For most of the year, there’s been an oft-repeated refrain among China-watchers. Whispered in private meetings with clients or loudly spoken by confident brokers, it goes something like this: “Don’t worry about the economy or markets in 2017 – Beijing won’t let anything bad happen ahead of the Communist Party Congress.”
Much less clear is what happens after the gathering, a once-in-five years conclave now scheduled to convene on October 18 in Beijing. Now that the dates – a secret until late Thursday – are known, the narrative will need to evolve, with what takes place at the meeting of some 2,300 delegates key to determining China’s course over the next five years.
“There are two big concerns among overseas investors who are interested in China – the yuan and the uncertainties around the party congress,” said Han Tongli, chief investment officer at DeepBlue Global Investment Ltd. in Hong Kong, which oversees $200 million. “Once the dust has settled and the uncertainties have gone post-congress, investors will re-evaluate market pricing.”
China’s policy makers have stressed the need for stability and order in financial markets in the lead-up to what will be the 19th congress, even as they persist with a campaign against leverage endorsed by the country’s top leaders. Investors have taken comfort in the strengthened yuan and buoyant stocks, betting officials will act swiftly to quash any signs of speculation or upheaval that could distract from the party’s message of prosperity and control.
But the ‘Congress Put’ keeping markets calm won’t last, with the gathering a vehicle to dispense key messages about the party’s vision for China’s future. That could unleash a flurry of policy and regulatory activity once the agenda has been set and the delegates have returned home. Markets typically see volatility in the wake of party congresses, according to Goldman Sachs Group Inc.
President Xi Jinping, who also serves as general secretary of the party, has been continuously solidifying his power base since his ascension at the 2012 congress, and a key metric for China watchers will be how successful he is in influencing key personnel appointments.
The second critical aspect of the meeting will be the work report delivered on the first day, which sets the priorities for government policy in China for the next half decade. The importance of this document “can’t be stressed enough,” say analysts at Trivium, a research group co-founded by former Conference Board economist Andrew Polk.
“We are genuinely curious to see what happens here,” they wrote in a preview of the gathering. “Xi has changed tack several times and the debate over economic policy is still raging with no obvious conclusion – stay tuned.”
While the Communist Party pledged early in Xi’s term to give markets a “decisive” role in shaping the economy, his leadership has seen the party’s control deepened in a broad range of areas, from state-owned enterprises to social media and the military.
Xi’s first term has seen periods of tumult in the markets, with individual investors encouraged to buy into stocks that went from boom to bust in a matter of weeks in mid-2015. Then came the shock devaluation of the yuan, which rattled global markets and exacerbated depreciation pressures on the currency just as China was trying to internationalise it.
Another key point is language surrounding China’s growth objectives. For market watchers, it’s key that the party strike the right balance.
Abandoning an explicit target for the economy without some new pledge to sustain a steady pace of expansion could cast doubt over the outlook for a continuation of the 6-percent-plus pace of gross domestic product gains. Still, too aggressive a target may fuel worries about excessive debt.
Similarly, observers will be watching for language on reining in financial risks, where again a balance between pledging to avoid a buildup in leverage while averting a contraction in credit that damages growth may be needed.
On personnel, the reshuffled membership of the Communist Party’s top body, the standing committee of the Politburo, will be all-important. Among the key markers to watch:
Whether Xi ally Wang Qishan, who has led the anti-corruption drive, stays for another five-year term, despite being beyond the informal retirement age of 68. That could indicate whether Xi stays in power beyond 2022, breaking a recent precedent for party leaders to step down after a decade.