Overview
China’s 20th Communist Party Congress concluded over the weekend with the confirmation of President Xi Jinping as party general secretary for a third term and the election of a new seven-member Standing Committee.
Growing the economy remains key to China’s prosperity goal
Some commentators have suggested that the consolidation of President Xi’s power and the make-up of the committee mean policy going forward will focus squarely on social issues, i.e. the focus on “common prosperity” of recent years, and that growth policies and innovation will take a back seat. We believe these concerns are misplaced.
President Xi clearly reiterated the importance of growth in a variety of sectors, ranging from emerging and strategic industries like aerospace, IT and biopharmaceuticals to infrastructure and high-end manufacturing. The reference to building a healthier China should positively impact the healthcare sector, along with consumption around culture and activity. Ensuring a sustainable future continues to be a key theme and we expect China to increase its focus as a leader in green and low-carbon technology, which will remain an important part of the economy.
China to continue opening up
While there was no change in the Zero Covid Policy (ZCP), President Xi’s speech also referred to the opening up of China globally, something we expect to take shape through next year. We should not be overly surprised at the pace of the reopening. Going into the Congress meeting, the People’s Daily newspaper published multiple articles about why the ‘Dynamic Zero Covid Policy’ remained in place.
And despite the Congress delivering no overall change, policy tweaks are ongoing: from the move away from full city lockdowns to the potential to reassess policy if the World Health Organisation changes its overarching view on the virus. If Hong Kong’s recent change in approach is successful, this could be trialled in mainland China in the first quarter, which could lead to a sustained change in economic expectations and conditions.
Foreign investors reduce exposure, but domestic investors are net buyers
Markets have, however, sold off. On Monday morning, foreign investor sales through the North-bound Stock Connect totalled 9.25 billion CNY compared to this year’s daily record high of 16 billion CNY. Broker reports suggest that approximately 80 percent of the selling is from EU/US investors.
By contrast, judging by the South-bound Stock Connect numbers, local domestic investors have been net buyers and we think the foreign selling is somewhat overdone. There have been positive signs in recent data, while many companies’ fundamentals remain intact. Indeed, the selling has included a number of cash flow generating and dividend paying companies with no debt.
Bear with us
We are still in a bear market in China and the economic recovery is going to be gradual, so being defensively positioned remains important. Concerns should abate over the coming weeks as more constructive support makes it clear that the economy has not been forgotten. But it will take a little time and may require further clarity on how the new leadership team plans to turn the economy around.
It is to be noted that the Congress will be followed by key economic meetings in the months ahead, starting with the Central Economic Work Conference in December. The People’s Bank Of China (PBOC) still has the tools to support growth where needed, putting China in the opposite position to western countries in terms of its policy trajectory. There may also be more measures from the leadership to support the economy in the near term. The property sector was not specifically mentioned at the Congress, but we have seen several policy actions to support the market in advance of the conference and we expect further support and restructuring to generate a more stable and sustainable position.
With the Congress completed, we expect to see further developments. The path out of the ZCP should emerge, and, geopolitically, the meeting of Presidents Xi and Biden on the margins of the G20 Summit in Bali could see a step towards stabilisation of the relationship.
