Strategy & economics
What are the political and policy ramifications of the 19th Chinese Communist Party Congress?
Our Global Economist, Janet Mui, writes her monthly market review on the culmination of the 19th Chinese Communist Party Congress.
Key points following the 19th Chinese Communist Party Congress:
- Xi secured political victory and near-absolute power consolidation at the 19th Chinese Communist Party Congress. By endorsing no clear successor, Xi has set himself up to remain the most powerful figure in the CCP for many years to come.
- “Xi’s Thought” effectively means his own thoughts rather than collective wisdom. As the most powerful person in China, it is not an exaggeration to state that Xi, alone, will determine China’s domestic and foreign policy. This raises the issue of key-man risk.
- The lack of a growth target suggests Xi’s policy focus has moved away from quantitative to qualitative aspects of life in China. Economic stability may no longer be enough, but providing a better quality of life for the country’s rising middle class is key.
- While the Chinese government envisions opening up the economy and, more generally, providing a better life for its people, the desire of the CCP to maintain power means it is exerting ever-greater control over every day life.
- Environment protection and policies to support the consumption levels of the rising middle class will be prioritised. With rising consumption, Chinese demand will become more beneficial to the world economy.
The 19th Chinese Communist Party (CCP) Congress concluded with two missing pieces to the puzzle, with both having important political and policy ramifications. The first missing piece is the apparent lack of a leadership succession plan after the end of Xi Jinping’s second term in 2022. Traditionally, the CCP includes the next generation of leaders in the 7-member Politburo Standing Committee during the incumbent’s second term. However, none of the five newly promoted members will be young enough to serve in the decade after Xi’s term ends, given the retirement age constraint. It is hard to believe there is no suitable candidate out of 1.4 billion people, so it appears that Xi has no plan to retire from the political scene after the 20th CCP Congress. By endorsing no clear successor, Xi has set himself up to remain the most powerful figure in the CCP for many years to come, even after the end of his second term.
Xi’s ultimate power consolidation leaves little room to challenge him
The memberships of the new Politburo Standing Committee and the Central Politburo highlight a political victory and near-absolute power consolidation by Xi, after years during which he has battled with the lingering power of former CCP general secretary, Jiang Zemin. The anti-corruption campaign over the past five years has helped Xi clear away most of the major figures in Jiang’s legacy clan who were his political opponents. As a result, only one member of the new Politburo Standing Committee is affiliated with Jiang; moreover, many of Jiang’s legacy clan were not retained in the Central Politburo.
It is not only that Xi has ensured total control over high level officials in the CCP and the continuity of his power at the 19th Congress; he has also incorporated his ideology, “Xi Jinping’s Thought on Socialism with Chinese Characteristics for a New Era”, in the CCP constitution. Xi is the only living leader to achieve this since Mao Zedong, making him one of the most influential leaders in the history of CCP. So what is “Xi Jinping’s Thought”? It is not complicated at all to understand this ideology – simply, “Xi’s Thought” effectively means his own thoughts rather than collective wisdom. Since his “Thought” is incorporated into the constitution, whoever is against Xi will be regarded as against the CCP. It is likely that the political cleansing of Xi’s opponents (including any officials who dare to challenge him) will continue, but it will be easier to effect going forward. As the most powerful person in China, it is not an exaggeration to state that Xi, alone, will determine China’s domestic and foreign policy. This raises the issue of key-man risk.
The lack of a growth target – quality over quantity
To ensure the longevity of one-party communist rule in China, it is important that the regime is able to block the emergence of alternative political movements and also to repress dissatisfied citizens. Economic stability may no longer be enough, but providing a better quality of life for the country’s rising middle class is key. That leads us to the second missing piece of the puzzle: the lack of a growth target. Xi’s policy focus has evidently moved away from setting a numerical growth target and is instead focusing on more qualitative aspects of life in China – for instance, a cleaner environment, better social safety net, improved public services, national security and an uplifting culture. Also, as growth is likely to continue slowing during the economic transition from being manufacturing/investment-driven to being more services oriented, discarding a growth target removes the need to defend it. Previous attempts to meet growth targets have resulted in mini-cycles brought about by sporadic fiscal stimulus, generally resulting in higher leverage, speculation and asset price inflation. It would seem that by abandoning the growth target, Xi is trying to remove the requirement for short term, potentially destabilising policy adjustments.
Desire of the CCP to exert more control over its citizens
The policy objective of the 19th Congress was to address the tension between ‘unbalanced and inadequate development’ and the ‘people’s ever-growing needs for a better life’. While the definition of a ‘better life’ is debatable, China is exerting ever-more control over the lives of its citizens. China is a heavily censored country, and almost all social media platforms, search engines and news channels from the Western world are banned (including Google, Facebook, YouTube, Twitter, Bloomberg, BBC, WSJ). Political discussions are heavily monitored, negative comments on authorities are quickly removed and Western articles on Xi (e.g. from The Economist and Time magazine) are mostly banned. While this is not new, censorship has become significantly stricter during Xi’s leadership. For instance, WhatsApp was blocked as recently as September 2017, just ahead of the 19th Party Congress. However, this approach is likely to become increasingly contentious. With globalisation and improving educational levels in China, the rising hunger for knowledge and truth, alongside an increasing desire to be connected and heard globally, are not being met. At the same time and equally controversially, the Chinese government is increasingly deploying technology, such as facial recognition, to monitor the daily life of its citizens. In the financial arena, stricter capital controls have been implemented, affecting both individuals and companies to deter capital outflows, as evidenced by the crackdown on outbound foreign direct investment in early 2017. As a result, investors are being prevented from pursuing external investment opportunities, which has had the unintended outcome of causing inflation in domestic asset prices. The point is, while the Chinese government envisions opening up the economy and, more generally, providing a better life for its people, the desire of the CCP to maintain power means it is exerting ever-greater control over or intervention in everyday life, which may lead to undesired consequences.
So what does this all mean for investors? Xi’s power consolidation and tighter control of the economy mean that he has a greater ability to impose his fundamental political agenda. According to Bloomberg, Xi used the term ‘the environment’ or similar words 89 times in his opening address, while his predecessor Hu Jintao mentioned it 74 times in his 2012 address. Reference to ’the economy’, meanwhile, dropped to 70 from 104 five years ago. It must be assumed, therefore, that protection of the environment will be a key theme for China in the coming years, if not decades. In addition, policies to support the consumption levels of the rising middle class will also be key. These are likely to include improving the social safety net, the insurance system and healthcare provision. Meanwhile, Xi’s affirmation that ’housing is for living rather than speculation’', suggests there will be more construction of affordable housing and a continuation of property purchase restrictions in top tier cities. Simultaneously, with no explicit growth target, the commitment to further deleveraging, capacity cuts, economic rebalancing and environmental protection, implies that overall growth will continue to slow. However, the rising share of services within GDP (now over 50%) should mean that growth is less volatile. It is also likely that with rising consumption, Chinese demand will become more beneficial to the world economy. On the other hand, transitioning state-owned enterprises (SOEs) into private ownership and deepening monetary and financial reform may take longer to realise, given the desire for the government to remain in full control.
At the end of the day, if Xi’s consolidation of power remains effective for the next decade, there will be no rush to fulfil these politically difficult reforms and he will pace things accordingly. Whether this proves acceptable to the Chinese people remains to be seen.
Janet Mui, CFA is the global economist at Cazenove Capital, the wealth management division of Schroders. Janet is responsible for the formulation and communication of Cazenove’s top-down views. She is a member of the investment committee that oversees strategic and tactical asset allocation at Cazenove. Janet is also the macro spokesperson and a regular commentator at major media outlets including the BBC, Bloomberg and CNBC.
This article is issued by Cazenove Capital which is part of the Schroder Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.