For most of the year, there has been an oft-repeated refrain among China watchers. Whispered in private meetings with clients or loudly spoken by confident brokers, it goes something like this: “Don’t worry about the economy or markets in 2017 — Beijing won’t let anything bad happen ahead of the Chinese Communist Party [CCP] Congress.”
Much less clear is what happens after the gathering, a once-in-five-years conclave scheduled to convene on Oct. 18 in Beijing.
Now that the date — a secret until Thursday last week — is known, the narrative will need to evolve, with what takes place at the meeting of about 2,300 delegates key to determining China’s course over the next five years.
“There are two big concerns among overseas investors who are interested in China — the yuan and the uncertainties around the party congress,” said Han Tongli (韓同利), chief investment officer at DeepBlue Global Investment Ltd in Hong Kong, which oversees US$200 million. “Once the dust has settled and the uncertainties have gone post-congress, investors will re-evaluate market pricing.”
China’s policymakers have stressed the need for stability and order in financial markets in the lead-up to what is to be the 19th congress, even as they persist with a campaign against leverage endorsed by the country’s top leaders.
Investors have taken comfort in the strengthened yuan and buoyant stocks, betting officials will act swiftly to quash any signs of speculation or upheaval that could distract from the party’s message of prosperity and control.
However, the “Congress Put” keeping markets calm will not last, with the gathering a vehicle to dispense key messages about the party’s vision for China’s future. That could unleash a flurry of policy and regulatory activity once the agenda has been set and the delegates have returned home.
Markets typically see volatility in the wake of party congresses, Goldman Sachs Group Inc said.
Chinese President Xi Jinping (習近平), who also serves as general secretary of the CCP, has been continuously solidifying his power base since his ascension at the 2012 congress, and a key metric for China watchers will be how successful he is in influencing key personnel appointments.
The second critical aspect of the meeting will be the work report delivered on the first day, which sets the priorities for government policy in China for the next half decade.
The importance of this document “can’t be stressed enough,” say analysts at Trivium, a research group cofounded by former Conference Board economist Andrew Polk.
“We are genuinely curious to see what happens here,” they wrote in a preview of the gathering. “Xi has changed tack several times and the debate over economic policy is still raging with no obvious conclusion — stay tuned.”
While the CCP pledged early in Xi’s term to give markets a “decisive” role in shaping the economy, his leadership has seen the party’s control deepened in a broad range of areas, from state-owned enterprises to social media and the military.
Xi’s first term has seen periods of tumult in the markets, with individual investors encouraged to buy into stocks that went from boom to bust in a matter of weeks in the middle of 2015.
Then came the shock devaluation of the yuan, which rattled global markets and exacerbated depreciation pressures on the currency just as China was trying to internationalize it.
Since then, policymakers have been trying to insulate the yuan, first using reserves, then stricter capital controls and monetary tightening to stem its drop.
US President Donald Trump’s election, and his threat to label China a currency manipulator, brought with it a fresh imperative to stem weakness, and the yuan has chartered a steady, strengthening course through this year.
This means the work report will be keenly watched for the tone it adopts on market reforms.
“The guidance won’t come in the form of specific policies, but represent the party consensus on longer-term strategies going forward,” said Aidan Yao (姚遠), a senior economist at AXA Investment Asia Ltd in Hong Kong.
Another key point is language surrounding China’s growth objectives. For market watchers, it is key that the party strike the right balance.
Abandoning an explicit target for the economy without some new pledge to sustain a steady pace of expansion could cast doubt over the outlook for a continuation of the 6 percent plus pace of GDP gains. Still, too aggressive a target might fuel worries about excessive debt.
Similarly, observers will be watching for language on reining in financial risks, where again a balance between pledging to avoid a buildup in leverage while averting a contraction in credit that damages growth might be needed.
On personnel, the reshuffled membership of the CCP’s top body, the standing committee of the Politburo, will be all-important.
Among the key markers to watch:
Whether Xi ally Wang Qishan (王岐山), who has led the anti-corruption drive, stays for another five-year term, despite being beyond the informal retirement age of 68. That could indicate whether Xi stays in power beyond 2022, breaking a recent precedent for CCP leaders to step down after a decade.
How many allies Xi gets on the seven-member panel, and whether the group shrinks — giving Xi greater influence.
Whether a clear potential successor is appointed to the panel. In recent history, the mid-term party congress typically sees the leader-in-waiting established, as Xi himself was in 2007. One man to watch is Chen Miner (陳敏爾), a Xi protege recently elevated to party boss of megapolis Chongqing.
Also key is whether People’s Bank of China Governor Zhou Xiaochuan (周小川) stays on, along with Chinese Premier Li Keqiang (李克強). Li is considered a proponent of market reforms, but has been marginalized by Xi as the Chinese president set up competing bodies overseeing economic and financial policy.
The extent to which the looming party congress has influenced the economy and markets was on display on Thursday, when China’s monthly purchasing managers’ index gauge of manufacturing advanced for last month.
With activity among larger enterprises outpacing that for smaller ones, it might have signaled “the outsized role played by government-affiliated enterprises in sustaining economic conditions during the crucial period” before the gathering, Morgan Stanley analysts wrote in a note.
Economic conditions will probably remain solid until the congress is done, keeping Morgan Stanley “optimistic” on the direction of the offshore yuan and the prospects for higher bond yields.
However, time is running out on that narrative.
“The past five years has seen growth largely driven by spending and an increase in leverage,” Han said. “It’s understandable that Xi spent the first five years focusing on creating an environment that discouraged corruption, but now the market is looking for more.”
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