Reflecting on China’s 19th Party Congress

This month’s meeting of China’s ruling elite reconfirmed several trends which are important for global investors. Xi Jinping is the strongest Chinese leader since Deng Xiaoping, but he is not a dictator. There will not be significant changes to economic policy, with Xi continuing to emphasise quality over quantity; gradual progress toward a more market-driven, entrepreneurial economy; and financial sector de-risking. Xi will play a more visible role on the global stage, taking the opportunity to step up where Washington steps back, including on climate change.

Not a dictator

Xi Jinping clearly consolidated his political power over the past few years, a process which was formally recognised at the Congress. His personal political philosophy was enshrined in the Party constitution, meaning he joins the ranks of Mao Zedong and Deng Xiaoping. Xi is clearly the most powerful leader since Deng died in 1997.

There are, however, limits to Xi’s power within the party. Wang Qishan, one of his closest confidents and director of Xi’s anti-corruption campaign, was forced to retire from the Politburo Standing Committee this week, having reached the party’s informal retirement age. There was widespread speculation that Xi hoped to persuade his colleagues to break with past practice and permit Wang to remain in the leadership, but that did not happen.

It is important to acknowledge that in addition to enhancing his power as head of the Party, Xi has been working to strengthen the party and its control over China’s economic and political infrastructure. Unique among one-party, authoritarian regimes, since 1989 there have been three peaceful, efficient transfers of power between leaders, none of whom was from the same family.

The party this week broke with recent precedent and did not anoint a successor to Xi. There is not enough visibility into internal Party politics for us to understand what this means. One possibility is that Xi is aiming to ignore the retirement rules and stay on for a third term. It is also possible that Xi will retire in five years, but does not want to be a lame duck leader, with his successor watching over his shoulder throughout that time.

Economics: Focus on Quality over Quantity

One of the most significant developments of the Congress was the decision to change (for the first time since 1981) the Party’s mission statement.

In 1981, the Party’s mission was to bridge the gap between people’s material needs and insufficient goods to meet those needs. During the Congress, Xi explained why the Party’s mission statement had to be revised to focus on the quality of growth, rather than just on the speed of growth and quantity of output. “Not only have [the Chinese people’s] material and cultural needs grown; their demands for democracy, rule of law, fairness and justice, security, and a better environment are increasing,” he said.

In our view, when Xi referred to the economy transitioning from a phase of rapid growth to a stage of high-quality development, he was signalling that he will continue to pursue supply-side reforms, primarily reducing overcapacity and debt levels among state-owned enterprises (SOEs) in heavy industry. Over the last five years, the role of SOEs has continued to shrink while the role of China’s entrepreneurs has continued to rise. The Chinese consumer, fuelled by incredible income growth, has also surpassed industry as the primary economic engine.

Xi mentioned the residential property market in his speech, reiterating his government’s principle that housing is for living, not for speculation. This, too, is not new, and is consistent with our view that the government will continue tapping on the policy brakes, but will not take dramatic steps.

Xi also confirmed that he will continue his anti-corruption campaign, which Xinhua, China’s official news agency, described this week as an effort “to secure a sweeping victory over the greatest threat to the Party”.

Overall, we expect few significant changes to economic policy in the coming quarters.

Searching for a bigger role on the world stage

Xi made clear that he intends to play a larger role on the world stage in the coming years. He said that China’s economic success provides an alternative model to developing countries, and sharing this experience with other nations is part of the “great rejuvenation of China”.

Xi’s plan is somewhat opportunistic: where Washington is retreating from the global arena, he hopes to step up. For example, Xi pledged China would continue to embrace globalisation and trade, and he also expressed a desire to lead international efforts to respond to climate change.

But we do not anticipate Xi will become more antagonistic toward his regional neighbors or the US, recognising that his recent aggressive moves have been counterproductive. For example, to manage the North Korea problem, Xi is likely to continue working cooperatively with Washington, largely because he values a positive relationship with President Trump. We will have a better perspective on US–China relations after Trump’s early November visit to Beijing.

Andy Rothman is investment strategist at Matthews Asia