On the one hand, the results of the 19th Communist Party Congress that begins tomorrow are completely predictable. Current president Xi Jinping will be elected to a new five-year term and when the dust has cleared from the once-every-five-years turnover of 70% of the 350-member Central Committee, the 25-member Politburo, and the 7-member Politburo Standing Committee, President Xi will have tightened his grip on power still further.
On the other hand, there’s huge uncertainty over what Xi will do with all his power during the next five years. His first term has been marked by a retreat from market-based reforms, a strengthening of the role of state-owned enterprises in the economy, and a conservative don’t rock the boat at all stance on cash flows and monetary policy. One school of thought says that a second term for Xi will bring more of the same. A contrasting school says that now that Xi has consolidated his hold on the party and the government, he will move on needed economic reforms in a second term.
It matters. For China and for investors in China.
In 2017 to date Xi’s emphasis on the state-owned sector has produced a better than 10% gain for mainland stocks in the CSI State-Owned Enterprise Composite Index. In contrast the CSI Private-Owned Enterprise Composite Index is basically flat for the year.
And Xi’s monetary policies have resulted in a crackdown on overseas deals by state-owned companies (and private enterprises) that have scuppered some big overseas acquisitions.
The informed “betting” right now is on these changes or the lack of change:
Xi and other party leaders have made increasing the efficiency of state-owned enterprises a high priority. The effort now seems to be focused what has been called “mixed ownership” with sales of partial stakes of state-owned businesses. The partial sale of telecom carrier China Unicom is an example. Party leaders seem also to be determined to create stronger national champions in key sectors of the economy through government-orchestrated mergers. Anything that points toward an acceleration of this policy is likely to lead to speculative trading in state-owned enterprises in the steel, electricity, and chemical sectors. I’d expect buying to focus on a strategy of purchasing the shares of the leading companies in each sector. The government’s attitude toward privately-owned national champions such as Ali Baba (BABA) could get tested in a second Xi term.
There seems to be a recognition among party elders that China has a debt problem and that there is a need for deleveraging. At the same time there’s a fear of reigning in credit growth too strictly and tanking economic growth. China’s debt load seems to have stabilized in some areas–official bank balance sheets, for example– but continues to explode in others–consumer borrowing, for instance. The trend in Xi’s first term has been to seek a balance between supporting growth and curbing debt. There’s no reason to think that this balancing act will be any different in the next term. Which does promise a certain stability–in short-term interest rates and exchange rates, for example–but leaves the essential financial market reforms for another day. The International Monetary Fund recently issued a report card on 14 challenges facing China that ranged from reducing corporate debt to relaxing foreign exchange controls (which is necessary for the yuan to become a global currency), and reforming state-owned enterprises. The IMF said that Xi had achieved only “some” or “limited Progress” in 12 of these areas.
One key figure to watch in any effort to figure out where China decides to head after this congress is Wang Qishan. Wang is a member of the Politburo Standing Committee and the head of President Xi’s fierce anti-corruption campaign, which has been a key force in consolidating Xi’s grip on power. Wang is now 69, which puts him over the informal retirement age of 68. Wang is widely seen as the government’s most accomplished financial figure. If Xi engineers a waving of the retirement rules for Wang and pushes through his reappointment to the Standing Committee (and there’s even talk of Wang replacing Li Keqiang as premier), it will be a sign that China can expect more rather than less action on financial and economic reforms.