AUSTRALIAN shares followed a global sell-off on Thursday, reflecting the uncertainty coursing through markets as China kicked off a once-in-a-decade leadership transition and Barack Obama's post-election victory high rapidly gave way to concerns that a "fiscal cliff" of looming tax increases and spending cuts could cripple the US economic recovery.
Despite Greece's fractured parliament passing austerity measures on Thursday that will give it access to bailout funds and stave off a default, and latest unemployment figures showing the Australian economy added more than 10,000 new jobs last month, the benchmark All Ordinaries index closed 32.6 points, or 0.7 per cent, lower at 4483.8.
Voters returned Mr Obama to office despite a stuttering economy and a stubbornly high unemployment rate, but the defeated Mitt Romney's Republican party retained its majority in the lower house, and the prospect of the president and Congress struggling to agree on a resolution - needed by year's end - sent Wall Street stocks down 2.4 per cent on Wednesday.
The Congressional Budget Office in the US has estimated that the fiscal cliff could result in a drag of up to $US600 billion next year, or 4 per cent of gross domestic product.
In Beijing, China's outgoing President Hu Jintao - who is expected to be succeeded by vice-president Xi Jinping - warned corruption remained the biggest threat the legitimacy of the ruling Communist Party, as he formally opened the party's national congress.
The week-long congress will usher in a new set of leaders, who will likely oversee China overtaking the US as the world's largest economy.
But the transition is being held in a backdrop of mounting social issues, including a growing wealth gap, rising costs of living and perceptions of rampant corruption. "If we fail to handle [corruption] well, it could prove fatal to the party, and even cause the collapse of the party and the fall of the state," Mr Hu said.
China also faces an urgent need to structurally reform an economy that favours its state-owned enterprises and to shift the economy's reliance on investment-led growth more to domestic consumption.
"Reform of the political structure is an important part of China's overall reform," Mr Hu said. "We must continue to make both active and prudent efforts to carry out the reform of the political structure and make people's democracy more extensive, fuller in scope and sounder in practice."
Qu Hongbin, HSBC's chief economist for China, said the new leadership could liberalise interest rates, and push to make the yuan freely convertible within five years. "There are clear signs that China's new leaders will make speeding up reform top of their policy agenda in the coming years," he said in a report.
But others point out that internal factional struggles - laid bare by the Bo Xilai scandal - would mean the new leadership under Mr Xi would take time to consolidate its power before being able to make meaningful policy decisions.
"If the markets hope that structural changes could take place soon after March next year ... my advice is 'don't hold your breath'," said Tao Dong, a Credit Suisse economist.
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