China’s Communist Party Congress: what does it mean for investors?

China has entered a ‘new era’ and should ‘take centre stage in the world’, President Xi Jinping told the Chinese communist party congress – one of the most anticipated events of the Chinese calendar, which has now begun. 

Twice a decade, the Communist Party of China assembles for its national congress to decide on the country’s five-year plan. That assembly determines who will rule the world’s rising superpower over the next five years. 

What happens in China is relevant for the world economy because the country is a key driver of global growth. 

-How will the Chinese economy revive and sustain growth?

China, which might be best described as an authoritarian capitalist regime, might only have one political party, but behind the scenes various factions fight each other for political control.

The current congress marks the beginning of President Xi Jinping’s second five-year term, and the leader is likely to continue consolidating his power. 

Thus far, in his first term, he has used an anti-corruption campaign to rid himself of opponents. ‘However, other senior appointments could affect the country’s policies and economic development goals,’ says Alistair Jex, head of bespoke portfolio management at Coutts.

The second term of a presidency in China is where most changes are implemented, argues Witold Bahrke, senior macro strategist at Nordea Asset Management. 

‘This is why Xi’s second term it is so important. As China faces the structural challenge of a high and rising debt, combined with the potential of slowing growth, it risks being caught in a middle-income trap.’ But he believes that so far, the government has not found convincing strategies to cope with its economic challenges.

In contrast, others are more bullish on China. Eric Moffett, portfolio manager of the T. Rowe Price Funds Asian Opportunities Equity Fund, says: ‘Regardless of whether reform intensifies, we have in recent years seen improved management discipline in China, with businesses now throwing off a lot of free cash flow after significantly cutting unnecessary capex.’

-Why you shouldn’t be too worried about China’s property bubble…yet

The Chinese economy grew at double-digit rates for more than three decades, but growth began to slow in 2010 and it had fallen to 6.7 per cent by 2016. However, the Chinese economy has been more resilient than expected this year, and has defied pundits who predicted that it would suffer a painful slowdown.

As China transforms its economy from export-led model to a slower-paced economy fuelled by consumption, it faces many challenges: from environmental pollution to a lack of social services for its growing urban population.

President Xi’s upcoming second term is likely to emphasise environmental policies to improve the quality of life for Chinese citizens. ‘Expect anti-pollution measures to continue featuring high on the priorities of officials,’ says Craig Farley, lead manager of the Ashburton Chindia Equity Fund. 

He adds that urban infrastructure will also be radically industrialised to make cities more liveable, while ongoing efforts to reform the registration system will be increased to integrate migrant workers into cities.

Therefore, he says, themes and sectors that may benefit include major industrial state-owned enterprises (SOEs) in monopoly sectors, such as telecommunications and energy. Other sectors set to benefit are those focusing on building materials, resources and capital goods, defence and public security. ‘Environmental-related sectors may also receive a boost, like electric vehicles, nuclear, solar and wind power,’ he adds.

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