Hopes of policy change dashed
Although the outcomes had been widely predicted, Western investors still hoped that last week’s National Congress of the Chinese Communist Party might provide an opportunity for the Chinese Government to change course following a year of slowing economic growth, public frustration over zero-Covid policy, and displays of industrial and geo-political intransigence.
The results of the week-long congress dashed any hopes of an imminent change of course on any of China’s policy objectives. Over the course of the 7 days, Xi Jinping gave no indication that China would relax any of its recent contentious policies. He reiterated the importance of internal and external security and said Beijing would work faster to modernise and enhance its military capability. He also promised to build China’s self-reliance and strength in science and technology.
All things considered, the likely consequence of last week’s Congress is that China will be even more determined to forge a path based on the ideology of its party leader, Xi Jinping. This conclusion is supported by changes introduced to the Party’s constitution, which cement Xi as leader of the Party and his ideas as the guiding principles for China’s future direction. The unveiling of the membership of the Standing Committee and the Politburo brought further confirmation, with China’s key decision-making bodies now dominated by Xi loyalists, along with the removal of several free-market reformist party officials. These changes display resounding support for the belief that Party controlled economic and ideological direction represents a distinct advantage over freer markets.
Reports following the Party Congress have focussed on Xi’s defiance of his critics and his moves to concentrate power at the top of the Communist Party. This narrative gained unexpected fuel when former President, Hu Jintao, was escorted off stage during the closing ceremony. The portrayal of this incident as a deliberate power play by Xi appears provocative given the range of other plausible explanations. In addition, there has been little emphasis in the reporting of the economic and business friendly credentials of the new generation of officials appointed to both the Standing Committee and the Politburo.
Given the points above, it is worth emphasizing some of the less reported messaging from the Congress. Although Xi made clear that China will focus on “security” this was discussed in very broad terms and reliant on economic growth. Specifically including the pursuit of high-quality development, highlighting prosperity in China is positive for the world, as well as importantly acknowledging that China cannot develop in isolation from the world.
It is also worth reiterating the broader case for continued investment in China.
One of its obvious attractions is the range of opportunity resulting from its size. It is the world’s most populous nation and boasts the world’s second largest economy. It is also the world’s largest exporting nation. Its stock markets are home to over 4000 companies. The scale of China’s domestic and export markets, combined with its desire to develop national industrial champions, has resulted in the creation of many truly world leading Chinese companies in a broad range of industries.
Despite its zero-Covid policy and ongoing efforts to unwind its debt-dependent property sector, China is still achieving economic growth of 3%1 year-to-date in 2022. There are several routes China could take to relax its Covid policy which could trigger a rebound in domestic consumption. The government has the ambition to grow the economy over the longer term, with a stated aim to achieve per capita GDP comparable to a mid-level developed country by 2035.
Despite the slowing economy, broadly speaking Chinese listed companies remain in sound financial condition and continue to allocate capital effectively to the benefit of minority investors. For example, we have begun to see a broadening out of share buybacks as highly cash generative firms take advantage of lowly valued stock prices.
Whether we consider the overall market or look at individual companies, China’s equities are trading at attractive valuations, at a discount to comparable businesses in other countries.2 Critics may suggest low valuations reflect a path to becoming uninvestable. Whilst we acknowledge Chinese ideology is very different to Western norms, we continue to see Chinese corporates and broader economic policy as rational.
1Source: Trading Statistics and National Bureau of Statistics China. Data sourced 25th October 2022 and refers to the first 9 months of 2022.
2Source: MSCI. Data for MSCI China Index to 25 October 2022
3Source: MSCI. Data for MSCI World Index to 25 October 2022
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