The most important event on China’s political calendar is nearly upon us. The twice-a-decade 20th Party Congress will begin on 16 October and will usher in the country’s leadership for the next five years. We expect President Xi Jinping to extend his tenure by an unprecedented third term in a break from the traditional two terms. A new Politburo and standing committee will also be unveiled during the week-long affair.
Historically, these proceedings have been a positive anchor for China’s economy and equity markets. But this is not the case this time. The MSCI China has slid over 30% so far this year as the bumpy economic recovery looks headed for a sub-par growth of around 3% this year.
But while there is speculation that the Party Congress may provide significant policy clues or changes to address the challenging headwinds, we don’t see a major shift in policies before 1Q23.
Event focuses on leadership appointments, not policies
It’s important to note that the primary purpose of the Party Congress is to appoint and announce China’s top leadership. It is not a forum for policy debate or decisions.
Around 2,300 delegates will pick the party’s 200-member Central Committee, which will then vote for the 25-member Politburo and its top standing committee. Confirmation of a third term for President Xi is widely expected.
Still, a solidified leadership is expected to clear market uncertainty around the party structure, paving the way for policymakers to focus more on the economy.
Dramatic policy shifts unlikely at this stage ahead of more high-level meetings
We think new policies and initiatives will only begin to emerge in subsequent conferences. The 20th Party Congress will mark the start of a series of high level meetings, including a Politburo meeting in late October, the Central Economic Work Conference (CEWC) in late November or early December, and the National People’s Congress (NPC) in March next year.
This means a dramatic shift in policy dynamics or large-scale stimulus remains unlikely at this stage. Instead, any messaging will likely be related to areas that were earlier mentioned as priorities, such as advanced manufacturing, tech and supply chain self-sufficiency, dual circulation, and decarbonization.
Zero-COVID exit remains distant
China’s zero-COVID strategy is also unlikely to be relaxed immediately after the Party Congress. Indeed, we don’t see a meaningful change in this area until after the NPC in March 2023. Both political and medical factors drive this view.
Beijing has touted its COVID policy as one of its major political successes and is likely to keep restrictions tight to ensure it remains so during the busy and high-profile, political calendar. On the medical side, elderly vaccination rates remain well below official targets and locally-produced COVID treatments have yet to be approved. We think these preconditions to easing could be resolved in 2Q23.
So, we maintain our neutral stance on China in our Asia strategy. We see select opportunities in sectors that enjoy support from previous announced priorities, such as supply chain security, industrial upgrade, dual circulation, and decarbonization. We advise investors look to align with China’s policy focuses amid the string of important political meetings in coming months.
We continue to avoid Chinese property bonds and equities. We also advise investors with Chinese exposure to hedge their yuan against further weakness. We expect the yuan to weaken to 7.2 against the dollar by year-end, driven by USD strength and as China economic growth concerns linger through to 2023. Being long USDCNY earns a positive yield carry of around 1.4% annually.