All eyes are on China after the country's leadership change this March, with president Xi Jinping and his seven-strong Politburo Standing Committee tasked with controlling China's development over the next five years.
A diverse panel of market analysts discussed their fears and expectations for these new leaders at AsianInvestor's recent Asian Investment Summit in Hong Kong. They considered how political and social change could impact portfolios as the government engineers a structural slowdown as it rebalances its economy towards domestic consumption.
Tom Byrne, senior vice-president at credit agency Moody’s who oversees sovereign risk in Asia and the Middle East, sees healthy growth prospects for China over the next five years, estimating that its GDP will maintain an annual 7-8% growth rate, with inflation at 2-3%.
He points out that there have only been three periods of major economic reform in China, the most recent of which was when China entered the World Trade Organisation in 2001. That helped to boost China's GDP to 10%, from 8% previously – meaning that maintaining a growth rate of 8% is equivalent to what it was a little over a decade ago.
The participants also note that domestic consumers will begin to drive China's growth, rather than external investment. But as Stephen Joske, senior manager at AustralianSuper, points out, this economic transition will be far slower than many market pundits are forecasting, largely because China is still very much a poor and developing country in need of major investment.
While Shanghai, Beijing, Shenzhen and Guangzhou are leading the way economically, the rest of the country still has a lot of catching up to do in terms of industrialisation, Joske says, adding that he expects China's economy to be driven by investment for a number of years yet.
The issue of shadow banking – or non-bank lending – is also prominent in the minds of investors. However, Byrne sought to sooth frayed nerves, saying that while China's economy has become "very dependent on credit growth" post-2008, the country does not rely on external financing or have a large net-liability position, so the chances of a 2008-style crash are remote.
International commentators have also expressed concern about political reform and social change, seeing it as potentially destabilising.
Graham Hutchings, a former China correspondent and now managing director of analysis and advisory firm Oxford Analytica, asked the question: to what extent does China's rebalancing to consumer-driven growth require the Communist Party to undertake an act of self-destruction?
He notes that the emigration of the educated elite in China should be used as a barometer of public confidence in China's leadership, although Byrne dismissed this notion, suggesting evidence of its impact was only anecdotal rather than material.
Jiangnan Zhu, assistant professor at the department of politics and public administration faculty of social science at the University of Hong Kong, suggests that the political signals are mixed at the moment.
On the one hand, surveys show that public trust and happiness towards the government is in decline. On the other, very few large demonstrations have taken place as authorities maintain stability, partly because students are more interested in getting a good job than involving themselves in politics. Zhu is not expecting any large-scale demonstrations to rock the boat.
The panelists expect China's new leaders to focus on getting the requisite infrastructure right, namely a functioning legal system, tax reform and property rights, Byrne says. The latter is seen as especially important since it affects all investment decisions, Zhu agrees.