Xi is in total control of China.

The much-heralded 20th Communist Party Congress took place in early October and President Xi Jinping was confirmed as President for a further five years. In accepting the confirmation, he announced some new policies but one policy that did not change was the zero covid lockdown policy which has cost China so much in liberty, growth, and health.

China has endured the world’s strictest lockdown that have destroyed lives and livelihoods and there is no guarantee that this will not continue with Xi Jinping having been handed an unprecedented third term in office. Xi is in total control of China and is determined to enforce China’s cultural and military dominance even at the expense of the economy. With the zero Covid policy continuing and another Shanghai lockdown on the cards the opportunity for a big economic growth stimulus package looks some way away until China is free of Covid.

Over the past 5 years, we have seen policies that de-risk the Chinese economy such as the crackdown on shadow banking, property development, local government debt and fin tech. There has been a refocus on ‘common prosperity’ and a cut back in private education companies. Xi has signalled that he will continue to pursue his common prosperity programme and in doing so will take on the financial elite in China. Hence the wealthy are leaving and their money is flowing out.

The Communist Party Congress appointed a new Politburo Standing Committee which will set the tone for the next five years. With the lowering of Chinese growth numbers, the pressure on ordinary people in a low growth economy with growing levels of unemployment and lack of investment will soon be evident.

The Chinese system of government relies on the good will of its population for its success. Hence, the new Politburo will need to address these issues so we should expect some form of Covid vaccination policy and a growth stimulus package.

China is in a very different position over inflation and interest rates. The country has the capacity for growth once the authorities allow it. Chinese inflation is currently 2.8% and interest rates are 3.65%

We are however concerned about the policy of Xi Jinping over culture and geopolitics and it is this that is frightening off international investors. It seems that China is less interested in starting a war than has Russia. Russia’s share of world trade is only 1.5% and that has fallen due to oil and gas sanctions. China’s share of world trade is 15.5% so it is far more engrossed and needing of export trade which could be lost if China was to try to recover Taiwan as a province of China.

The newly elected Politburo will be overwhelmingly dominated by Xi loyalists, while well respected economic reformers are retired. Their replacements are less experienced, close confidants or bureaucrats who will prioritise a state model of economic management.

The market reaction to the Communist Party Congress outcomes was negative. Stocks on the Heng Sang slumped and the renminbi weakened against the US$ over concerns that Xi will continue with ideological policy at the expense of the economy. Money is flowing out of China; investors are repatriating capital due to the growing concerns over China withdrawing into a more dictatorial regime. This will hamper economic growth.

Official Chinese figures for GDP growth for Q3 were 3.9% beating expectations and were a strong bounce back from 0.4% growth in Q2 when many cities were in lockdown. However, these latest growth figures are high compared to all developed countries but well below past Chinese growth rates. The delayed disclosure of the Q3 GDP figures did not reassure markets either. The main concerns are that the property sector continues to slump, retail sales and labour markets are weak and any stimulus support looks a long way off.

Some observers are hoping that China will stand by its zero Covid policy but will take incremental steps towards easing the policy. China must re-open and will need to stimulate growth. This is not universally accepted as there are concerns that the Secret Kingdom will revert to exactly that. Markets have recently responded to a ‘leak’ that China will ease its zero Covid policy.

We hope that Chinese leaders will begin to re-engage with their global counterparts in other countries after a prolonged lockdown. This will be a signal of the approach the new government takes.

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