China's 19th National Congress and the ‘presidential put’

What to expect from China’s Communist Party congress in October 2017

01 Aug 2017

China’s most important political event—the 19th National Congress of the Communist Party of China—will begin on 18th October with more than 2,000 Party delegates from the country attending.

At the 18th Communist Party congress back in 2012, Xi Jinping was anointed China’s leader and it is expected that he will serve for another five-year term.

This year all eyes will be on the new leadership line-up and the policy direction for the next five years.

Xi Jinping’s footprint

In recent months, China has introduced several new policies aimed at reducing leverage. These actions are part of Chinese President Xi Jinping’s reform agenda.

An important difference this time around, as we’ve seen many announcements over the years, is the central party’s higher resolve to unwind the leverage in the economy than at any stage since Xi Jinping came to power.

Xi is now the center of the party, and this is the first time he’s been able to select his key party ministers. In 2013 when he came into power, most members were already in place.

This year, nearly half of the 25 spots in the ruling Politburo and 5 out of 7 on its supreme Standing Committee are replacement possibilities with his people, which means he’s less likely to be challenged should there be missteps.

Those involved in sectors targeted for reform will be more compliant than in the past as the new five-year plan is laid out later this year.

Additionally, for the first time in many years, regulators, the People’s Bank of China (PBOC) and politicians seem very confident about the growth backdrop. If this is their mindset, then you sense the resolve to tackle the leverage issue can be enforced with vigor.

The Chinese ‘presidential put’

We’re contemplating another aspect tied to this topic of resolve, and the consequent behavioral impact on the market.

Over the last fifteen years, long-time China observers have become accustomed to the Chinese ‘presidential put’ (Xi Jinping & Hu Jintao) —not too dissimilar to the famous Greenspan put in the US.

If the economy turns south, the central authorities quickly abandon strict policy measures and turn on the lending taps to save the economy.

In China’s case it had more to do with supporting the underlying economy, rather than propping up financial market assets as was the case in the US.

What if Xi officially abandons explicit GDP growth targeting at the end of year during the National People’s Congress?

Will the market interpret this as a ‘presidential put’ that has expired? It is interesting to see at the local level Chinese provinces no longer just have GDP targets.

These days, they have a broad array of measures such as environmental and reform agenda targets.

What to expect

Our key takeaways are:

We don’t expect to see the old days of extended credit fueled upswings going forward.

Short rates will likely remain elevated as the credit creation slows and tighter macro prudential measures plug the leaky holes in the unregulated lending markets.

Our out of the box call is a potential Xi announcement pulling the ‘presidential put’ from their armory, cancelling an explicit GDP target. In our portfolios, we are looking to add Chinese long bonds in the 3.7%–4.0% range.

Important legal information

To proceed, please confirm that you are a professional / qualified / institutional client and investor.

Views and opinions expressed are presented for informational purposes only and are a reflection of UBS Asset Management’s best judgment at the time a report or other content was compiled. UBS specifically prohibits the redistribution or reproduction of this material in whole or in part without the prior written permission of UBS and UBS accepts no liability whatsoever for the actions of third parties in this respect. The information and opinions contained in the content of this webpage have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith but no responsibility is accepted for any errors or omissions. All such information and opinions are subject to change without notice but any obligation to update or alter forward-looking statement as a result of new information, future events, or otherwise is disclaimed. Source for all data/charts, if not stated otherwise: UBS Asset Management.
Any market or investment views expressed are not intended to be investment research. Materials have not been prepared to address requirements designed to promote the independence of investment research and are not subject to any prohibition on dealing ahead of the dissemination of investment research. The information contained in this webpage does not constitute a distribution, nor should it be considered a recommendation to purchase or sell any particular security or fund. The materials and content provided will not constitute investment advice and should not be relied upon as the basis for investment decisions. As individual situations may differ, clients should seek independent professional tax, legal, accounting or other specialist advisors as to the legal and tax implication of investing. Plan fiduciaries should determine whether an investment program is prudent in light of a plan's own circumstances and overall portfolio. A number of the comments in the content of this webpage are considered forward-looking statements. Actual future results, however, may vary materially. Past performance is no guarantee of future results. Potential for profit is accompanied by possibility of loss. 
© UBS 2019 The key symbol and UBS are among the registered and unregistered trademarks of UBS.