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#Market Strategy — 26.10.2017

Reading the Tea Leaves of the 19th China Party Congress

Prashant BHAYANI

What are the key takeaways of the 19th China Communist Party?

"Better to go three days without food, than one day without tea." - Chinese proverb.

 

The 19th China Communist Party meeting concluded on 24 October. This event only happens once every five years and lays a political blueprint of potential policy through 2022. This occurs at the important mid-term (end of first year term) of President Xi Jinping’s tenure and one of the most important events in China.

What are the key takeaways?

Firstly, the makeup of the Politburo Standing Committee (PSC), the Committee containing the top leadership of the communist party remains at seven members with five new members. The five new members are a consequence of retirements due to the informal age limit of 68. The members of the PSC are not known till they walk on stage on the last day of the meeting, not quite as riveting as the Oscars, but a dramatic moment nonetheless. All of the new members were from the existing broader 25-member Politburo. My tea at this point is the normal English breakfast to start the day.

Crucially, for the eagle-eyed, and I am not ageist, none of the new members of the PSC are likely successors if we are following recent protocol, as all are above 57 years old. As this would mean they would not be able to serve the two potential, 5-year terms beginning in 2022 that has been customary for Presidents in China without violating the informal age limit. This is intriguing as prior presidents since the 1990s, including Xi as a potential candidate himself, appointed what turned out to be potential successors to the Politburo Standing Committee at the mid-term. This is illustrative of President Xi Jinping’s growing power. It will undoubtedly fuel possible 3rd term speculation for Xi as well. At the same time, a successor can be anointed anytime during his second 5-year term. In fact, there are several potential successors (Chen Miner, Ding Xuexiang, Hu Chunhua) among others on the wider Politburo body of 25 members.

Thirdly, on the other hand, what is not receiving much press or analysis is that the new Politburo Standing Committee does not comprise a key ally, Wang Qishan, who led the anti-corruption drive in government. On the surface, this should not be a surprise, given that he is 69. However, there was speculation that by reappointing him, President Xi Jinping, would signal a possible third term by breaking with the retirement age tradition. Instead, he has kept everyone guessing. The speculation of a 3rd term fits commensurately with his growing clout and will allow him to decide, at a later point, on the succession path at a time and place of his choosing. Clever!

Fourthly, President Xi is only the third ruler (and second since Mao) while in office, to have his name in the party constitution “Xi Jingping Thought on Socialism with Chinese Characteristics for a New Era.” A strong Chinese tea would have been advisable before Xi’s 3.5 hour opening speech, which forcefully advocated his strong policy goals. It was importantly and notably the longest speech in the Party’s history. It should engender coherence and party unity for the second term when many challenges and opportunities will be faced. Clearly the spotlight will be for him to deliver with this greater authority.

Areas of policy focus include restructuring the SOEs, boosting environmental policies, slowing credit growth and shadow banking activities, as well as improving income distribution. These policies entail a lower GDP growth with a focus on better returns on capital. This would be positive for the equity market in the long term. However, the reality is that many of these goals are politically difficult and require a careful balancing act of fiscal policy to offset some of the inevitable growth slowdown. Until now, without his strengthened status, Xi has had reasons not to deliver on the reform agenda at the pace some of his critics would have liked. Now the focus will be clearly on his actions.

In short, the tea (economy) has run hot for years, perhaps too hot, but now the tea master needs to formulate the right blend to deliver the perfect tea.