Xi’s the one: what China’s Party Congress meant for investors

If any confirmation were needed that the 20^th National Congress of the Chinese Communist Party would break the mould of decades of transitions in the Party leadership, it came during Saturday’s closing ceremony.

In an extraordinarily rare display, former President Hu Jintao was escorted from the stage in front of more than 2,000 delegates. State news agency Xinhua reported it was due to his health; even so, it was still a dramatic break from the party’s usual careful display of choreographed routine.

And it wasn’t the only way the Congress broke with precedent.

As was widely anticipated, leader Xi Jinping secured the revisions to the party’s constitution that will allow him to remain party leader and military commander-in-chief for at least another five years, which will in turn allow him to remain president for the same period.

All the General Secretary’s Men

Xi’s move to formally make himself – in theory – president for life has long been on the cards, but it’s in the makeup of the new standing committee of the Politburo that other crucial shifts have taken place.

Before this year’s Congress, only three of its seven members were Xi’s allies in the party’s complex factional politics – including Xi himself.

Now, however, three of the four new appointees have previously worked either together with or under Xi at the provincial level. Most notably, Li Keqiang – current Prime Minister and Hu Jintao protégé – is out, as is the pro-market reformer Wang Yang.

Among the four new members is Shanghai Party boss Li Qiang, now seen as a frontrunner to be the next prime minister. In another break with tradition, he has not previously served as vice premier,

With loyalty perhaps paramount, this means that going forward it will be Xi calling the shots to an even greater extent. Who he places into key policy roles will give us clues as to his plans for the vast Chinese economy.

Under China’s Leninist system, where party and state are fused, the prime ministership is technically a state role (like the presidency). We’ll know who is set for the premiership come next March’s annual meeting of China’s legislature, a body technically distinct from the party known as the National People’s Congress.

That’s also when we’ll know who’s replacing economic tsar Liu He, banking regulator Guo Shuqing and central bank governor Yi Gang, with whoever slots into these roles set to play key roles in determining the future of one of biggest markets in the world.

Forecasting the future trajectory of any organisation that has come under the sway of a single man to such a great extent is difficult.

Suffice to say that in any institution where decision-making is concentrated to this extent, information flows are likely to be degraded, and the risk grows that policies are determined and deployed without sufficient challenge.   

 Hitting the wall?

What does all this mean for markets?

Immediately following the Congress, investors didn’t like what they saw. The offshore renminbi was down close to 1%, while the HSCEI Index of Chinese companies listed in Hong Kong lost a whopping 7.3%.

The HSCI, an index representing all companies listed in Hong Kong, has meanwhile recovered somewhat, but remains 5% below its level last Friday and has hit a 13-year low, as we can see below:

However, we don’t see this as a buying opportunity, as it reflects weaker medium-term growth prospects.

Meanwhile, signs are growing that the government may move away from its Zero-Covid Strategy in 2023Q2. This has buoyed the HSCEI Index and erased post-Congress losses. Under normal circumstances, we would have participated in the re-opening euphoria, but the long-term implications from the Congress kept us on the side-lines.