New leadership in China and the US

What should businesses expect?

Last week, the world’s two largest economies – the United States and China, which together account for more than a third of global output – were gripped by imminent political transition.

Barack Obama gained around 51% of the popular vote in the United States presidential election, defeating his Republican challenger Mitt Romney by more than 2.5m votes (or 332 electoral college votes to 206 under the US electoral system) to win a second term in office.

Meanwhile in China, the State Council began its 18th national congress which will see leadership of the world’s most populous country transferred to Xi Jinping, who will become President next March and Li Keqiang, who will become Prime Minister.

So in some ways, little has changed. But what does it mean for businesses?

The lack of jobs will be high up Obama’s second-term agenda. No incumbent US President had been elected with a higher unemployment rate since Franklin Roosevelt in 1936, when the economy was still in the throes of the Great Depression.

Today, the US economy is limping along with growth of around 2% simply not fast enough to make much of a dent in the jobless figure. The economy added 171,000 jobs in October, but the unemployment rate edged back up to 7.9%.

However, Obama’s more pressing concern is the ‘fiscal cliff’ of tax rises and spending cuts which would kick in on 1January 2013. According to the Congressional Budget Office, the combined effect would wipe 3% off US economic output, almost certainly plunging the economy back into recession, and see the unemployment rate shoot back up to 9.1%.

Obama is due to sit down with congressional leaders this week to thrash out a deal, but not before he has met with a number of large corporate CEOs. Having been accused of being ‘anti-business’ in his first term, this is an important move.

As well as reducing the deficit, Obama identified reforming the tax code as one of the four key challenges of his second term in his victory speech. It is thought that he will demand tax increases for the rich in any deal made on spending cuts and there is some evidence that the Republicans’ position is softening.

The success of these negotiations may well define his presidency.

With growth still running at around 7.5%, the new Chinese leadership does not envisage radical reform. Indeed, in his address, outgoing president Hu Jintao stressed the need to “enhance the vitality of the state-owned sector of the economy and its capacity to leverage and influence the economy”.

This will disappoint those who hoped to see key sectors such as energy, finance, media and telecommunications open up more to private investment.

It also seems to jar with a recent World Bank report, conducted in partnership with the Development Research Center of China’s State Council, which stressed the need to reform and restructure state enterprises and banks, develop the private sector, promote competition, deepen reforms in the land, labour, and financial markets and develop a more robust legal system.

In a nod to the World Bank report, Hu did suggest the market should play a bigger role in guiding the economy as growth rates become more sustainable. He also set a target to double per capita urban and rural incomes from 2010 levels by 2020.

But it would appear big economic or political reform is off the agenda for now.

With the global economy so delicately poised, business leaders will be hoping the newly mandated leaders in each nation navigate past the political challenges that await, to focus on the needs of businesses in their own economies.

Measures to boost economic dynamism and develop business growth environments could have positive repercussions around the world.