daily work by the General Secretary, to
host the overall work of the standing committee with
concentration on the legislative, legal construction work.
Chairman of the National Committee of the Chinese
People's Political Consultative Conference (CPPCC): To
host the overall work of the CPPCC, manage democratic
Central Commission for Discipline Inspection: Manage
work style of cadres and promote anti-corruption. In
addition to the above five main positions, the standing
committee consist of another four seats for leaders
responsible for other duties.
Besides Xi Jinping and Li Keqiang, other speculated
members of the Standing Committee include:
Li Yuanchao, Born on 11 November 1950, current
committee of the Politburo, Secretary of the Secretariat,
Head of CPC Central Organization Department. Wang
Qishan, current committee of the Politburo, VicePremier.
Yu Zhengsheng, current committee of
the Politburo, CPC Shanghai Committee Secretary.
Zhang Dejiang, current committee of the Politburo, Vice
-Premier, CPC Chongqing Committee Secretary. Wang
Yang, current committee of the Politburo, Secretary of
the CPC Guangdong Committee. Liu Yandong, current
committee of the Politburo, State Councilor. Liu
Yunshan, current committee of the Politburo, Head
of Propaganda Department of the CPC Central
Committee.
As seen from the above candidates, the transition of
leadership has the following characteristic political cycle:
Though the NPC is held every 5 years, leadership
transition in fact takes place every decade. Candidates
are generally decided by the current member of the
committee. Voters basically have no right to choose. The
candidates have close relationship with current
-
sustainability of the communist power. This is also the
To ensure a smooth power transition, some leaders will
even sacrifice his achievements in their last stage of
service term to serve the next leaders.
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08thOctober 2012
usually has the following cycle: Leadership transferèEconomy stimulusèCredit growthèoverheated economy
(overheating period) èCentral regulationè Monetary
tightening (stagflation) èCool economy (recession) è
Leadership transfer (recovery). Hence, in general, Chiyears. After that, the growth slows down.
Affected by the economic cycle, the financial market
has also shown a certain pattern. Analysis has pointed
out, excluding the stock market bubble in 2006-2007,
the period between the 3rd and the 4th CPC Central
meeting usually has the best return. It is expected that
this time, the period would be from now on to about a
year after. However, due to a small number of political
broke 2000 points while HKHSCEI remained stable,
awaiting the stimulus of new information.
We expect when the new government comes to
power, a series of stimulus will be introduced, which are
central government will increase the weight in this
round. The policies are expected to be more targeted
and focus on stimulating domestic demand in China. One
of the main drives of the economic growth will be investing on infrastructure by local government, which has
already begun to take shape.
We expect the economic stimulus will benefit the
financial and material industry.
and the occurrence of global economic crisis within the
period, there is limited data available for analysis, and
hence insufficient to reach a conclusion.
2012 marks the leadership transition once every
decade. To ensure the smooth transition, the economy
is now in between recession and recovery. Economy
growth has slowed down, exposing China to a risk of
anything. It does not cut rate, does not lower the deposit reserve, but to inject fluidity to the banking system by
reverse-repurchase only. Its main intention is to maintain
an austerity policy, leaving more room for the new government to stimulate the economy.
Figure 6: Congress related to Chinese political economic cycle
(GDP growth average before and after the congress) (National
Bureau of Statistic, CMS)
Hong Kong Hang Seng China Enterprises Index
(HKHSCEI) can better reflect this political economic
cycle as it does not have the systematic problem as the
Shanghai Composite Index (SSECI). Recently, the spread
between HKHSCEI and SSECI has increased. SSECI
Figure 7: Party Congress and Macroeconomic indicators, 19772011 (GDP and Fixed asset investment) (CEIC, Barclay Research)
Figure 5: Chinese political economic cycle logic flow (CMS)
Figure 8: Figure 4: Congress and Shanghai Composite Index
(WIND, CMS)
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08thOctober 2012
Analysis of the US election year impact
to stock market
Compared with the political and economic cycle in
Financial Service
Materials
China, the one in the US has shown a completely different pattern. The effect of the political and economic
Value Partners China
Convergence
9.00%
Henderson Horizon
China A2
37.10%
16.70%
Baring China Select A
USD Inc
28.00%
17.10%
First State China
Growth 1 Acc
15.30%
12.50%
Baring Hong Kong China A USD Inc
33.60%
17.30%
27.00%
cycle to stock market in the US is first found by Jeffrey
four-year presi-
Figure 9: Asset allocation of China Investment Funds
(GEO Research)
dential election cycle. It is now widely accepted in both
academic and investment circles.
The US economy has a multi-party system. Multiple
parties nominate presidential candidates. The president
election is held once every four years. As a rally of the
election, the US political economic cycle mainly possess
the following features: Lack of stimulus policy in the first
president year and soft economy. Voters tended to foreconomy then began to improve in the second year with
stock market rebounded from the bottom. The third
year was even better. The fourth year is the election
year. A large number of stimulus policies were introduced. The rise in stock market was to pave the way for
the re-election of current government or current candidates. Due to the above cycle, we can see that the US
economy and stock market perform exceptionally better
during the election year. The government creates a
Figure 10: One year Shanghai Composite Index (SSECI)
(Bloomberg)
loose monetary environment by adopting fiscal and monetary policies to promote economic growth, enhance
favorable economic condition, the capital market per-
Figure 11: Once Year Hang Seng China Enterprises Index (HKHSCEI)
(Bloomberg)
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08thOctober 2012
Figure 12: Presidential election political economic cycle (CEIC, CMS)
Figure 14: S&P 500 stock performance (Jan
recent) (Bloomberg)
Historical return of S&P500 index
Year
Return
Year
Return
Year
Return
1928
43.60%
1956
6.50%
1984
6.30%
1932
8.20%
1960
0.50%
1988
16.80%
1936
33.90%
1964
16.50%
1992
7.70%
1940
-9.80%
1968
11.10%
1996
23.10%
1944
19.70%
1972
19.00%
2000
-9.10%
1948
5.50%
1976
23.80%
2004
10.90%
1952
18.30%
1980
32.40%
2008
-37%
Figure 13: Stock returns on election year
The information contained in this report is for internal training and general information purposes only. It cannot be used as sales material, does not constitute an
offer, solicitation or invitation, advertisement, inducement, or any kind of representations or enter into any transaction of advices or recommendations.
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