Earlier this week, China’s parliament changed the country’s constitution to allow for current President Xi Jinping to remain in power indefinitely, rather than the traditional two five-year terms. Not since the days of Mao Zedong, the founder of the communist state, has a leader had the power to govern for longer than that.

As Canadian pension plans increasingly look to China, what’s the significance of this geopolitical event?

Read: Is China becoming more open to institutional investors?

In the short term, the prospect of Xi remaining at China’s helm bodes well for the country’s economy and the foreign funds invested in it, says Andy Rothman, an investment strategist at Matthews Asia. During his first five-year term, he “has been emphasizing the quality of growth over the speed of growth, which is a good thing. He was emphasizing improving Chinese people’s quality of life over just worrying about how fast GDP growth was.” 

As such, the outlook remains positive for investments focused on consumer staples and discretionary spending, according to Rothman.

Specifically, Xi has taken steps to promote further entrepreneurship in China, which has led to a steady flow of new, privately owned companies becoming listed on both Chinese and foreign stock exchanges. Rothman says that’s where Matthews Asia have been focusing its strategy. “His signalling that he is powerful enough that he can continue to implement these kinds of policies in his second five-year term, which is just started now, is not a bad thing for us,” he says.

Although the short-term perspective isn’t a reason to move away from the region, there are worries further down the road, adds Rothman. It’s important to understand that Xi’s position is threefold: he’s head of the communist party, the military and the state.

Read: What’s the outlook for key Asian economies?

While the recent change affects Xi’s position as president, his role as leader of the communist party and the military have both never had any formal term limits. There’s a precedent, however, that the head of the party will only serve two five-year terms before retiring. That practice has contributed to a calmer outlook for the political process in China, which is now in for a shakeup, according to Rothman.

The idea that Xi may break that historical pattern by staying on for a third term is the biggest cause for concern for investors in China in the long run, says Rothman.

However, the last few years have seen an increase in North American institutional investor confidence in China, says Rothman, “as it appears that the Chinese are making progress and addressing some of the risks that people have been concerned about: risks in the banking system with corporate debt. And also because there has been, over the last several years, an improvement in corporate profitability in China and improvement in access to better-quality companies to invest in on an equities basis.”

As such, investors should watch the political process in China more closely as the issue plays out in the long term, says Rothman, especially since, after all of the coverage of the constitutional change, Xi has yet to indicate publicly whether he actually intends to seek a third term.

Read: Looking at investment in China with a long-term lens

Copyright © 2020 Transcontinental Media G.P. Originally published on benefitscanada.com

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