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Observations on China's 19th Party Congress

Key Takeaways

  • Greater reform intensity along the same policy lines. The Party Congress did not yield a material change in policy direction, and we expect continued focus on targeted reforms which seek to promote deleveraging, reduce excess capacity by addressing the dominance of state-owned enterprises (SOEs), and facilitate movement up the value chain. Personnel shifts in senior governing bodies may help the economic reform agenda gain momentum, including improved progress in the anti-corruption program. Economic reform may also lead to further financial market openness, though steps will likely be slow and incremental.
 
  • Focus on quality, efficiency and sustainability of growth. Policymakers are increasingly focused on the sustainability, efficiency and quality of growth, with emphasis on higher productivity, innovation, better allocation of resources, higher profitability and balanced development between different regions, and between urban and rural areas.
 
  • Personnel changes point to a consolidation of power for President Xi. New appointments at key governing bodies include individuals considered to be key advisors and confidantes of President Xi. This will strengthen President Xi’s platform to implement his political, economic and foreign policy agenda.
 
  • Open question on leadership beyond 2022. Past political transitions have involved the appointment of new candidates who are of an age that would indicate potential leadership succession, and in line with Chinese political norms, individuals aged 68 or over retire. The age of new appointments unveiled at this Party Congress do not point to a successor to President Xi or Premier Li Keqiang in 2022, if the retirement age convention is to be maintained. This leaves open the question of who will succeed President Xi when his second term ends in 2022, or whether he will seek reappointment.

Investment Potential in Equity Markets

Over the medium- to long-term, we believe reform intensity, deleveraging efforts, and a commitment to environmental protection will improve the operating environment for businesses, creating a new growth equilibrium that is balanced by domestic consumption, innovation, and an assimilation of “old” and “new” industries. And as the market impacts of reforms materialize we expect increased investment opportunities to emerge, particularly in consumer-oriented and innovation-led industries. Below we outline what we view as the key implications of the current policy agenda:  

  • Consumption-led Growth. Successful deleveraging, containment of financial risks, and supply-side reforms may improve China’s economic health and corporates’ financial health. This may ultimately pave the way for a more efficient allocation of resources, helping China to transition to consumption-led growth. 
 
  • Expansion of “New” Economy Sectors. Market-oriented industry consolidation and improved governance are facilitating innovation in new technologies, including automation, artificial intelligence (AI), and electric vehicles, all of which may signal a new wave of industrialization in China. 

 


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