China Monitor: ‘Five More Years’ Unlikely to Cheer Up Markets

Summary

• We examine policy, politics and markets in this bi-weekly China Monitor.
• The consensus for the upcoming Party Congress is that President Xi Jinping will continue for ‘five more years’ as head of the party, country and army.
• But it is unclear if Xi will leave this Congress as unassailable as in recent years or if there are signs we are over ‘peak Xi’.
• The market outlook is bleak in the case of ‘five more years’ as ideology will continue to trump the economy and reform. Tech regulation, zero-Covid, property restrictions etc. will continue to plague markets.
• CNY could reach 7.50 if the Congress produces no serious measures to boost the economy.

As the Party Congress approaches, the rumour mill of China politics is picking up. In this China Monitor, we consider possible personnel decisions and policy outcomes from the Congress. We also briefly look at the state of the Chinese financial markets in September.

‘Five More Years’ Highly Likely, But Is ‘Peak Xi’ Behind Us?

A main purpose of the Party Congress is to decide leadership posts for the next five years. Members of the Standing Committee and Politburo will likely catch the most attention.

The questions being debated are:

• Will Xi relinquish one of his three top roles? Most observers expect Xi to keep his three leadership roles (of the party, country and army). But a minority believe he is under pressure to relinquish one of them. Surely, the zero-Covid strategy is not helping Xi win supporters lately. But more broadly, a focus on ideology and lack of reform during Xi’s 10 years have irked the clans of previous reformist leaders such as Jiang Zemin and Zhu Rongji. Note that retired leaders still influence personnel decisions made during the Party Congress.
• How many members of the seven-person Standing Committee will be Xi supporters? On the current Committee, most but not all members are Xi supporters. Five of seven are currently known to support Xi (including Xi himself). Most are in their 60s and due to be replaced. There is speculation about how many members of the new Standing Committee will be on Xi’s side. Expectations are for the same number, five, again. But there may only be four, which would signal a reduction in his power.
• Will Xi’s next term be his last, i.e., possibly a lame duck term? No one in the current leadership is immediately capable of taking over from Xi. But this may change by 2027, and eyes are therefore on the promotion to the Standing Committee of younger leaders from the so-called ‘sixth generation’. Such promotions could be seen as a preparation for Xi to stand down in 2027. Were this the case, the countdown on Xi’s leadership would begin. Even in absolutist China, this could make Xi a lame duck.
• Who will take Li Keqiang’s and Liu He’s roles? Over the past 10 years, Premier Li has driven whatever economic reform there has been under Xi. Li is now widely expected to step down from the premiership. The question is how much his successor would continue to push for reform. A similar question hangs over the replacement of the ‘economic czar’ Liu He.
• Who will take over the helm of PBOC? As part of the rotation in leadership roles at all levels, the PBOC governor will also probably change. But this will not happen until March of 2023.  

In summary, the focus of the Party Congress will be on whether Xi emerges as an unassailable leader again, or whether he is ‘over his peak’ but still in command.

‘Five More Years’ Unlikely to Cheer Up Financial Markets  

In terms of policies, we see the Party Congress as more about continuation and consolidation than change. Xi’s policy platform emphasizes ideology first and foremost. The Congress is likely to emphasize such topics as Xi’s vision for ‘common prosperity’ or his signature zero-Covid policy rather than economic reform.

As such, financial market consensus is that the Party Congress will bring no market-boosting news. Policies that have plagued stock markets in past years, such as heavy-handed tech regulation and a crackdown on the property sector, are expected to continue.  

In the immediate aftermath of the Congress, negative newsflow for Chinese markets may even increase. The frozen property sector may continue to generate negative headlines, such as increased bank NPLs or local government vehicles struggling to handle the debt load. Also, with Taiwan’s local elections due in November, we may see renewed geopolitical sabre-rattling between Beijing and Taipei.

Finally, if such market pessimism prevails after the Party Congress, CNY will likely keep falling. Recently, USD/CNH reached a new high of 7.25. The PBOC has intervened since then, and spot is now closer to 7.00 again. But USD/CNH could reach a new high of, say, 7.50 if the Party Congress proves a dud for markets.

China Markets Continued to Fall in September Despite Policy Steps

Chinese markets traded mostly lower in the past few weeks. A few measures were announced to support the property sector, but they were not seen as structural solutions for the sector. In response, the stock and credit market registered a small bounce only, from low levels (Table 1). Meanwhile, PBOC had to intervene in the CNY market. USD/CNY had risen above its previous peak of 7.20, to reach 7.25, but the central bank sold dollars to keep the renminbi stable as the Party Congress approached. In sum, pessimism reigned supreme in Chinese markets in September.

Bert Gochet is a strategist at Macro Hive, specialising in Emerging Markets strategy. Between 2009 and 2017, he was co-head of global EM strategy with a focus on fixed income and currencies at JP Morgan.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)