China post National Congress - Westpac

China’s 19th National Congress has come at a time when growth has outperformed and authorities’ control over China has been shown to be undeniably strong, according to analysts at Westpac.

Key Quotes

“It is also a very uncertain period for the economy, with a new long-term plan necessary to drive household income and wealth higher and see the economy become more consumer-centric.”

“The political vision

• The ‘vision’ laid out by President Xi at the National Congress seeks to meet these challenges head on, calling for the nation to become a “fully modern economy” by 2035 and then a global leader in innovation, influence and military power by 2050.
• Underpinning both goals is a drive to pursue productivity and efficiency and consequently to increase the nation’s income and wealth rather than its debt.
• President Xi’s belt and road initiative is essential to this ‘new era’. Highlighting this is its naming in the Party’s Charter. While it is certainly a long-term plan, the benefits are already being accrued and opportunities for the decade ahead are substantial. Particularly key are the potential to improve trade linkages with close to 70 countries across Africa, Europe and Asia as well as the capacity to diversify China’s industrial base by upskilling China’s population for higher-tech manufacturing and service roles while, at the same time, offshoring low-skilled and high-polluting operations to less-developed nations.
• Increasingly though, the pursuit of growth for growth’s sake is not enough.
• China’s environment was a focus of President Xi’s opening remarks. Reported amendments to the Charter also speak to its protection as well as the need to more broadly distribute income and wealth across the population. These policy objectives are no longer ‘nice to haves’; rather, they are seen as necessary if the population is to continue supporting Party rule.
• To achieve these goals, strong leadership will be needed; this is certainly what President Xi intends.
• The inclusion of “Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era” in the Party’s Charter and Xi being affirmed as the “core” leader highlight his power over the Party and therefore the nation. Xi Jinping is the third leader to be named in the Charter, and only the second after Mao Zedong to receive that honour while still in power (and alive). This sets the scene for President Xi to remain in power  past the end of his second term as President and General Secretary in 2022.
• The make-up of the Politburo and its Standing Committee for the coming term also shows the open-ended nature of President Xi’s tenure. No clear successor has been named, and the ages of the Standing Committee members range from 60 to 67, leaving them close to (or over) the 68 retirement age comes 2022.”

“Implications for China’s economy and the financial system

The implications of President Xi’s plan for the Chinese economy is that we are likely to see growth progressively slow to a more modest pace. We anticipate it from 6.8% in 2017 to 6.2% in 2018, then below 6.0% from 2019. Public investment will continue, but it will be structured to fit with long-term development objectives rather than cyclical momentum. Private investment will be encouraged, as long as it fits with the Government’s economic and political agenda and does not put financial stability at risk. The simplest expression of this will is a continuation of the tight rules on foreign investment by Chinese firms. For the corporate sector, there is clearly a need to progressively work through SOE legacy debts and to make sure future lending decisions provide credit to the most productive and profitable firms. In time this will see corporate debt to GDP ratio stabilise and then gradually fall, from their currently “very high” levels – as described by soon-to-be retiring PBOC Governor Zhou.”