New leaders likely to focus on real-wage growth, suppressing corruption and environmental enhancement.
In the last 10 days I travelled with colleagues to Hong Kong and then Macau for a global investment conference attended by mainly Asian-based investors.
With our economy becoming ever more dependent upon China and a change of leadership imminent there, this conference was very timely. Growth in China is improving and consequently sentiment towards China-related investments is improving.
For instance, gaming revenue hit records in October, and Macau had more than one million visitors in one week.
Chinese industrial profits for the third quarter provided a positive surprise and, although discounted by some analysts, bank profits rose in the last quarter.
The real estate market also showed improvement. For the fourth month, Chinese property prices were up slightly in the top 100 cities, and property was one sector where bank non-performing loans actually fell. It seems that liquidity has also improved significantly.
Unfortunately, much of that liquidity has spilled over into the Hong Kong financial system and real estate market, resulting in a recent move requiring all non-HK residents and companies to pay a 15 per cent tax on real estate purchases.
The leadership transition will most likely see five new members appointed to the Politburo for two terms of five years.
There is speculation that an older group will be appointed to maintain balance with likely new leaders Xi Jinping and Li Keqiang, both relatively young at 61 and 57 years old respectively.
There is no incentive for the new leadership to prime the economy and it makes more sense to ensure smooth economic growth, maintaining the re-balancing, real-wage growth and better governance policies of the current leadership.
Local media are reporting that a further crackdown on corruption and the environment are two key policy areas for the new leadership.
This rebalancing won't be easy in the face of numerous vested interest groups. However, Li Keqiang has the pedigree and economic knowledge to stay the course and the support to tackle corruption.
To sustain growth, China needs a strong service oriented economy, and domestic tourism is tipped to drive service sector growth.
China has fallen in love with tourism. The 2010 Shanghai World Expo started the trend. Now everyone wants to see China. Increasingly, they also want to go overseas. First to Hong Kong and Macau, then to Taiwan, then further afield.
There were more than two billion domestic visits in the last year, and 65 million overseas visitor nights by Chinese mainlanders.
Chinese overseas tourist visits are expected to hit 150 million nights by 2015.
Inbound tourism is also rising. In September 550,000 visitors arrived in mainland China, up 19.5 per cent from last year. These included 296,000 foreigners and 254,000 "overseas" Chinese.
Concern for health is also getting big in China. Watsons (a pharmacy, health and beauty chain) has 1000 stores today and plans to open 2000 more in China in the next five years.
The environment is both a priority and a source of unrest. Local analysts indicated several projects, a potential new iron ore mine, a steel factory and a chemical plant, had recently been shelved, following significant local opposition.
The fact this opposition was tolerated suggests that the leadership considers the environment to be an important factor in future growth.
Milk powder issues also grab headlines.
China banned Wakodo and Morinaga infant milk powder in August for containing too much iodine. Both brands are Japanese. A report also slammed six other products.
This created significant demand for products from New Zealand.
Restrictions remain in place on how many milk powder cans you can buy in Hong Kong and how many you can take into China.
While part of the excess demand for foreign milk powder (especially from New Zealand) arises from perceptions of the quality of the local product, it seems the Chinese product also struggles to compete on price for equivalent quality.
The large gaming venues in Macau are all very busy. Macau is now seen as a place to go with friends, appealing to middle class visitors and not just the high rollers.
Macau offers both large-scale convention and family entertainment, and Chinese say that it is like going overseas without leaving home. Middle class travel is set to be the next big thing to watch for out of China.
Steel and iron ore indicators are bottoming, although I would be hesitant to say they are taking off.
Quantitative easing in the US and Europe has helped, but cyclical indicators in China and the US, especially on the construction fronts, have lifted.
While most analysts don't expect a return to strong steel demand, many talk about the starting up of freeway, subway, social housing and other projects in a measured way. Recent nation-wide data has confirmed the lift in infrastructure spending. The key for resource stock prices is that the market still doesn't seem to believe that this re-acceleration in Chinese growth will last.
As a result there is some scepticism that the move from US$86/tonne for iron ore to US$120/tonne will be sustained. Therefore, iron ore prices may not yet be reflected in equity prices.
We think China's growth momentum will continue to build and that iron ore prices will maintain a higher range.
Andrew Bascand is the managing director and portfolio manager of Harbour Asset Management, a New Zealand-based asset manager with extensive professional investment experience managing funds for government institutions, corporate superannuation funds, multinationals, charities, banks and insurance companies. A disclaimer is available. This article does not constitute personal investment advice.