Following China’s Communist Party Congress, will President Xi’s new term take a different economic approach or prove to be more of the same?
The Chinese Communist Party Congress has now concluded and was quickly followed by the election of a new Politburo and Standing Committee. The party’s constitution will now include a reference to “Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era”, the first such honoring of a current leader since Mao Zedong, and further consolidating Xi’s grip on the institution. The new Politburo and Standing Committee will be highly supportive of Xi and contains no obvious short-term successors. This means that Xi, now starting on his second five-year term as party general secretary, might choose to stay in power even longer.
“Chinese policy-making is a much more patchwork process than might appear.”
But does the party congress set the scene for a different approach to political or economic management, or should we expect more of the same? How effective is Chinese economic management likely to be in future, in a changing global economic environment? And how will Xi’s efforts to “make China great again” through bolstering its global economic and military presence feed back into its domestic economy?
One clear issue is that of control, as exemplified by Xi’s assertion of authority over the party and his crackdown on consumption. Another crucial consideration is the new membership of the party’s Politburo and Standing Committee. Xi also wants to bring policy-making even more fully under party control but we consider Chinese policy-making to be a much more patchwork process than might appear.
The increasing prominence given to small leading groups – in particular, that for deepening reform – show a belief that concentrating power will work but we argue there are also risks. Concentrating power should make it easier to implement difficult reforms but could eventually also limit the ability of the economy to respond to unexpected events ahead.
“Xi is now in a position to direct policy in whatever direction he wants.”
Looking at Xi’s long-term economic goals allows us to assess China’s current economic position more clearly. We believe that still high expected levels of economic growth will make it easier for the People’s Bank of China (PBoC) and other regulators to tighten monetary policy without fear of precipitating a slowdown. We also believe that debt problems will take a long time to solve and that a debt crisis (though unlikely) could be triggered by external as well as domestic factors.
Any new Chinese political and economic policy directions are bound to bring investment implications. China is in a sense conducting the biggest-ever political experiment by searching for an alternative to open democracy, the final form of which remains unknown. The process will take time and this means that investors will have to accept the current patchwork approach to policy. Although, as noted above, Xi is in a very good position to implement radical reform, there are few specific indications of a change of course.
“The opening up of the services sector still appears to be a priority in coming years”
Based on Xi’s opening speech to the party congress, the opening up of the services sector still appears to be a priority in coming years, as does a greater role for markets and further SOE reform. But we do not think that major changes to, for example, the capital account or currency regime are likely. We think that multi-pronged efforts to reduce leverage will continue, with monetary policy unlikely to be loosened significantly.
Against this background, we are broadly positive on Chinese equities, with a number of sectors offering interesting opportunities and a number of longer-term investment “themes” emerging, for example around infrastructure spending. As regards bonds, there will be continued areas of risk in China, but we remain positive on emerging market bonds in general. We do not foresee any sharp changes in the exchange rate.