Hello. My name is Gabriela Santos, and I'm a Global Market Strategist at JP Morgan Asset Management. Welcome to On the Minds of Investors. Today's topic is "What are the investment implications of China's Party Congress?"

As usual, China has been going through its own economic policy and political cycle. While the rest of the global economy is slowing down and even facing the possibility of a recession ahead due to elevated inflation and rapid policy tightening, China's economy began to slow down over a year ago and already went through a contraction in the second quarter.

In the third quarter, economic data showed a re-acceleration beginning, aided by low inflation and policy easing. The question for investors is, exactly how much speed can China's economy pick up this quarter and in 2023? And this depends on an improvement in local consumer and business confidence.

Politically, other countries are embarking on some key transitions. There is the US midterm elections, the change in UK and Italian prime ministers. But China has just concluded its twice a decade political reshuffle, the Party Congress. And what are its investment implications for China's economy and markets?

In the second quarter of 2021, China's economy grew 7.7% year-over-year. But eventually it decelerated to only 0.4% a year later, the second quarter of this year and, actually, a contraction of 7.3% measured as quarter-over-quarter annualized. This week's data show China's economy picked up some speed in the third quarter with GDP increasing 3.9% year-over-year as activity and mobility improved from those April lows.

Looking beneath the hood helps shed some light on some nuances here. Positives-- the manufacturing side of the economy expanded 5.2%, helped in large part by exports, which contributed 27% to third quarter growth. Policy support also continued helping manufacturing and infrastructure investment, which grew over 10% year-over-year in September.

Room for improvement-- the services side of the economy grew a more modest 3.2%. Retail sales disappointed in September, growing only 2.5%. And the unemployment rate moved up 20 basis points to 5.5%.

Challenges-- housing continued its rapid deceleration with residential real estate investment contracting over 12% in September. Now boosting domestic consumption, strengthening the labor market, and smoothing the pace of real estate deceleration really requires an improvement in local consumer and business confidence.

Now that we've removed political uncertainty with the conclusion of China's Party Congress, investors are focused on whether policy uncertainty can also decrease. And really it's about questions around modifications to zero COVID, the implementations of reforms in the real estate sector, and, really, the long-term success of this focus on innovation.

Now that the country's leadership structure has been settled for the next five years, some of this may actually become clearer in the weeks ahead. Investors will now turn their attention to the economic conference in December and then the National People's Congress in March.

Initial market reaction was very negative the day after the conclusion of the Party Congress. The MSCI China fell 8.2%, and the Chinese Yuan depreciated due to both concerns around policy and also technical factors. But the truth is local and foreign investor confidence is already very low. This is reflected in MSCI China's price-to-earnings which is 29% below its 20-year average, and in the Chinese Yuan which is at its weakest level since 2008.

So any small shift towards lowering policy uncertainty could already spark a market rebound. But, ultimately, investing in China is about focusing on the new, new China sectors with a very clear understanding of the portfolio risks involved.