China congress will keep investors catastrophizing

Chinese President Xi Jinping pledges an oath to the Constitution after being confirmed president for another term during the fifth plenary session of the National People’s Congress (NPC) at the Great Hall of the People in Beijing, China March 17, 2018. REUTERS/Thomas Peter / File Photo

HONG KONG, Sept 13 (Reuters Breakingviews) – China’s faltering economy puts the set-piece of the country’s political calendar on a big stage. The twice-a-decade Communist Party Congress starting on Oct. 16 is likely to hand an unprecedented third term to President Xi Jinping. Amidst the grandstanding, there will be hard-to-decipher clues on the financial future, too.

The expected week-long gathering will bring together some 2,300 representatives to choose the party’s leadership team and set strategic goals for the next five years and beyond. Most of the action happens behind closed doors. At the end of the confab, seven politicians walked across the stage, thereby unveiling the de facto top decision-making body. Who steps up and down will dictate a broad reshuffle of government posts that will happen next year. Xi’s visit to Central Asia this week, his first foreign trip in two years, suggests he’s comfortable with his grip on power at home.

The congress is primarily about allocating power within the party, but Xi’s speech in 2017 was three-and-a-half hours long and the transcript came in at 69 pages, leaving plenty for investors to muse on. They are looking for answers to urgent questions. What is the roadmap out of China’s growth-sucking zero-Covid policy? Will Beijing use more force to deal with debt problems in the property sector? How determined is the central bank to defend a falling yuan? How much will China double down on what Xi calls its “common prosperity” effort to redistribute wealth, or on its self-sufficiency push?

Some of China’s current economic malaise traces back to the vision Xi outlined at the previous meeting when he confirmed the People’s Republic will transition from a phase of rapid growth to “high-quality” expansion. He stressed the importance of party control over everything and advocated for a stronger public sector while repeating past platitudes made by the party in 2013 about letting market forces play a decisive role.

Investors heard what they wanted, ignored the red flags and felt the shock later as the dizzying ascent of China’s technology and property giants including Alibaba (9988.HK), Didi Global and China Evergrande (3333.HK) was rudely halted last year. The benchmark CSI300 index tracking the largest companies in Shanghai and Shenzhen has delivered annualized returns of less than 4% over the past five years, per Refinitiv data, including reinvested dividends. That’s better than the MSCI Emerging Market Index but barely a third of returns from America’s S&P 500.

Xi’s effort to de-risk the economy and to end wasteful investment has led to more defaults; most recently officials let two small lenders in the northeastern province of Liaoning enter bankruptcy proceedings. To boot, the party has stopped obsessing over logging unrealistically-high national growth rates. The big surprise is the heavy-handedness of officials. Since late 2020, efforts to curb what senior leaders have called the “reckless expansion of capital”, for example, has punished private companies for monopolistic behavior even as state companies carry on consolidating.

Investors may hope that after Xi’s political dominance is reassured, officials will then focus on boosting business confidence. That could prove to be wishful thinking. A similar assumption of the importance of economic stability ahead of the meeting has already been shattered. Xi is shuttering major cities every few months to stamp out Covid-19 outbreaks despite the traumatising impact on services and consumption. For the first time, annual growth may miss the official target of 5.5% by a wide margin. State media trumpet zero-Covid as a “big benevolent policy”. That implies economic disruptions are irrelevant and any easing of restrictions depends on medical breakthroughs or a drastic expansion of hospital capacity.

Barring major social discord, it is hard to see Xi walking back from the current trajectory. Key figures in his economic team may step down from the party’s top echelon and then leave their government roles in March. These could include the cautious, reform-minded Premier Li Keqiang, and Vice Premier Liu He, known for his warnings on financial risks, as well as banking regulator Guo Shuqing, who pushed outright debt caps on property developers. The risk is that replacements might be promoted for their loyalty rather than competence, especially if Xi cares less for the economy than investors assume.

Whatever Xi emphasizes at the meeting this time around, investors might seize on signs that China is sticking even more determinedly to its current unsettling course, instead of cheering for the best.

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CONTEXT NEWS

China’s ruling Communist Party will hold its 20th national congress from Oct. 16, according to state media.

Xi Jinping will visit Kazakhstan and Uzbekistan on Sept. 14-16, the Chinese foreign ministry said on Sept. 12. It will be the Chinese leader’s first foreign trip in more than two years.

Editing by Una Galani and Thomas Shum

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