WASHINGTON, June 13 (UPI) -- In less than six months in office, Chinese President Hu Jintao has launched a major democratization initiative, and intervened deftly in various local student and worker protests. He also dealt with two major crises donated to him by the old regime: the SARS outbreak and the imposition of U.S. sanctions on Norinco, China's arms merchant to the axis of evil.
When Asian authoritarians reform, it's often a bumpy ride for equities and debt, as investors learned from Korea to Indonesia to India in the 1990s. But for investors with a time horizon of several years, the emergence of political competition to match China's economic competition of the last 25 years is strongly bullish.
Hu's skill is perhaps best revealed by his ability to deal with the unexpected. Before the U.S. imposed the trading curbs on Norinco several weeks ago, Vice President Dick Cheney reportedly conferred with Hu on the matter. In light of repeated Chinese failure to deal with U.S. complaints about Norinco's dealings with Iran, Iraq, Pakistan, North Korea, and other rogue regimes, Cheney suggested, the U.S. might have to act on its own through targeted measures against Norinco.
Hu, reportedly, didn't beat an eye. He told Cheney that such an action would have to be reviewed by his government, which (still) does not acknowledge Norinco's aggressive merchanting of weapons of mass destruction, and their delivery vehicles and components, around the world. But what he did not say was that such a measure would cause a fundamental rift in Hu's relationship with Bush and Cheney. Hu's government does not acknowledge Norinco's arms sales, Hu said, but certainly does not endorse them.
(Vice President Cheney's press office had not returned a call requesting comment by deadline.)
The U.S. crackdown on Norinco is, on one level, "anti-China." It is not necessarily, however, harmful to Hu. Indeed, since Norinco's dealings are a product of the old regime, the U.S. action weakens the old guard, and gives Hu an opportunity to clean house. In a similar way, Mikhail Gorbachev, and later Boris Yeltsin, were aided in their political reform efforts by such events as the Chernobyl nuclear disaster, the Soviet quagmire in Afghanistan, and Russia's own arms merchantry in the 1980s and 1990s.
If the Bush Administration is now engaged in confronting the old regime's role as the chief arms supplier to terror regimes around the world, and has even established a tacit understanding with Hu, the result would be both a plus for the U.S. war on terror, and a plus for Hu's reforms. It suggests both Hu and the U.S. have a sophistication about the reform process which bodes well for their mutual objectives.
In a like manner, Hu used the SARS crisis not only to bring shame on the party hacks who first attempted to cover up the outbreak, but to clean house. He also reinforced the positive message that China must have a bit of glasnost. Not only is open information and political competition a right, Hu has said, but it's an economic necessity. Western firms that are driving the boom in investment and output in China simply can't operate in an environment of closure and corruption. The 80 percent plunge in business travel to the region for several months made the argument for him.
Hu's conversion of crisis to opportunity comes against a backdrop of political reform that predates both scandals. In January, before SARS or the Norinco sanctions -- in fact, shortly after taking office -- Hu announced his government would begin to implement competitive local elections. Non-communist-party candidates, he said, would be allowed to appear on the ballot, and indeed, such political competition would be encouraged.
This initiative so far has caught major attention only from London's Financial Times and in selected domestic press, such as China Daily. It should be generating banner front-page headlines.
On May 15, voters in Shenzen selected Wan Liang for the city council. Liang, not endorsed by the Communist Party, won in a landslide. "The right to vote and run as a candidate," Liang commented, "is sacred to every citizen."
On June 2, voters in Shenzen's Maling district recalled a Communist representative to the district people's congress, again by a large margin. The law allowing non-Communists to run, and Communists to be thrown out, was established three years ago -- but used only rarely until Hu's announcement in January that his regime would encourage open elections.
Interestingly, the effort is focused in Southern Guandong Province. This was the home of Deng Xiaoping's economic opening in the late 1970s. It is also, however, the power center of a number of leaders of the old regime, including Jiang Zemin, which began its exit from power late last year, but has attempted to cling to real control in the traditional manner of the party elders.
What comes next? The old guard is bound to fight back, but has been hampered by Hu's skill at handling the difficulties handed to him, and the rising popularity, in Shenzhen, of the new democracy policy. If he can make it through the next six months, as the economy picks up after SARS and muddles through the U.S. arms pressure, Hu may begin to acquire the kind of unassailable mystique that both Deng and Yeltsin enjoyed following their own reform drives.
Look for a Hu hardline vis-a-vis Taiwan, to keep the party elders happy, and continued crackdowns against intellectuals or journalists who attempt to press for more-rapid progress on democracy in other provinces. Hu will be reticent and even tough in any public comments about China's arms sales -- but monitor what happens with the management at Norinco.
A Hu shakeup of Norinco, and other quasi-military firms, is a significant prospect. How Hu handles senior management, more than what he says publicly about the U.S. line, is the thing to watch.
The bottom line is, long Chinese debt, long Chinese equities, with a little powder dry. Short firms with heavy state ownership against the possibility of a Hu housecleaning, and the mining sector with its potential for worker unrest.
(Gregory Fossedal is chief investment officer of the Democratic Century Fund, managed by the Emerging Markets Group. His firm may hold some of the securities mentioned his articles. Individual investors should contact their own professional advisor before making any decisions to buy or sell these or any related securities.)