International investors are focused upon indications of China's Communist party leaders commitment to further reforms in the country's National Congress of the Communist Party of China (CPC), which commences today (October 18) in Beijing.
Though essentially a political meeting focusing on party succession, the National Congress is also important for economic policy-watchers as political pronouncements and the composition of the new leadership will help investors make predictions for the next five years to 2022.
From discussions with asset owners and managers, AsianInvestor learned that foreign investors are particularly interested in Beijing's commitment to further reforms, along with future policy on capital controls, property and state-owned enterprises (SOEs).
“A lot of international investors are looking at the 19th national congress, to see if there will be a confirmation that a reform agenda is still a priority,” Mark Konyn, group chief investment officer at AIA told AsianInvestor.
In the past few years there has been a reduction in new initiatives as authorities reined in excesses resulting from policies enacted following the global financial crisis, so “international investors will be keen to gauge the likelihood of further reforms as part of the forthcoming five-year plan,” Konyn said.
Such initiatives would include policies relating to banking, SOEs and taxation, he added.
Karine Hirn, partner of East Capital, pointed out that one indicator of reform prospects is staffing decisions. These will “shape and give direction to China’s political power in the years ahead”, she said in a written commentary released on October 13.
Hirn noted that the CPC’s Standing Committee of the Central Political Bureau, the top decision-making body, consists of four conservative members and three reformists, including president Xi Jinping and prime minister Li Keqiang.
There is a tradition that Chinese leaders retire at the age of 68 at the latest, and on this basis Xi and Li are today the only candidates from the existing seven who qualify to carry on until 2022. So with reformists potentially in a minority in the new standing committee, the pace of reforms may be at stake, Hirn said.
Despite a call for an easing of capital controls from China’s central bank governor Zhou Xiaochuan one week before the congress, investors’ expectations on capital controls are mixed.
“We expect the 19th Congress to be all about “control”… especially … more control over the capital account to prevent unauthorised capital outflows,” Robin Parbrook, co-head of Asian equity alternative investments at Schroders said in a written commentary on October 17.
However, Jean-Charles Sambor, deputy head for emerging market (EM) fixed income at BNP Paribas Asset Management, told AsianInvestor that he expects policy makers to be focusing on the gradual opening of the capital account and a commitment to attracting more foreign inflows.
“Over time, the regulatory regime will be simplified and the Chinese bond market will become the natural habitat of many global and emerging market investors,” he said.
Real estate wrinkles
Catherine Yeung, investment director of Fidelity International said she saw one of the biggest risks in China over the next five years to be property, which remains the anchor for China’s economy.
“We could see policies aimed at smoothing the property cycle or the introduction of tools to ensure stabilisation,” Yeung said in a written commentary released on October 16. This could be in the form of tax mechanisms or a long-term rental programme.
Whatever policies are introduced, they need to be timely and balanced. “Too much or too soon could weigh on buyer psychology,” she added.
UBS Wealth Management also said in a commentary on October 11 that the government's primary goal will likely be to ensure short-term stability in order to enact long-term reforms and increase the country's global influence.
As such, UBS expects a continuation of economic policies that promote financial deleveraging and the curtailment of property market bubbles.
SOEs in focus
East Capital’s Hirn said that 2017 has been a year of stability due to the political transition. “Once the transition is done, one can expect less need for stability; and reforms such as SOE reforms might accelerate,” she said.
If Xi can push through reforms to SOEs and change management incentives to focus more on delivering shareholder value, many of the companies regularly shunned by foreign investors may come back into focus, Eric Moffett, portfolio manager of the T. Rowe Price’s Asia opportunities equity strategy said in a written commentary on October 16.
The authorities are already testing reforms, with China Unicom one of the companies undergoing substantial reform. This could be a catalyst for more reforms, Moffett noted.
The pioneer in a trial “mixed-ownership” program which the government intends to draw private capital into SOEs, China Unicom will sell a 35.2% stake to 14 companies to raise Rmb78 billion ($11.6 billion). The investors include China Life, Alibaba, Tencent and Baidu.