Financial-market investors were craving economic policy guidance from the China’s Communist Party Congress, but when the ruling party wrapped up its twice-a-decade political gathering on Saturday to the tune of “The Internationale”, a socialist anthem, investors finally realized they didn’t hear what they wanted, and they saw the red flags.
China’s leader Xi Jinping secured a groundbreaking third leadership term and introduced a new Politburo Standing Committee in a press conference on Sunday which was seen by China observers as a “war cabinet” without any economic technocrats or reformers.
“For investors the formal ending of the pro-growth reform era can only be considered a long-term negative,” wrote Christopher Wood, global head of equity strategy at Jefferies in a Thursday note. “It is also a concern that the major technocrats who presided over the sensible deleveraging policies of recent years are seemingly now due to retire and there is no clarity, as yet, on who will replace them.”
For example, there had been high hopes that reform-minded Wang Yang, 67, who was the party chief of economic powerhouse Guangdong province and was considered as the most liberal member of the current Politburo, might become the next premier. However, he will retire, as will several other officials including Liu He, 70, the trade negotiator with the U.S., along with banking and insurance regulator Guo Shuqing and the central bank governor Yi Gang. All of them were dropped off lists of both the seven-person Politburo Standing Committee and the 205-person Central Committee, which will set the course of policymaking for the next five years.
Neil Thomas, senior China analyst at Eurasia Group, thinks Liu He, the “champion” of the financial deleveraging program of the last few years, will likely replaced with He Lifeng, the current minister in charge of the National Development and Reform Commission, the country’s planning agency. But according to Thomas, he is not an economic technocrat at all but a politician.
“He’s unlikely to bring the same level of focus on financial deleveraging, and Xi’s report also seems to downgrade the focus on deleveraging, which is perhaps more positive than expected for thinking about China’s short-term growth outlook, especially if the zero-COVID policy is relaxed,” Thomas told MarketWatch on Friday.
“But in terms of providing some comfort to investors, and in terms of China’s long-term economic trajectory, that level needs addressing. If no one pushes this agenda at the top, then it could lead to bigger problems later on,” Thomas said.
The party’s leadership reshuffle left Chinese financial markets with jaw-dropping losses this week. Hong Kong’s Hang Seng China Enterprises Index 160462, -4.08% recorded the worst-ever five-day losing streak with a weekly loss of 8.9%. On the mainland, China’s benchmark CSI 300 Index 000300, -2.44% capped the week with a loss of 5.4%, the worst since July 2021, while the Shanghai Composite SHCOMP, -2.25% booked a weekly loss of 4%.
The reaction was even more violent in Chinese U.S.-listed equities with the group of stocks making up the Nasdaq Golden Dragon China index losing $67.33 billion in market capitalization this week, according to Dow Jones Market Data. Technology giants Alibaba Group Holding Ltd. BABA, -3.19%, Tencent Holdings Ltd. TCEHY, -4.19% and Pinduoduo PDD, -0.30% tumbled 12.5%, 14.2% and 28.8% on Monday, respectively.
Investors hoped to get hints on potential zero-COVID policy changes, support for the ailing real estate sector, and signs of easing its crackdown on the technology sector, but they didn’t get the messages they wanted.
“It seems to me that when the government decides to do something, they just do it. The swiftness and the severity of regulatory changes are much more severe,” said Kevin Barry, chief investment officer at Summit Financial. “I think that you should pay a lower (price-to-earnings) multiple because you have more regulatory risk in China…(And with the) government policy regulatory risks for Chinese companies, that’s an area I underweight.”
As Xi stated in his work report to the Congress, science and technology will be the “primary productive force”, and innovation will be the “primary driver of growth” in the next five years. The rising focus on science and technology is designed to make China an innovation superpower to address problems with lagging economic productivity, as well as its dependence on the west for many advanced technologies, said Thomas.
“Xi identified a number of new growth drivers that aligned with this vision, such as artificial intelligence, industry, energy and a host of others, so we can expect more policy support for those areas,” Thomas said. “And there’s also a rising focus on balancing economic developments with national security. So it’s part of a broader shift on Xi from pursuing a high pace of growth to receiving high quality growth.”
Another big question that remains unaddressed is how Xi plans to achieve his goal of achieving “common prosperity” by 2035 and leading the world in terms of “composite national strength and international influence” by 2049.
“And that some level of economic growth is necessary as a foundation for achieving these regulatory agendas. And especially advancing China’s international power. But the question is, how are most of these competing goals going to achieve because we don’t have a clear sense of a workable policy program that’s going to get shown,” Thomas said.
China’s economy expanded by 3.9% in the three months ended Sept. 30 from a year earlier, the government said Monday in a release that had earlier been abruptly postponed as Communist Party leaders gathered last week for the congress. However, the data brings the average growth for the first nine months of 2022 to 3.0%, well below the full-year target of 5.5% the government set in March.
The broader U.S. stock market was unaffected this week by developments in China with three indexes finishing the week with gains, as investors assessed weak tech earnings reports and awaited Federal Reserve’s policy meeting next week. The S&P 500 SPX, +2.46% was up 4% for the week, while the Dow Jones Industrial Average DJIA, +2.59% booked a weekly gain of 5.7% and the Nasdaq Composite COMP, +2.87% gained 2.2%.