China's Hu Jintao, already head of state and the ruling Communist Party, has consolidated his control over the world's largest and most prosperous dicatorship with his recent ascension to defacto head of the military after the resignation of party elder Jiang Zemin.

The impact, paradoxically, should be bullish for investors. The Chinese market seemed to confirm this reading, surging more than five percent in the days following the announcement that Jiang was stepping down. Similar rallies followed the first two parts of Hu's accession in 2001-2003.

Chinese equities had slumped in recent months during an apparent power struggle over Jiang's desire -- at the strong urging of Jiang's cronies, of course -- to hang on to his post as chairman of the Central Military Commission. The battle, covered best by The New York Times, sapped the leadership's strength for two years. This was a time at which China faces major challenges at home (slowing down an economy it fears is overheating) and abroad (notably in trade and security relationships with the U.S.).

Furthermore, investors took it for granted -- correctly -- that there were at least some ideological differences underlying this struggle. The fact of such divisions at the top suggested the possibility of instability; in a phrase, regime risk.

The resolution of the last major threat to Hu's power from the old regime brings a sigh of relief, on two levels.

First, it ends the struggle. Even if Hu had few differences with Jiang over policy, periods of communist-party wrangling and infighting are not, historically, those in which China's economy or market flourish. China's true leaps forward have tended to take place only when the new leadership -- Deng in the 1980s, Jiang in the 1990s -- has truly consolidated itself.

Second, Hu may not be the apparatchik semi-Jiang-clone many Western observers assume.

Hu, for example, emphasizes China's relationship with its immediate neighbors, as against Jiang's desire for close U.S. ties. This is not necessarily bad for investors. China's neighbors are more nervous than the U.S. about the expansion of the country's naval arsenal, and have more to worry about regarding the North Korean nuclear program, of which China is a key sponsor and beneficiary. Exporters like Korea and Japan are suffering from the artificially weak Chinese renminbi yuan, and will raise pressures for a transition to free-market floating.

Hu is more of a redistributor on economic policy, a mild minus for growth. This may have the effect, however, of solidifying the country's transition to a true market economy. by contrast, the continued imbalances in growth, and the enrichment of a few party hacks in favored positions to take over state-owned enterprises, or profit from gouging them, would have threatened a reversal.

Most important, Hu appears to be a facto democratizer. He's no Yeltsin -- meaning, he apparently has no plan, or even conscious desire, to bring about competitive elections. But he may be a Gorbachev -- a ruler who will make incremental and grudging concessions to freedom and political competition, concessions that lead to more dramatic changes than even their author envisioned.

Indeed, shortly after coming to power, Hu launched a program of municipal and city elections that allowed candidates not approved by the Communist Party to get on the ballot and, in a number of cases, win. Importantly, in a series of 2001-2002 speeches, Hu presented this glasnost as a means of combating corruption.

He's right -- the mess that exists on many Chinese corporate balance sheets will be cleaned up much more quickly if there's a freer press to ferret out the dirt. Faster still if local party officials are at least starting to face the prospect of removal in competitive elections.

There's a virtual consensus among the Communist Party that something needs to be done about cronyism and corruption to ward off a social revolution. This message is repeated by Western investors and customers every day. To the extent that the party and society see political competition as a key tool in fighting corruption, democracy and press freedom can be advanced as merely practical, non-ideological methods: a tactic, not a strategy.

These limited elections were stalled as the power struggle with Jiang re-heated, and virtually suspended amidst the crisis over the SARS virus. Revealingly, though, Hu fought the virus by canning a number of state officials responsible for covering SARS up, and opening up developments to medical and media scrutiny. The successful rollback and reversal of what might have been a society-wide disaster by use of these methods probably has as much as anything to do with Hu's consolidation -- and the resurgent interest in an open society as, simply, the only practical way to generate wealth, health, and happiness.

Hu's succession won't be bullish for everyone. There are messy and downright sleazy balance sheets at state- and military-owned firms throughout the economy. Hu will crack down on these -- probably including China Life, Sinopec, and Semiconductor International, to name just a few -- and the results will not be pretty. Their loss, however, will be the general economy's gain.

The bottom line is, China's debilitating power struggle and prospects for a blowup were a good reason to be short the country over the last 5-6 months. The removal of that struggle, and the accession of Hu, means it's time to cover the shorts and go long.

Gregory Fossedal manages international investment research for Emerging Markets Group. His clients may (and usually do) hold long and short positions in many of the investment securities and opportunities mentioned in his reports. The Bottom Line is compiled from sources we believe to be reliable, but no representation is made that they are necessarily accurate or complete. Investors should perform their own due diligence and consult their own professional advisor before buying or selling any securities. Mr. Fossedal's opinions are entirely his own, and are not necessarily those of UPI or EMG. Furthermore, they are subject to change without notice.