Investment Contrarians

How the Once-a-decade Political Transfer in China Affects U.S. Corporations

By for Investment Contrarians |

How the Once-a-decade Political Transfer in China Affects U.S. CorporationsMany investors around the world are keeping a close eye on the Chinese economy. This is because a growing number of companies depend on the Chinese economy for their corporate earnings growth. One of the most important events in China is the transfer of power within the Communist Party that happens once a decade. The 18th National Congress starts on Thursday and ends next week.

Many are hoping that the new leaders for the Chinese economy are reform-minded, continuing to open markets and the possibilities for the corporate earnings growth of foreign firms. However, new sources are stating that a large number of conservative members will be making up the leadership of the Communist Party. (Source: “Conservatives dominate latest line-up for new Communist Party leadership,” South China Morning Post November 2, 2012.)

It appears that several reform-minded members have been opposed by conservative party elites, which will most likely eliminate them from senior posts. The greater the number of conservatives within the leadership structure, the less likely it is that any large reforms will be made. This will clearly impact the growth of international companies, especially many American firms, and their corporate earnings. From fast food services to carmakers, many American firms are generating a large number of corporate earnings from the Chinese economy and are expecting sustained levels of growth for a long period of time.

Banking is one area in which the foreign firms were looking at expanding their reach and corporate earnings growth. Some remain quite positive, such as the President of the American Chamber of Commerce in China, Christian Murch, who stated that while the near term is uncertain, he’s quite optimistic for the medium term. (Source: “Foreign banks hope China’s new leaders will loosen up regulators,” South China Morning Post November 5, 2012.)

Many are hoping that the reforms made over the past decade will continue. The Chinese economy has benefited by allowing pro-market reforms, which has led to corporate earnings growth not only for domestic companies, but for international firms, as well. Pro-market business reforms are a win-win situation for both the Chinese economy and the markets internationally. The larger the number of restrictions on business growth, the greater the number of impediments to corporate earnings expansion by U.S. companies.

While foreign banks have less than two percent of China’s total banking assets, they generated corporate earnings of $2.7 billion last year, an increase of 115%, according to a study of 41 foreign banks conducted by PricewaterhouseCoopers. (Source: “Foreign banks hope China’s new leaders will loosen up regulators,” South China Morning Post November 5, 2012.)

Obviously, there is a massive level of potential for the Chinese economy over the next couple of decades. As the new political leadership is being formed, many investors around the world are hoping that pro-market reform members will rise to the top and continue the policies that have helped grow corporate earnings for both domestic and international companies. It will be quite interesting over the next two weeks to see the results of this transition of power.

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