Despite the Sound and Fury, Chinese Political Shifts Don’t Seem Surprising to Us

Chinese stocks came under sharp pressure in Hong Kong and the US early this week, with the Hang Seng Index falling -6.3% Monday, cutting against a rise in most markets globally.^[i] This came as China’s delayed economic data hit the newswires and the Chinese Communist Party (CCP) National Congress concluded, officially handing President Xi Jinping an unprecedented third term amidst a restructured leadership group packed exclusively with loyalists to him.^[ii] Whilst that last part stirred much conversation amongst commentators we follow and may have surprised some at the margin, overall the developments look set to extend the status quo versus some kind of huge shock, in our view.

Let us start with the smaller stuff: The delayed data. When China didn’t release trade data as scheduled on 14 October—with no explanation—many commentators we read thought terrible figures would come.^[iii] Their warnings grew when it delayed GDP results last week, ahead of the Congress’s convening.^[iv] But in the end, we don’t think the data support that narrative. After Chinese GDP growth slowed to a 0.4% y/y crawl in Q2, the latest release showed it rebounded to 3.9% in Q3 and beat expectations.^[v] This was as September industrial production and fixed asset investment accelerated to 6.3% y/y and 5.9% year-to-date y/y growth, respectively.^[vi] It appears to us easing COVID restrictions and a raft of government support measures—many aimed at ailing property markets—helped buoy growth.

Headwinds remain. For example, 30 cities still face varying degrees of COVID restrictions, affecting around 225 million people.^[vii] Hence, with year-to-date GDP growth through Q3 at only 3.0% y/y, China may not meet its 5.5% full-year growth target.^[viii] Meanwhile, retail sales (2.5% y/y), exports (5.7%) and imports (0.3%) decelerated in September.^[ix] That said, few analysts we follow deem China likely to meet its 2022 growth target, and we think slowing in these retail and trade data just continues existing trends. Domestic and global demand have been weakening—the former more than the latter due to “zero-COVID” policies and real estate uncertainty—but China has dealt with these issues all year. They aren’t anything new, in our view.

We think the bigger news Monday was Xi’s return for a third term, potentially cementing his presidency for life. As many outlets we read pointed out, his was the only position unchanged amongst China’s new leadership slate in the Politburo Standing Committee—the country’s top decision-making body—whose roles are now stacked with Xi loyalists. We don’t think Xi’s status is any shock—it was widely predicted amongst commentators we follow that he would break with recent practice, setting himself up for continued rule. As for the Standing Committee, that may be more of a twist, although we don’t think the shakeup was a shock, either. The most surprising feature, arguably in our view, was the replacement of Premier Li Keqiang—the CCP’s second highest-ranking official, nominally in charge of economic affairs—with Li Qiang, Xi’s former chief of staff and current Shanghai chief (who oversaw the city’s zero-COVID crackdowns).^[x] That move seems to have stoked some concern in press reactions we read.

Li Keqiang is widely viewed by political analysts we follow as a market-orientated reformer and comes from the CCP’s Youth League faction, which has long pushed for economic modernisation.^[xi] His successor, who takes over in March, has little national experience.^[xii] Many observers we follow speculate that this appointment (coupled with the Youth League’s expulsion from the Standing Committee) will shift policy radically, but we think that is largely speculation built on distant analysis of policymakers’ reputations and personalities. Besides, Xi likely could have changed directions before—without changing anything in the Standing Committee, in our view. Hence, we see little tangible reason to think a new Politburo with Xi still at the helm likely changes much policy wise.

Whilst short-term market moves are open to interpretation, we see Monday’s swing as sentiment-based amidst an already nervous market environment. The associated headlines seem to us largely like efforts to read significance in those swings. Maybe there is some. Maybe not. But little here seems likely to pack fundamental surprise power at this point, in our view. We think markets have long been aware of these issues, which is likely to defang the effect some, and the reaction outside China helps illustrate this point. With Hong Kong only 0.7% of the MSCI World’s market cap, global stocks didn’t seem to mind much.^[xiii] The MSCI World was flat Monday and rose 4.3% through the Chinese conclave.^[xiv]