Speaking at a recent institutional forum in Tokyo organised by AsianInvestor, Song In-kyu says that worries about risk in equity markets and poor returns on global fixed income mean alternatives will play a growing role in overseas allocations.

Song left the $90 billion Korea Post last month to join PricewaterhouseCoopers in Seoul.

Today, Korea Post allocates 4% to alternatives, while the National Pension Service has an 8% allocation, and some pension funds have budgeted up to 15%. But all of these allocations are on the rise.

Song notes that Korean insurance firms collectively have about $400 billion in assets, while pension funds have $650 billion. Each category sees net contributions of at least $50 billion each year.

“The NPS already has $340 billion,” Song notes. “Where can the money go?”

In addition to the lack of interest in adding global sovereign debt or equities, big funds also want access to real assets. The NPS, for example, has been active in real estate and infrastructure. NPS, Korea Post and Korea Investment Corporation have been investing in private equity. At some point, smaller pension funds and the insurance companies will follow suit, Song predicts.

Hedge funds are the most difficult asset class, as NPS is barred from these by its statutes, and only Korea Post and KIC are investing in these in a meaningful way. But the increasing acceptance of hedge funds among Korean regulators means retail investors are starting to tap funds of hedge funds, and at some point the NPS will probably be allowed to invest in these as well.

So far the biggest beneficiaries have been domestic private-equity and real-estate groups. Overseas alternatives are seen as high risk. However, institutional investors learned hard lessons in 2008 and 2011, and they are coming around to the idea that global alternatives are desirable to diversify portfolio risk, rather than simply to gain returns.

As a result, as Korean institutions broaden their mandates, they will begin with the senior-most tranches in alternative capital structures. Then they will broaden into mezzanine debt, and then equity. Song says distressed asset buying (in the sense that it is buyers, not the assets themselves, in distress) will become a more popular theme. The KIC has pioneered this for Korean investors.

The NPS, meanwhile, has been the early mover in infrastructure, at first domestically and now overseas. Initial results have been positive so Song expects more institutions to look at this asset class. Opportunities will be found both by tapping distressed sellers from Europe and the US, as well as trying to get aboard the North American shale gas revolution. European bank recapitalisation efforts will also throw up more opportunities as they sell non-core assets, particularly in markets like Australia, where European banks are in retreat.

“Even Japan investments will become attractive,” Song says, acknowledging the local audience at the AsianInvestor event. He says Japanese assets can serve as useful diversifiers or stabilisers in an international portfolio, notably in real estate, either direct or through real-estate investment trusts.

It will likely need to do much more, and soon, given the terrible data. Analysts surveyed by Bloomberg were expecting year-on-year import growth of 10.9% and export growth of 8.5% — far higher than the actual print of 0.3% and 4.9%, respectively.

The slow growth in imports helped China’s trade surplus to beat expectations, but that is hardly a positive sign. With a return to recession in the eurozone, China is more reliant on domestic demand than ever.

There was plenty of other bad news. Industrial production also missed estimates, with year-on-year growth during April of 9.3%, compared to expectations of 12.2%. Power output grew just 0.7%, down from 7.7% during March, while fixed asset investment and retail sales also missed.

Sell-side analysts have largely welcomed the move to cut reserve requirements, but it is a fairly weak response in the face of such bleak numbers. It will mean banks have more money to lend, of course, but it will do little to make their customers more keen to borrow it.

“The constraint to growth last year was policy restrictions, but now it has shifted to demand limitation,” said Credit Suisse analyst Dong Tao in a note last month. “Outside of local governments’ infrastructure projects, the interest in making investments now in the private sector is low. Among the infrastructure projects, although some construction activities have been resumed, we have observed few new projects getting started — unusually low for the second year of a five-year plan cycle.”

Indeed, some of the worst news came in the April figures for new loans, which at Rmb682 billion were Rmb100 billion shy of analysts’ estimates.

Even the Chinese seem to agree that freeing up lending is a small gesture. After the last reserve cut in March, Zhou Xiaochuan, China’s central bank governor, was keen to stress that such actions are about hedging changes in foreign exchange reserves and should not be considered monetary easing.

That may suggest additional measures are set to follow. “Thankfully, the downtrend in inflation allows Beijing to do so,” said HSBC in a research note sent out on Friday. “We expect more aggressive delivery of policy stimulus via quantitative easing, substantial tax breaks, fiscal spending and investment deregulation in the coming months to ensure a soft landing.”

Most analysts still expect that China will ensure a soft landing, with the economy bottoming out this quarter, but the risks of a hard landing are rising with each disappointing piece of data.

One worry is the negative feedback between slowing property investment and weak external demand, according to Commerzbank analyst Charlie Lay. “These two forces could augment each other and result in a more pronounced downturn,” he said in a note on Friday. “If the external environment continues to deteriorate and lead to a continued slump in exports, we could see the authorities relax liquidity conditions even further.”

With so many global investors and businesses pinning their hopes on Chinese growth, there is a lot of money riding on an improvement. China bears, meanwhile, are grinning wider than ever, particularly as US data continues to surprise on the upside.

Company chief executive Richard David points out that the commercial property market is still nascent in China and dominated by foreign investment.

“Real estate is a domestic industry,” he says. “As markets mature, they tend to have far more input from domestic capital than foreign capital. It is the case in [China’s] residential sector, but not yet in the commercial sector, where there is still a huge amount of foreign investment.”

From 2007 to 2011 investment in commercial real estate in China totalled Rmb3.1 trillion, or 17.7% of total property investment, finds the National Bureau of Statistics. By comparison, the commercial sector accounted for 59% of the overall US property market, and 78% in Japan.

Following the Chinese government’s decision in 2008 to open up its commercial real estate market to the domestic insurance and pension fund sectors, David expects the pace of change to quicken over the next five years.

Accordingly TCT registered locally a wholly owned foreign enterprise, Treasury Holdings (Shanghai) Property Management, and obtained its RMB private equity licence in February this year. It means TCT now has the flexibility to raise capital onshore and offshore across a diverse range of investor profiles.

Most listed foreign investors in China’s commercial real estate sector are Hong Kong and Singapore firms, with names including Hang Lung, Hutchison Whampoa, Shui On, TCT, Capita Retail China Trust, Capita Malls Asia (Sing), and Perennial China Retail Trust.

Unlisted foreign investors are far more diverse and have been exclusively raising capital offshore. They often invest in joint-venture partnerships or into existing platforms or to provide pre-IPO seed capital. These investors include Gaw Capital, Harvest Capital, Canada Pension Plan Investment Board, Warburg Pincus, Forum Capital and Carlyle.

Another factor that drove TCT to apply for an RMB private equity licence was that the government started to tighten liquidity to commercial real estate late last year.

“In the first half of last year, the government made a clear distinction between residential housing and commercial real estate in terms of liquidity,” David notes. “But in the third quarter of last year, the government moved from restraining liquidity to the residential sector to making no distinction [with commercial property].”

He says authorities are making sure that banks do not make any new property loans over Rmb30 million, a sum he argues you can’t do much with in China’s commercial real estate sector.

“For the two transactions we did last year we did them with bank loans, including loans from Chinese banks,” he notes. “If we had settled them in the second half of last year or any time this year, we wouldn’t have been able to buy these properties.”

TCT has its core commercial assets located centrally in Shanghai’s business districts. It also makes investment in second-tier cities such as Qingdao and Xi’an, although for the office sector the firm does not see much opportunity outside of first-tier cities.

“For our business the certainty of recurrent income is important, so having a strong tenancy group is part of our strategy and down-side risk protection,” David says. “More than 80% of our tenants are fortune-500 companies and multi-national companies. But in second- and third-tier cities, you will be far more reliant on local companies.”

“We exerted downsize risk protection by investing substantially in Shanghai as China’s major commercial real estate market. Shanghai is now an internationally competitive commercial real estate market. If 80-90% of our assets are in Shanghai, then we are very comfortable with that.”

“Indeed, while top-line macro data appears strong, underneath the economy has begun to experience the same destabilising financial engineering that preceded the 1998 financial crisis,” wrote Sean Darby, chief global equity strategist at Jefferies in a report on April 19.

The current account moved into deficit during the first quarter of 2012, which, as Darby pointed out, “has always been an important turning point for emerging market investors”. Export volumes have declined, partly due to a strong rupiah, and most worrying, there has been a significant deterioration in the income position, largely caused by Indonesian companies remitting interest payments to foreign investors.

“A similar scenario occurred in 1996-97 in the lead-up to the 1998 Asian financial crisis,” said Darby.

His warnings are cautiously contrarian, and Darby concedes that his bearish call is “early”, but argues that it is necessary when an “overcrowded” carry trade that has pushed the Indonesian equity market to its previous highs following the 2008 credit crisis, “appears to be immune … to bad news”. The equity market rose 6.4% in US dollar terms during 2011, and local government bond yields have fallen from more than 10% to about 6% during the past couple of years.

But Darby reminded investors that Indonesian market prices also suffered a “sharp whiplash” during 2008 as financial contagion reversed the carry trade, forcing fund managers to sell shares and currency at the same time.

The good news has already been reflected in upgrades to investment-grade status by the rating agencies, Fitch (in December 2011) and Moody’s (in January 2012).

Annual GDP growth is expected to be around 6.5% during the next two years — although below the official target of 7% to 8% — and the economy is predominantly driven by domestic consumption rather than exports, providing a buffer against a worsening of conditions in Europe or the US. The country’s external debt has fallen from 140% of GDP in 2001 to 30% today, and foreign exchange reserves exceed $110 billion.

And beyond these numbers, despite persistent problems about governance, corruption and physical infrastructure, Indonesia has, Darby concedes, “just about everything that an investor could wish for: it’s rich in commodities, has excellent [youthful] demographics and a healthy banking system”.

But since 2008, inflationary pressures have led to higher domestic interest rates than in developed countries, and these have attracted overseas flows into the banking system and domestic bonds. More than 30% of government bonds are held by foreigners.

Although some of that excess liquidity has been sterilised by the Bank of Indonesia, exchange rate appreciation has absorbed the rest — worsening the terms of trade.

In addition, Indonesian companies have taken advantage of lower offshore interest rates and strong investor demand in the international bond markets. Although this makes sense, there is a danger that they may be caught out by currency mismatches between revenues and debt costs if the rupiah were to weaken.

Darby is clearly not afraid of an imminent crisis, but his reminder that progress is neither inevitable nor smooth is time

This generation of entrepreneurs that have grown up amid the expansion are now reaching an age where they must contemplate the challenges of passing their wealth on to successive generations.

To help meet this need, many international banks in the region have instituted education programmes to reach out to the children of their clients. These efforts focus on the theory and practicalities of managing significant wealth. While welcomed in most cases, there may be some understandable scepticism around the independence of this advice, with many families asking: “Would my peers give me different advice than my banker?”

Unlike their wealthy counterparts in Europe and America, where there is significant “old money” made generations ago that offers many useful examples, Asia’s new wealthy have fewer local models to learn from for managing the succession of family wealth and build a legacy through philanthropic giving.

To address this challenge, Tsinghua University and the Kai Feng Foundation co-founded the Tsinghua Kaifeng Family Heritage Center (TKFHC) in late 2011, dedicated to paving the way for family heritage development in the country. Through educational programmes, a research agenda and small discussion forums, they aim to facilitate a peer-to-peer dialogue between wealthy Chinese and international families for their mutual benefit.

The idea of families helping families, and building a global network to serve this purpose, has struck a chord. An example of this cooperation was Peggy Dulany Rockefeller’s visit to India in January and Hong Kong and China in February to meet some of the country’s wealthy individuals, as part of the Global Philanthropists Circle programme. The Rockefeller Foundation was registered in New York in 1913 and has now reached its sixth generation of descendants.

This year’s programme also includes a trip to London and Paris for an opportunity to meet several international families and family heritage experts to discuss how businesses are run in the context of the family as a controlling shareholder. Rockefeller will also meet family office chief executives to understand first-hand the infrastructure supporting successful wealth-owner families. Representatives from the Rothschild, Poniatowski, Bamford and Desmarais families will take part, as well as Martin Jenkins of Oxford Place, which advises wealthy families.

While mutual benefit to the families is a worthy aim, a key difference is the focus on inspiring Chinese wealthy to give back to society in innovative ways. China’s continued economic growth brings challenges to the wider community, some of which can be addressed by philanthropic giving.

By fostering leadership and responsibility at the family level, TKFHC hopes to see initiatives developed that are positive for the families in transferring wealth effectively, but that also benefit the wider population.

These sentiments are echoed in recent comments by Microsoft founder Bill Gates – “Remember what you have received. Forget what you gave” – citing a Chinese proverb to describe the growing popularity of philanthropy in China.

Gates believes China will surprise the world in its embrace of philanthropy, observing in a recent interview with Xinhua that “there is noteworthy philanthropy going on at all levels of society in China, not just among the very fortunate”

Chinese investors remain attracted to all that glitters, even as the price of gold has soared. “The shortage in supply has been deepening very fast; from 48 tonnes in 2007 to 400 tonnes in 2011,” said Song Xin, chief executive of China Gold International, the listing unit of China National Gold, one of the country’s biggest gold producers.

According to the China Gold Association, China’s gold mines produced a combined 361 tonnes of the yellow metal last year, which was 5.8% more than the year before, but not nearly enough to meet the 33% growth in the country’s consumption of bullion, which totalled 761 tonnes.

The increased demand is highest for bullion and coins. “Our customers are high-net-worth individuals as well as common householders,” said Song. “They seem to have lost faith in the stock markets, so they turn to buy physical gold as an investment or as gifts for family members.”

Indeed, no commodity has more value to the Chinese than gold. Gold bracelets are the most popular gifts for newborn babies and brides, and gold zodiac statues are preferred gifts during Chinese New Year or any other occasion.

Moreover, China’s stock markets have been one of the world’s worst performers during the past two years, bond markets are still underdeveloped, deposit rates are negative in real terms and even the long-favoured property market has shown signs of wobbliness.

“China’s fast economic growth has meant that many people have accumulated lots of wealth,” said Albert Cheng, managing director of the Far East for the World Gold Council. “And they have to tuck the money somewhere.”

The Chinese government is also reckoned to be topping up its gold reserves on a continuing basis, even though China’s central bank rarely publicly announces its gold purchases, said Johann Peter Santer, managing director at Superfund.

Demand for gold is also high in Hong Kong, according to Santer. “It took me two years to finally get two gold panda statues from the Bank of China in Hong Kong,” he said. “Every time I went to the main branch, it was always sold out, until one day there were only two left.”

Santer estimates the price of gold will exceed $3,000 an ounce during the next two to three years. “This is good news for us gold producers; we are not worrying about our sales,” said Song of China Gold. “However, the costs of mergers and acquisitions are also growing.”

The company, which is listed in both Toronto and Hong Kong, has been actively seeking overseas M&A opportunities.

“We are looking to buy gold mines with an existing capacity of around 100 tonnes and good potential to expand further,” he said. “We are also interested in some prospecting projects and copper mines, since copper is also in big demand in China. In terms of regions, we like Southeast Asia, the US, Canada and some African and South American countries where Chinese companies already have a well-established presence.

“The investment environment in Southeast Asia is poor, but the region has very good resources and it is very close to China. The developed countries, although have very high standard on environmental and labour requirements and high requiring prices but the profits tend to be stable.”

The new Catalog will take effect on January 30, 2012, which is the fifth revision, replacing the 2007 Catalog (The first one was released in 1995). Foreign invested enterprises approved prior to the effective date will not be effected. However, any changes to existing foreign invested projects that take effect after the effective date must comply with the terms of the new Catalog.

In accordance with the new Catalog, China will cut down restrictions on foreign investment by allowing them to invest in more sectors while lifting caps on the proportion of foreign capital in some sectors.Meanwhile, China will continue to welcome foreign investors to high-end manufacturing and modern service industries. Ihe Guidance also encourages them to invest in recycling industries.

However, the government will withdraw support for foreign capital in auto manufacturing because of the need of the healthy development of domestic auto making.It will neither support foreign investment in the sectors of polycrystalline silicon and coal chemical due to concerns of industrial overcapacity and repeated construction, as per the Catalog.

In light of regional development gaps, China will roll out a fine-tuned policy for the central and western regions in the future.

As explained by the NDRC, the new Catalog reflects the following changes:
1. Continued openness. This continues the trend towards opening up of the economy, consistent with China’s WTO commitments and the need to make use of advanced foreign technology. In the new Catalog,three items were added to the encouraged category, while seven items were removed from the restricted category and one item was removed from the prohibited category. In addition, where joint ventures are required, the required Chinese share was reduced in eleven cases and was not increased in any case.

2. Modernization and technical advance in the manufacturing sector. Consistent with the 12th Five Year Plan, the Catalog focuses heavily on promotion of the traditional manufacturing sector. In particular, advanced technology in textiles, chemicals and equipment have been added to the encouraged category. The deletions from the encouraged category reflect the government’s desire to prevent excessive investment in conventional manufacturing technology, particularly where there is extensive current investment by foreign enterprises. This goal is reflected by the deletion of vehicle manufacturing from the encouraged category. The government also intends to prevent excessive investment in certain “trendy” sectors. This goal is reflected by deletion of mono crystalline silicon and chemical processing of coal from the encouraged category.

3. Promotion of strategic new industries. A central goal of the 12th Five Year Plan is to move China beyond reliance on traditional manufacturing and onto strategic new industries that will mark the manufacturing world of the next several decades. The following seven such strategic industries have been identified:
Alternative fuel cars:hybrid cars and electric cars as well as better fuel-cell batteries;
Biotechnology: biomedicines, new vaccines, and advanced medical equipment;
Environmental and energy-saving technologies: energy efficiency, pollution control, clean coal, waste-matter recycling and seawater usage;
Alternative energy: ext-generation nuclear power plants, solar power, wind power, smart grids and bioenergy;
Advanced materials: rare earths, special-usage glass, high-performance steel, high-performance fibres and composites, engineering plastic, nano and superconducting materials;
New-generation information technology: cloud computing technology, high-end software, virtual technology and new display systems; and
High-end equipment manufacturing: Aircraft, high-speed rail, satellites and offshore oil/gas equipment.

4. Modern service industry. Service businesses that have a direct, practical value to the Chinese people or to China industry will be encouraged. Among the new entries in the encouraged category are:
Electric car fueling stations
Enterprise start-up consulting
Intellectual property consulting
Marine oil spill cleanup technology
Vocational skill training
In addition, medical enterprises and financial leasing have been removed from the restricted category.

5. Adaptation to differences in regional development. The basic approach of the Catalog is actually concentrated on the development of the already advanced coastal region. The goal of pushing China to high technology modernization conflicts with the extremely low state of development in the Western, Central and Northeast Regions, where the vast majority of the Chinese people actually live. For development in these regions, the government will need to take a different approach to foreign investment. For example, low value added, high labor content manufacturing that is strongly discouraged for the East may be permitted or even encouraged in the less advanced Western and Central regions.

In the first 11 months of 2011, China attracted USD103.77 billion of foreign direct investment, up 13.15 percent from a year earlier.During the same period, the country approved the establishment of 25,086 foreign-invested companies, up 3.23 percent year on year.

Some Chinese companies, especially those tarred by allegations of fraud and misconduct, apparently feel that they are stuck in a vicious circle — they release the least information possible for fear of spooking investors further, while investors, lacking sufficient knowledge, respond to any negative news by selling their holdings.

The most likely companies to go private include family-run businesses or those with a relatively small number of controlling shareholders. Stock exchanges in the US will see the most delistings, according to Kroll, a risk consultancy.

Indeed, there are incentives for firms to quit US exchanges and relist in other markets like Hong Kong. “Hong Kong-listed stocks are trading at a 40% to 50% premium to those listed in the US, although the spread has narrowed from a 70% premium a year ago,” said Mark Tobin, a California-based analyst at Roth Capital Partners, an advisory firm.

“We continue to view privatisations as an ongoing trend and expect additional transactions during 2012, driven by a number of catalysts, including a loosening of China’s credit markets and increased interest from companies,” he said.

Privatisation creates growing opportunities for due diligence firms. According to Colum Bancroft, managing director of Kroll’s Greater China financial investigations practice, there are a lot more clients, including private equity firms and auditing committees of listed companies, asking for a financial health check for target companies.

“Their main concerns are the asset quality of the target companies and how reliable the numbers [in the financial statements] are. Since footnoting [supplementary financial and non-financial disclosure] requirements are not very specific in China, it creates lots of potential loopholes,” said Bancroft.

China has the second-highest proportion of companies affected by fraud, exceeded only by Africa in 2011. Chinese companies traditionally have high staff turnover, Kroll said in its global fraud report, which can make it harder to catch and prevent fraud. At the other end of the payscale, China also has a very high rate of fraud perpetrated by senior executives, which are even harder to prevent.

Once an alleged fraud is detected it is hard for institutional investors without an on-the-ground presence in China to find out what exactly is going on. “Investors often respond to negative news with selling, selling and selling, which may not be the appropriate action in some cases,” said Violet Ho, senior managing director of Kroll’s Greater China business intelligence practice.

While the accuracy of financial statements may have been questioned by many, the lack of disclosure of non-financial information is also a big issue. Chinese executives often believe the less information they disclose, the fewer mistakes will be found.

To make the situation worse, many Chinese companies don’t see any incentive to engage with investors to repair their damaged reputation, noted Ho. “In some cases, key principals of listed Chinese companies have this kind of sentiment: It’s a business that I founded, I built and in which I still own a big chunk. Why should I let anyone else interfere with how I run the business.”

Indeed, some Chinese companies have decided to delist simply because they prefer to operate in the entrepreneurial way they did before becoming listed.

Jack Ma, chairman of Alibaba, said the motivation for delisting its business-to-business unit is to “be free from the pressure of market expectations, earnings visibility and share price fluctuations”.

That gives a heads-up for Chinese companies planning for an IPO — it is worth questioning whether they are capable of managing the pressure of market expectations.

Since Bo’s removal, Chinese social media exploded in speculation about the mysterious death of a young Ferrari driver in Beijing, rumored to be Bo Xilai’s son, and even claimed that Bo sympathizers in the Politburo unsuccessfully tried to stage a coup in retaliation to Bo’s removal.

In our last article, we outlined the importance of China’s leadership succession, arguing that underneath the stable veneer of China’s one-Party rule lies a competitive political struggle to control the heart of the Chinese state. In this article, we explain why the Chinese Communist Party removed Bo Xilai and discuss what these events might tell us about the incoming Party Chairman Xi Jinping.

Why the Communist Party fired Bo Xilai

The Communist Party chose to remove Bo Xilai as Chongqing Party chief to sideline a national distraction and expunge one of the Party’s biggest political liabilities. Prior to Bo’s firing, his police chief and confidant, Wang Lijun, unsuccessfully tried to escape to the United States consulate in Chengdu, fleeing charges relating to corruption and harvesting human organs, among other counts.

Only after the United States denied Wang Lijun asylum did it became clear that Bo’s anticorruption campaigns in Chongqing often relied on a host of grisly authoritarian tactics led by Wang Lijun, including torturing political rivals, appropriating private property in the name of the state, and censuring fellow Party officials for their ostensible lack of ideological rectitude.

The day before Bo Xilai’s dismissal, Wen Jiabao subtly condemned Bo’s heavy-handed approach, claiming that these types of coercive tactics could lead China down a dangerous road of paranoia and political upheaval, much like that of the Cultural Revolution. China’s leaders’ willingness to sack such a prominent member of their own ranks shows their implicit fear of Maoist-style ideological campaigns.

From this perspective, Bo’s firing can be seen as Chinese leadership’s repudiation of Bo’s unique brand of ‘Chongqing School’ revivalism. In all likelihood, key players such as Hu Jintao, Wen Jiabao and Xi Jinping recognize that charismatic leaders like Bo can capitalize on the legitimate desires of the Chinese people – like the goal of anti-corruption – to sow paranoia, encourage politically motivated purges, and aggrandize themselves to feed their own cult of personality and expand their power.

The message is clear: Ideological battles might have turned the Communist Party into the omnipresent force that it is in China today, but these types of old-school conflicts could derail the awesome progress of the Chinese economy over the past thirty years and sink Chinese international aspirations. By overstepping his ideological bounds, Bo set the stage for his own dismissal.

Xi Jinping: Laying low to rise above

In all of the confusion that took place over the last month, many China observers have wondered where Xi Jinping went. The de facto incoming General Secretary of the Communist Party has had a quiet month after returning from his trip to America, which many in China saw as the international legitimization of China’s sixth generation of Party leaders. Even the Global Times, one of China’s more hawkish and nationalist news outlets, openly called for clarity in the face of allegations of party infighting, denigrating the tepid response from the Party about China’s coup rumors.

Despite this criticism, staying quiet may constitute a coherent strategy on behalf of Xi Jinping. In facing these rumors, Chinese leadership encountered the timeless paradox of the strong: To acknowledge rumors is to give them (and their proponents) political credibility; to ignore the rumors creates the space necessary for these rumors to grow and take on a life of their own.

By sacking Bo Xilai and staying reticent about coup rumors, Xi Jinping and his fellow leaders have attempted to triage between both of these competing goals. On one hand, sacking Bo is an implicit acknowledgment of the corrosive effect of Bo’s policies on the Chinese body politic. On the other hand, by ignoring the associated coup rumors that went along with Bo’s firing, Party bosses have been able to give Chinese citizens the impression of normalcy, delegitimizing the coup rumors by not responding to them.

Today, there are no tanks on the streets and no restrictions on how average Chinese citizens can go about their lives. Projecting this image of stability and continuity in the face of challenges to their own power is a coherent strategy employed by Xi Jinping to create distance from himself and the fallout associated with Bo Xilai’s firing.

As the last month has shown, China is far from a unified monolith, seamlessly handing power from one generation to the next. Unlike elections in the West, where every gaffe and conflict among candidates dominates the news cycle, China’s succession is just as fiercely contested but takes place outside the view of the public eye.

The eruption of the Bo Xilai scandal serves as a stark reminder that just as Western leaders fear China’s political regression to Maoism, Party elites also feel threatened by the stark historical memory of the Cultural Revolution.

Further, while many in the West are content to let their imaginations run wild about purported coups and high drama in Beijing, the Party likely realizes that a show of normalcy and strength will give it the space it needs to usher in the 6^th generation cadres and help China navigate this tumultuous period of domestic politics.

“Making house prices more affordable to middle- to low-income families is likely to be high on his agenda, as there is too much complaint about prices in Hong Kong now,” said Adrian Ngan, a property analyst at Citic.

Leung, 57, posted a message on Facebook after winning the election on Sunday, saying that he would address the problem of income inequality, high inflation and property prices, which have all led to growing resentment among the city’s working population.

Leung is hardly the people’s choice — more like the lesser of two evils — but he will need to build public support if he is to see the end of his full term in 2017. Styling himself as a man of the people, he has written on his blog about an ordinary upbringing as the son of a policeman, and even claimed that as an 11-year-old boy he sold plastic flowers with his mother to supplement the family’s income.

By contrast, his main election opponent, Henry Tang, is the wealthy scion of a Shanghai textile family. His luxurious Hong Kong mansion helped to spark his downfall, thanks to allegations that he had built an illegal 2,000 square-foot underground wine cellar.

It is hardly surprising that property is such an emotive issue in Hong Kong. During the past few decades, the property sector has been a pillar of Hong Kong’s economy, both in terms of its contribution to GDP and to the government’s revenue.

However, while real estate assets have generated substantial wealth for the city’s big property developers and wealthier individuals, there are still tens of thousands of people living in cage homes. Soaring property prices have made Hong Kong one of the most expensive cities in the world — and with one of the biggest wealth gaps.

Unlike his predecessors, Leung has a deep understanding of Hong Kong’s property market. He opened his own real estate surveyors in 1993, was the former chairman of Hong Kong’s Royal Institute of Chartered Surveyors and has also advised some local Chinese governments on land reform.

While it is still early to speculate whether Leung will make radical changes to existing government policies, he may implement necessary changes to improve Hong Kong’s economic structure and competitiveness, noted Ngan.

“This could mean that the inherited importance of the property sector and property companies in Hong Kong could be de-emphasised over the longer term,” he said.

“Currently, Hong Kong relies too heavily on the property sector. The government has 50% to 60% of its revenue coming from land sales and mortgages are a major business in Hong Kong’s banking sector, which is the city’s other economic pillar.”

Ngan reckons that in the short to medium term the business environment for property companies will not suddenly becoming hostile. At this stage, there is hardly any other sector ready to replace property in supporting the city’s economy.

Still, Leung may face challenges from Hong Kong developers. Property tycoon Li Ka-shing has publicly voiced his support for Tang and refused to drop his support for him even after China threw its weight behind Leung. Hong Kong’s richest man is clearly not a fan, but in the current environment that may be the best thing going for the new chief executive.