China: The Transition of Power Continues

Big changes in China will effect U.S. companies

   

China: The Transition of Power Continues

ChinaFlag 300x225 China: The Transition of Power ContinuesLast week was a slow one in Shanghai, with the first three days of week off for Qing Ming Festival, followed by Easter and Good Friday in the U.S. The Qing Ming Festival is an important traditional Chinese holiday, a day when families visit and clean up the graves of deceased ancestors. It is an extended three-day holiday because many families need to travel long distances to reach their ancestral resting places.

The significance of Qing Ming Festival in China highlights the importance of familial ties in Chinese culture. In traditional Chinese society, the family is the basic social unit, unlike in Western societies that emphasize individualism. That is why whenever something good happens to a Chinese individual, the person’s entire family benefits, and the opposite tends to apply as well.

Although there is no official “nobility” in contemporary China, descendants of powerful government officials and communist party leaders wield enormous influence and clout in the country. Known as “Princelings,” the children of Chinese political leaders believe that they are entitled to inherit the nation. Many military commanders in China are still loyal to the children of their late former commanders, which is a source of power for many leading Princelings. Another source of power for Princelings is economic clout, which often generates financial gains that in turn create even more economic clout.

In Beijing, the two most powerful political interest groups are the Princelings and the Communist Youth League (CYL). Current Chinese president Hu Jintao was a former chairman of the CYL. Originally Hu favored another former CYL chairman, current vice premier Li Keqiang, to succeed him as president at the end of the year.

However, the Princelings favored one of their own, current vice president Xi Jingpin, to succeed Hu for the next ten years. After a series of ongoing behind-the-scene power struggles, the Princelings gained the upper hand, and for now it seems likely that Xi will become the next president and Li will become the next premier of China.

The current power structure in China is such that no one individual can truly call the shots on everything anymore. Even President Hu, who heads the state, the communist party and the military, is more of a first amongst equals than  the supreme leader of  the land . Officially, there is the nine-member central politburo, which Hu leads, that controls the communist party and the government. In addition to the politburo, there are several powerful Princeling families, such as scions of former leaders Deng Xiaoping and Jiang Zemin, who still wield significant influence within the  military and the communist party. One such Princeling was Li Xiaopeng,  a son of former premier Li Peng, who headed Huaneng Power for several years before being transferred to become the vice governor of Shanxi Province.

It is almost certain that seven out of the nine current politburo members, including president Hu Jintao and premier Wen Jiabao, will step down from their posts at the end of the year. Chinese political observers believe that while Xi and Li will stay to lead the next generation of Chinese politicians, the other seven spots are still up for grabs.

There is an ongoing power struggle for these spots. But unlike the presidential election in the U.S. this year, the power struggle in China will continue to largely remain behind the scenes. That is why Beijing will do all they can to ensure that the Chinese economy remains stable this year and prevent social upheaval to make sure the power transition goes through peacefully.

The power transition is causing the Chinese government to increase fiscal spending this year, which would be good for domestic consumption. Companies in our portfolio ranging from Baidu (NASDAQ:BIDU) to Starbucks (NASDAQ:SBUX) will all benefit.


Article printed from InvestorPlace Media, http://investorplace.com/2012/04/the-transition-of-power-sbux-bidu/.

©2014 InvestorPlace Media, LLC

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