China’s new ruling elite to decree ‘steady as she goes’

China’s revamped leadership team will likely emphasise stability at the Party Congress next week, but watch out for hints of further state sector reform.
China’s new ruling elite to decree ‘steady as she goes’

President Xi Jinping looks likely to tighten his grip on power at a key Communist Party gathering next week, a move that should smooth the way for reform of the bloated public sector. 

Xi will have his chance to promote allies to senior party and government positions at the 19th National Congress of the Communist Party of China, which will convene in Beijing on October 18.

The new lineup will run the world’s second-largest economy, with Xi at the helm. Held every five years, the roughly week-long meeting has the potential to reshape the political landscape in terms of policy, institutions as well as personnel.

“The vice-premiers, the cabinet members and the People’s Bank of China (PBOC) governor are all likely to be replaced after the Party Congress,” noted Isaac Meng, an emerging markets portfolio manager at Pimco, in a note on October 6.

Power is up for grabs as about half of the 25 Politburo members are due to retire. More importantly, five out of seven of its Standing Committee members – China's most powerful decision-making body – will exceed the unwritten age limit of 68, except for Xi and Premier Li Keqiang.

Chairman of the Standing Committee Zhang Dejiang, Chairman of the Chinese People's Political Consultative Conference Yu Zhengsheng, vice-premier Zhang Gaoli and party propaganda boss Liu Yunshan are among those likely to retire.

If Xi manages to stuff these institutions with his own men, even potentially his successor, then such power in the hands of one man could also signal an end to 20 years of collective leadership and cautious rule by consensus.

Even if the age limit is relaxed—for example to keep on one ally the anti-corruption tzar Wang Qishan—it will send a powerful signal that Xi, 64 years old, may try to hang on to power longer given that there is no term limit for party leaders.

For all but the very elite in China, visibility regarding the next generation of top-level personnel at the Party Congress remains very cloudy indeed. But the consensus among China watchers is that whatever the outcome, Xi will likely cement his status as the country’s most powerful leader in decades. 

“We expect President Xi Jinping … to emerge from the CPC as a very powerful and far-sighted leader, willing to bite the bullet on the more painful reforms,” said Nomura’s China economist, Yang Zhao.

Reading the tea leaves
When the new Politburo Standing Committee membership walks out on stage at the conclusion of the Congress, what will the transfer of power mean for the economy? Well, most China watchers expect the key message to be ‘steady as she goes’.

Xi’s continued tenure is likely to mean that the government’s overarching themes and strategies will remain the same, such as reining in leverage, particularly at state-owned enterprises (SOEs), reducing excess capacity and keeping broad credit growth on a downward trend, analysts believe.

If there are any changes in policy direction they will likely not be made clear until the National People's Congress in March 2018.

Nevertheless, investors should listen carefully for changes in tone during key speeches.

Xi, also the Communist Party general secretary, will lay out a vision for China over the next term through 2022 in his keynote speech on the first day of the Congress. He will present his report to about 2,300 delegates in Beijing, the top echelon of the nearly 89-million-member Communist Party.

“A key indicator that we believe would demonstrate China’s focus on reform over growth would be a lowering of the official GDP growth target to 6.0%-6.5% in 2018,” said Nomura’s Zhao.

After all, China only needs 6.3% annual growth in the next three years to achieve its long-term goal of doubling its real GDP between 2010 and 2020.

Investors should also look out for changes in tone from previous official statements on key issues such as SOE reform.


Source: ING Bank
Impact on the economy from Xi's power consolidation
Source: ING Bank

The State Council issued guidelines for SOE reform in August 2015 but progress to date has been disappointing for international investors, especially in terms of promoting mixed ownership. Instead, China has emphasised adherence by all key actors, including SOEs, to Party leadership.

However, there have been some signs of an acceleration of SOE reforms in the run-up to the Congress, such as mixed ownership announced at China Unicom in August.

“Policymakers could further promote mixed ownership reforms for central SOEs and spin off non-core business from SOEs,” said economists at Morgan Stanley in a report.

The National Financial Work Conference in July emphasised that deleveraging SOEs is a priority. Then the State Council executive meeting in August announced new SOE deleveraging measures, including a plan to set up an alert line mechanism for debt ratios for different sectors, and to urge enterprises to pay down leverage with profit earned.

One possible measure announced at the Party Congress could be setting an upper limit of leverage ratios for SOEs and local governments. This would read as a good news for the longer term at the cost of short to medium term growth years, said Iris Pang, an economist for Greater China at ING Bank.  

Given the government’s prioritisation of environmental protection off the back of public concerns, there could be even more pressure on SOEs.

“A stronger push to reduce pollution is likely to accelerate cuts to capacity and production in heavy industry, where many problem firms are state-owned,” said Louis Kuijs, head of Asia economics at Oxford Economics.

However, the nature and pace of SOE reform will continue to be shaped by objectives such as creating international champions and intra-party disagreements on the speed of the reform process, he added. 

Buoyed by a strong yuan and solid corporate earnings, international investors have been flocking back to the A-share market. 

In August, net purchases of Chinese A-shares via the Stock Connect scheme hit Rmb27 billion ($4.1 billion), the highest level since December 2014. Any upsets from the Party Congress may prompt some investors to trim positions.

So, enjoy the party but be ready to grab your coat.

China's power structure
Source: Analysts at Goldman Sachs





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