Chinese leaders gather next week for the
19th Party Congress, a five-yearly
plenum that sees the leadership of the Communist Party
reshuffled, and economic and policy priorities outlined.
Many observers think that this Congress will mark a major
watershed in the direction of Chinese policymaking. It won’t.
There will be some political appointments that reflect President
Xi Jinping centralizing yet more power around himself. But the
reality is that the Congress is just political theater, and
investors need to look beyond it to understand where China is
It’s tempting to focus on the Party Congress because it appears
to offer a rare glimpse of the inner workings of China’s opaque
political system. But the Congress is primarily a Communist Party
set-piece, rather than a policy-making forum. Those hoping for
announcements of bold, potentially disruptive reforms of the
sclerotic state-owned enterprises, or an aggressive reining in of
China’s enormous credit growth, are likely to be disappointed.
Concrete policy changes are more likely to emerge at the Central
Economic Work Conference in December, the National People’s
Congress in March, or the Third Plenum later next year. These are
the settings where detailed policy is really hammered out. Reform
measures probably will come out of those meetings, but they will
be gradual and measured.
Anyone wanting to understand where China is heading needs to look
at the economy a little more closely. China’s official growth
figures are widely distrusted. They have an uncanny way of coming
in bang on target. The current 6.5% per annum target is above
plausible estimates of the long-term sustainable growth rate, and
could (and probably should) be lowered – perhaps closer to 6%.
This is one reason why we created a “nowcast” estimate of Chinese
growth, which aggregates a broad range of up to date data series.
It suggests that, after slumping in 2015, growth has been very
strong over the past year. Indeed, China has been the primary
driver of the recent global upswing.
Aberdeen Standard Investments
Source: Aberdeen Standard Investments, October 2017.
However, our nowcast measure appears to be coming off the boil of
late, albeit from very strong levels. Widely followed measures of
Chinese economic activity like industrial production, fixed
investment and retail sales also appear to be turning down.
Chinese policymakers have consistently acted to stimulate the
economy when it has slowed more than they would have liked in
recent years. This has raised fears about Chinese debt levels and
financial stability. Measures like the nowcast will be useful
ways of seeing how willing the authorities are to allow the
economy to stand on its own two feet.
Similarly, investors should watch the actions of the People’s
Bank of China (PBoC), where there has been a quiet revolution in
the setting of monetary policy. The PBoC used to set outright
lending quotas for individual banks and a system-wide lending
quota using reserve requirements. But as the economy has matured
over the past couple of years, the PBoC has shifted to the more
orthodox approach of setting interest rates to control growth and
inflation. The PBoC will probably keep interest rates steady over
the next few years, given subdued inflation pressures.
However, an interest rate cut to stimulate the economy would be
an indication that policymakers are reverting to the old playbook
of turning on the stimulus taps every time growth slows. The
recent lowering of bank reserve ratios for those banks lending
most to small businesses and the agricultural sector looks like
part of the PBoC’s efforts to support the reform process, rather
than an attempt to prop up growth.
It’s been 25 years since China became a middle income country.
Many countries get stuck at the middle income level as their wage
competitiveness declines and growth slows. The next five years
will be crucial if China is to escape this middle income trap.
China’s chances are decent, even with demographic headwinds
building. Just don’t expect the political theater of the
19th Party Congress to shed much
light on how Chinese policymakers are going to pull it off.