The political goings-on in Washington, DC, can sometimes seem all-consuming. It is difficult not to keep one eye on Twitter for President Trump’s latest market-moving opinion on health insurance or the pharma industry. We would all like to know whether tax reform will get through the US Congress and deliver a boost to corporate America. We stay tuned to the latest Fed-speak on the inflation conundrum, and the race to assume the chair at the Federal Reserve. We might even spare a moment to fret about the Nafta stalemate.
In the meantime, however, more than 2,000 delegates are attending the largest gathering of legislators anywhere on the planet, a gathering that will determine the leadership and broad policy goals of the world’s second-biggest economy.
A ‘New Era’ for China
The National Congress of the Communist Party of China is, at heart, a big cabinet reshuffle. The real economic and administrative detail usually gets worked out over the following months, at the Central Economic Working Conference and the National People’s Congress. But this 19th gathering feels more substantial than most. When President Xi Jinping said in his opening speech that China is entering a “new era,” it was more than just political bombast.
The Politburo Standing Committee looks set for big changes, given the ages of the incumbents, and President Xi’s anti-corruption purge may alter the complexion of the Central Committee, too. China watchers are particularly focused on Premier Li Keqiang and Wang Qishan, leader of the anti-corruption campaign, as well on any hints that Xi himself might try to serve as President beyond 2022. This news should emerge tomorrow.
What is clear is that President Xi has spent five years consolidating authority and associating his tenure with important economic and financial initiatives. These range from the Shanghai-Hong Kong Stock Exchange “Connect” systems, the liberalising of the onshore bond market, an overhaul of financial regulation and the managed transition and deleveraging of the economy, all the way up to the ambitious “One Belt, One Road” trade-and-development strategy.
MSCI is set to include more than 200 A-share large caps in its Emerging Markets Index next year. Can investors expect more progress on liberalisation and reform once the Congress is over?
More Regulation or More Liberalisation?
In his opening speech, President Xi pledged to open the financial-liberalisation door “wider and wider,” and to improve the “quality and efficiency” of Chinese growth. His comments echoed those of People’s Bank of China Governor Zhou Xiaochuan a week earlier, who anticipated “bigger steps to increase the market access for financial institutions.”
On the ground, however, we have seen more regulatory intervention recently. We expect that removing systematic risk and ensuring financial-market stability will top the new agenda, which implies stricter regulation rather than more innovation and liberalisation. The mission, structure and personnel of the new super-regulator, the Financial Stability Committee, is likely to be more clearly articulated to facilitate that.
As the credit-rating downgrade by Moody’s back in May indicated, China has yet to tackle its credit boom comprehensively. Interest rates have risen, but remain low. So far, deleveraging has only occurred in the banking system and some other financial institutions. We expect it to intensify and expand, especially through the reform of state-owned enterprises (SOEs), where the aim is to shift the focus from growth-at-any-cost to consolidation and capital efficiency.
This is likely to slow growth further as SOE-related investments decline. Expect the government actively to encourage more consumption to offset some of that, through measures such as improved access to consumer finance and lower taxes.
The Last Leg of a Journey
As the authorities balance the competing forces of deleveraging and financial stability, volatility is likely to increase. As President Xi put it last Wednesday, China’s prospects are bright, but its challenges — rapid aging, low productivity growth, income inequality, low consumption and a limited social safety net — are grave.
Nonetheless, China’s ability to look through that volatility is unique. As the US struggles with division in Washington, and Europe faces Brexit to the west, political backsliding to the east, fraught coalitions in Germany, the Netherlands, Austria and Italy, and outright constitutional crisis in Spain, President Xi articulates a vision for 2050 with a proverb that says, “The last leg of a journey marks only its halfway point.”
The scope and potential impact of that vision is why investors should turn their eyes from Twitter to Beijing.
— Joseph V. Amato, President and Chief Investment Officer – Equities, Neuberger Berman
