JK Capital manager outlines likely China Politburo direction

China’s new Politburo Standing Committee, which will hold power from March 2013 for the next seven years, is likely to maintain current policies and gradually create an environment more favourable to private firms and small businesses, according to Fabrice Jacob, CEO of Hong Kong based-JK Capital Management.

The fund management firm was previously known as MYM Capital Ltd. Set up in 1992 by Randy Kwei, portfolio manager of Asian Select Equity Investment Partnership, now known as JK Asian Invest LP. It was renamed in 2007 following the acquisition of Pacific Capital Management Ltd.

Jacob set up MYM Capital in 1997, and in October 2010, Paris-based La Française Asset Management became a 20% shareholder of JK Capital Management. Jacob also manages two of the firm’s value equity funds.

He says the names of the new president and prime minister have been known for some time, but the announcement of the names of the five other members of the Politburo is also important.

“These appointments can even be considered the most important announcement made by the (recent) Congress, which, in itself, simply confirms the outcome of talks held behind closed doors in the month leading up to the meeting,” he explains.

Although few indications have been given as to the future policies of the Standing Committee, the background of its members can give some idea of their focus.

Jacob notes all members have solid economic knowledge, “giving us faith in their ability to preserve growth”. Two of the three “reformist” candidates were kept out of the elite Standing Committee, so no immediate or major reform of the country’s political or economic structure is expected.

“Instead we expect a number of current policies to be maintained, including the ongoing liberalisation of interest rates, an easing of ties between state banks and public corporations, which will create an environment that is more favourable to private firms and small businesses, a heavy emphasis on fighting corruption and continued investments in infrastructure.”

The majority of Politburo members have worked in central and western China, so the policy of developing these regions and rebalancing rural and urban development should continue. Two members are energy specialists, which suggests energy could be an important part of Chinese policy.

One member is a tax specialist and Jacob expects one reform is possible, giving the country’s provinces greater resources to develop their own welfare policy and integrate their surrounding rural areas.

Among other policies, further reforms could be made to the Hukou system of residency permits, which provide access to education and healthcare. This reform will be important to the development of the Chinese social model.

“The Committee’s composition is reassuring in the sense that it is neither ultra-reformist nor particularly conservative and because its members are on the whole in favour of continuing China’s liberalisation and capable of doing so,” he added.

“Statements suggest that they are aware of the issues facing China as they are generally perceived internationally and by the financial markets, namely development, social policy, access to public healthcare, wage growth, agricultural modernisation and the rebalancing of investment and consumption.”

“We therefore expect the Chinese recovery to continue and that we will even see an upturn in growth in 2013 once the transition is complete.”

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