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China’s new leadership – What has changed?

Four of the seven-member Chinese Politburo Standing Committee are new appointees. What are some possible implications of the change?

Before the pandemic, the cryptocurrency world seemed isolated from financial markets. Bitcoin and other crypto instruments [1] showed little correlation with equity market performance. Cryptocurrencies were even regarded as helpful in diversifying risk and as a hedge against swings in other asset classes.

The 20th Congress of the Chinese Communist Party (CCP) concluded on 23 October and the new Politburo and Standing Committee members were confirmed a day later. They will be procedurally approved by the National People’s Congress in March 2023.

Policy & reform continuitylation

As expected, Xi Jinping remains as President, as well as Party Secretary and Army Chief (the two most powerful positions in the government). This means policy and reform continuity, with a focus on:

  • Economic development to put China on a sustainable path
  • Making China a ‘moderately affluent’ society by 2035
  • The roles of both state-owned enterprises and private companies in structural reforms.

Policy continuity reflects a stable government and should be seen as good news in the face of the current economic headwinds, wider policy uncertainty and rising geopolitical risks.

However, the Congress’ emphasis on macroeconomic policy prudence and housing policy (i.e., that houses are for living, not for speculation) implies that the current housing market weakness will likely continue to act as a drag on the economy in the near term and there is not going to be any massive policy easing after the Congress.

Beijing’s zero-Covid policy will also continue, although there may be minor adjustments to increase policy flexibility to lessen its impact on the economy.

President Xi’s position strengthened

The Congress showed that Mr. Xi’s core leadership power had been strengthened: 

  • He broke the two-term president limit of the Party constitution, and broke the implicit retirement age rule of 68 by appointing members in the Politburo and the Standing Committee who will pass the age limit in the next year or two.
  •  ‘Xi Jinping Thoughts on Socialism with Chinese Characteristics in a New Era’ were enshrined in the Party Constitution.
  • Mr. Xi also broke the Party’s conventional practice of appointing as premier someone who served as vice-premier before. Premier Li Qiang (replacing Li Kequiang) is not a vice-premier. He has been promoted in preference to two

Overall, Mr. Xi has surrounded himself with strong supporters, who are also reformers, in the nucleus of the power structure. This arrangement should guarantee policy and reform continuity. Till now there have been positive results under his leadership, notably progress in deleveraging and reducing corruption (Exhibits 1 and 2).

While there is a strong justification for Mr. Xi to re-centralise power to push through painful reforms (despite how the West looks at this), China and the world face ‘key man risk’ since Mr. Xi is the one who calls the shots.

Given Mr. Xi’s record of delivering reforms, we believe China deserves the benefit of the doubt in that it may be able to sustain long-term growth with higher quality by finding new drivers in a creative destruction process.

What’s new?

One important change is that the economic and finance team will be reshuffled, with Premier Li Keqiang, first Vice-Premier Han Zheng, Vice-Premier Liu He, central bank governor Yi Gang, CBIRC chairman Guo Shuqing and Finance Minister Liu Kun to be replaced by next March.

The new team, to be announced later, is expected to contain supporters of Mr. Xi’s economic and financial liberalisation policies.

Significantly, the Party is explicitly toughening its policy stance on securing national sovereignty, on Taiwan unification, Hong Kong’s one-country-two-systems approach, and military upgrading through technology enhancement. [1] At the Congress, the Party warned of dramatic changes (read rising geopolitical risk) in the world. This is in sharp contrast to the assessment in the 19th Congress five years ago that saw peace and development as the major global themes.

Innovation and security have now become development priorities. They echo Beijing’s ‘dual circulation’ policy [2] (in place since 2020) which emphasises education, technology and innovation to boost China’s long-term growth by enhancing productivity and preparing for intensified Sino-US technology competition.

Indeed, the US government has recently expanded the scope of its controls and restrictions on technology exports to China; the restrictions have been extended to talent flows and will probably involve investment flows later.

Fiercer competition in the tech sector could pose headwinds to China’s supply chain and industry upgrading. It could also hurt the outlook for the tech sector in the short to medium term, and slow down (but not derail) its progress.

Greater geopolitical tensions could make China more determined to improve self-sufficiency and supply chains in technology and advanced manufacturing. However, it can be expected to continue to open up its financial sector to benefit from international capital flows, as per the ‘dual circulation’ strategy.

Also read 20th China Communist Party Congress – The surprise of no surprises

References

[1] See reference in footnote 1.  

[2] “Chi on China: China’s Dual Circulation Strategic Pivot to Counter External Exigencies and Global Demand Shift”, 16 September 2020. 

Disclaimer

This material is issued and has been prepared by BNP PARIBAS ASSET MANAGEMENT Asia Limited (the “Company”), with its registered office at 17/F, Lincoln House, Taikoo Place, Quarry Bay, Hong Kong. BNP PARIBAS ASSET MANAGEMENT Asia Limited in Australia is an authorised representative of BNP PARIBAS ASSET MANAGEMENT Australia Limited ABN 78 008 576 449, AFSL 223418 (“BNPP AMAU”). This material is distributed in Australia by BNPP AMAU. This material has not been reviewed by the Hong Kong Securities and Futures Commission. This material is produced for information purposes for wholesale investors only and does not constitute:

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2. investment advice.


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