China: Takeaways from the 20th Party Congress
The Communist Party of China (CPC) concluded its 20th National Congress on the 22nd of October, marking the end of an old term and the start of a new term.
The Communist Party of China (CPC) concluded its 20th National Congress on the 22nd of October, marking the end of an old term and the start of a new term. This time it caught special attention as it is the first time the leader of China has secured a third term, despite the two term rule, since Mao Zedong. What is the plan for next five years or even longer term? Will there be any directional change? Will policy-driven crack-down on particular sectors continue?
Please read on as Andrea Yang, GFICC Research Analyst covering China, breaks down some takeaways.
A more power concentrated leadership
Xi Jinping was appointed for a third term as General Secretary of the CPC and as the Chairman of the Central Military Committee, which was well anticipated. At the same time, the 24 members elected in the new Political Bureau and the 6 members elected in the new Political Standing Committee (PSC) have long standing ties with Xi, and for the first time since 1997, no females were elected.
In addition, Xi did not follow the long standing rule that “people aged 67 or below stay and that people aged 68 or above go”. He retired Li Keqiang and Wang Yang, who are both 67 years old, while he kept 72 year old Zhang Youxia, as the first Vice Chairman of the military committee, who is said to have a very close relationship with Xi. These appointments suggest that, after ten years’ presidency and anti-corruption campaign, Xi should be able to consolidate power and have full control of key personnel arrangement.
While Xi’s third term was well expected, such power concentrated leadership is different from expectations. Markets expected there would be at least one member of the PSC who is not within Xi’s inner circle, someone to help balance power. However, Xi did not choose any outsider for his new PSC team, suggesting that Xi is seeking full power consolidation without any exception.
All of the above representatives have experience working with Xi Jinping and have a strong background as technocrats. According to previous interviews and media appearances, they also demonstrate caution when speaking to the public and have a strong ability to execute. Again, these traits are consistent with what was highlighted above: that political team members are likely to share similar ideology with Xi and are good executors.
The road map ahead
Economic development to be the top priority. The 20th Party Congress political report indicates that, “From now on, the No. 1 task of the Party is to lead the nation to achieve a strong modernized China”. The report reiterated the two-step arrangement towards a strong socialist modern country by the middle of the century. With specified goals to: (1) build up a basic socialist modernization country by 2035; (2) build up a strong socialist modern country by 2049.
Upon completion of the first step, GDP per capita should be double of that in 2020 by 2035 (which was announced by Xi Jinping in Nov 2020), suggesting average annual GDP growth of ~5.5% during 2021-2025 and ~5% during 2021-2035. While such growth targets are less likely to be achieved, as a result of the three years’ disruptions from COVID, the report suggests the Party is still working towards that direction, which may dispel the concerns on the directional change.
In particular, the Party will focus on the following areas to achieve high quality development: (1) Technology; (2) Opening up; (3) Market orientation and Private sector;(4) Legal system; (5) Carbon neutralization; (6) National security.
Technology is high up in the report. It is not surprising to see technology gain such attention in the development plan, and we think it reflects the considerations on: (1) with continued tensions in US-China relationship, especially on technology, China has to prepare for the worse; (2) China’s aging population suggests that growth driven by low-end manufacturing (relying on the demographic dividend) will not work anymore. Therefore, since they will promote high end manufacturing as the new engine that will compensate for the losses resulting from the diminishing demographic dividend—technological development is needed. We are likely to see accelerated spending and inputs on technology related areas and sectors in the coming years.
Will national security and ideology outweigh growth? We think not. With a thorough analysis of the paragraph written on national security, we note that the statement has applications beyond the military. The report defines national security as a series of securities including food security, energy security, supply chain security, etc. While national security definitely has a higher priority and a broader meaning compared to the 19th Party Congress, this does not come as a surprise as national security is a key concern globally (given persistent disruptions from COVID and geopolitical conflicts). That said, market participants will remain cautious until there is more evidence that there is no renewed bias against the private sector and more evidence that growth can regain momentum.
No new information on COVID Policy. The report gives no indication of a change in the strict zero-COVID policy. That said, we believe the authorities are already well aware of the increasing public grievance and persistent negative impact on the economy. Now that, in this new term, the Party ranks economic development as the most important task, it is possible to see a gradual loosening of COVID policy to support economic growth. This shift will require progress in the elderly vaccination rate and oral drug preparation.
Taiwan is still a concern. The report reiterates that China will continue to strive for peaceful reunification with the greatest sincerity and the upmost effort; however, there was no promise to renounce the use of force or other necessary measures. While China seems to strike up the same tune, by spotlighting Taiwan early in the report, the Party is trying to reaffirm its bottom line on the Taiwan issue and give warnings to any party that helps with Taiwan’s independence. This suggests that episodes of tension (like the one registered during US House Speaker Nancy Pelosi’s visit to Taiwan) may indeed reemerge in the future.
Bottom line—Preparing for the worst but hoping for the best
Overall, we received mixed signals from the 20th Party Congress. Ambiguity surrounding policy-making may continue, but, on the other hand, the efficiency of policy implementation may improve—since economic development is still the top priority and the economic team mostly consists of solid technocrats with strong execution ability.
Shortly after the Party Congress, various regulatory bodies continuously sent market-friendly signals emphasizing support of the FDI, private sector, opening up, etc. Moreover, we’ve seen progress in medical preparation as the first inhaled vaccine (R&D and produced by CanSinoBIO in China) was approved to be used in Shanghai as the booster. This booster is reported to have better protection, fewer side effects, lower costs, and greater ease of storage and deployment. Furthermore, the resumption of Macau tourism coupled with the increase in international flights, suggests higher tolerance for cross boarder travel. We maintain our base case for: (1) a meaningful deviation from current policy setting after the NPC, National People’s Congress, in March of next year; (2) expect clear GDP growth acceleration in 2023 versus this year, supported by continued strong infrastructure investment, mild recovery in property investment and a visible rebound of consumption/services.