What does China’s CCP Congress mean for investors?

Summary

We have been discussing the news flowing out of China’s 20^th Party Congress (held from 16^th-22^nd October) at length over the past few weeks. While the press and market reaction was poor, there are some positives from the event that are underappreciated by the press/market. While political and structural risks remain elevated, we have kept our China weighting at neutral given positive signs of economic bottoming and improving liquidity data.

The event is important as the Congress report outlines high level, long term structural issues with more detailed economic policy due for release at the Central Economic Work Conference in December this year. Xi’s speech to Congress, a shortened version of the report, signalled no dramatic changes to policy. In addition, the new Central Committee of the CCP and Politburo Standing Committee were both announced at the conclusion of Congress. The Standing Committee, which is the apex of China’s political system, were all Xi loyalists and with Shanghai Party chief Li Qiang touted as the next Premier being the major surprise.

Below we list the positive, negative and neutral points which emerged from Congress.

Positives

• Reiteration of development (implies economic growth) as a top priority and the real economy is the cornerstone (vs. pessimistic market speculations that this will come in second place after national security, or China would reject opening up). However, it seems that they’re calibrating the balance between development and security.
• Continued emphasis on education, technology and innovation (in fact, higher priority vs. 19th congress). More support to semis and IT.
• Relationship between consumption and investment: strengthen the fundamental role of consumption in economic development and the key role of investment in optimizing the supply structure.
• Reiterated target that in 2035, China’s GDP per capita should reach that of a “medium-level developed country”, target was first announced 3yrs ago with no specific definitions, but it will carry more weight given it’s in the opening report of the congress this time.

Negatives

• Major shock was the composition of the new Politburo Standing Committee – all belong to Xi’s faction, some are relatively young (by CCP standards) and perceived to lack central government experience.
• The market reacted negatively to the news despite this direction of travel having been made clear years earlier when Xi changed the Party constitution in 2018 to remove the two term limit for the presidency. However, most China watchers were hoping to see some checks and balances in the Politburo make-up as per historic precedent.
• Foreign investors were quick to dump Chinese stocks once the list of Standing Committee members was announced – especially H-shares and US ADRs, while A-share declines were more moderate.
• Appointments broke unwritten precedent that any officials aged 67 or under at the time of a party congress can be promoted, while anyone aged 68 or over is expected to retire (Xi turned 69 this year). 
• Appeared to double down on zero covid.
• Plenty of mentions of common prosperity (basic requirement of China’s modernisation).
• Reiterates policy continuity in the housing market (housing is for living, not for speculation).
• More security (89 times in his speech, vs. 55 in 2017), less reform (48 vs. 69 before). National security a higher priority (vs. 19th congress). The concept of national security is comprehensive, covering political, economic, military, technology, cultural and social aspects and integrating external and domestic issues. Including key aspects like energy, self-reliance of food & technology.
• Relationship between the market and the government: the market plays a determining role in resource allocation, and the role of the government should be improved.

Neutral

• Relationship between SOE and non-SOE sectors: consolidate and develop the public sector economy; meanwhile, encourage, support and guide the non-public sector economy.
• Chinese-style modernisation (more mentions vs. 19th congress).
• Li Qiang is the de facto Premier (officially appointed in March next year). He is a Xi loyalist and the ex-Shanghai chief who presided over the city’s 2-month lockdown earlier this year. Li will be expected to steer the economy out of its current slump, relying on extensive experience in regional economic management in a number of business hubs.
• No change of rhetoric on Taiwan – will make every effort to foster a peaceful resolution, seek more exchanges with Taiwan, but use of force cannot be ruled out.

Other observations

• First time Xi didn’t read out full report (1.8h speech yesterday vs 3.3h 5yr ago), full report is more important – hasn’t released the official version, a 72pg version available on internet.
• Zhao Lijian (spokesman for Chinese Ministry of Foreign Affairs) said: “China will never follow the old path of being closed and rigid, instead China’s door will only open wider. We will maintain high quality development and high level of opening up to provide a sustainable driving force for global economy.”

Conclusions

Long term investment implications

• Congress does nothing to reduce the risk of China becoming stuck in the so-called “middle income trap”.
• No clear sign that historic tendency for pragmatic policy making will change.
• Cold War 2.0 with US to persist.

Short term investment implications

• Short to medium term returns will be driven by the economy and Covid.