How will the imminent leadership transition affect the Chinese market?

The market has already priced in death for China (FXI, quote). Policy clarity will be key to taking the market higher as commodities hang in the balance. Overall, there were new lows overnight for the Chinese market.

Image courtesy Fastily: http://commons.wikimedia.org/wiki/User:Fastily

Beijing's Great Hall Of The People, the Chinese Parliament building

Meanwhile if you follow one of the market’s top technical strategists — Tom DeMark, the Chinese market has set up for one of the most powerful Buy signals since December 2011, and previous to that, late fall 2008 when the emerging markets leader bottomed out and went on to rally 106% into fall 2009.

The Chinese market is back to December 2008 levels right now going into a major holiday. The “Golden Week” will have markets closed, but this has historically been a catalyst to the Chinese market and economy. More importantly the Communist Party of China has a scheduled leadership shuffle in two weeks.

Because of term and age limit restrictions, seven of the nine members of the Politburo are retiring, including Hu Jintao, China’s president, and Wen Jiabao, the premier. Expectations are for current Vice President Xi Jinping, 59, and Vice Premier Li Keqiang, 57, to take over the top spots.

They will inherit the weakest economic growth since Deng Xiaoping three decades ago. As Bloomberg Businessweek notes:

“data from exports to production signal the government will struggle this year to reach its 7.5% expansion target. The retiring top echelon took power in 2003 with growth above 9% and their predecessors were bequeathed a 14% pace in 1993.”

There is no room to regress on policy moves. China’s 13th five-year plan will be announced at the Congress, and large Chinese companies have a need to understand the government’s policy objectives so that they can plan their 2013 budgets on spending: capex etc, which are typically tied up that week.

I wouldn’t be short into October in China… just sayin’!