19th National Congress of the Communist Party of China: Xi, Xi, Xi, Xi and Xi!

On Wednesday, October 18th, the 19th National Congress of the Communist Party of China will very likely see President Xi Jinping further bolster his position as one of the most powerful leaders in modern Chinese history, even in the worldwide political scene.

Xi Jinping is expected to use this congress, which marks the start of his second and last legal five-year term, to further fortify his position by stacking the party’s upper echelons with loyalists. Five of the seven spots on China’s top ruling council, the politburo standing committee, are theoretically up for grabs, as are 11 of the wider politburo’s 25 seats and roughly half of the spots on the 205-member central committee. The question then is what Xi will do with that power? Most expect a continuation of his hard-line domestic policies and assertive international postures which have seen Beijing aggressively push territorial claims in the South China Sea and position itself as a champion of globalisation. An optimistic few continue to hope that, having strengthened his political position, Xi might reveal himself as a political or economic reformer. Next week’s highly-scripted event will offer important clues as to just how much power Xi has managed to amass, with many experts predicting that he will upend two decades of precedent in two highly significant ways. First, Xi may decline to promote a successor, sending a message that he intends to remain in the top party post for a third, or maybe even fourth term. According to party norms, China’s top two leaders are usually publicly anointed at a congress five years before they take power. Xi emerged as China’s presumed future leader at the 17th party congress in 2007. So far, no heir-apparent has appeared; a possible successor was recently toppled in a politically-charged corruption investigation.

 

From a more economic and financial point of view, this political status quo should be seen as economic and financial signs of stability. Indeed, the ratings downgrades of Moody’s in May 2017 (to A1/stable from Aa3/negative) and Standard & Poor’s in September 2017 (to A+/stable from AA-/negative) was perceived as first signs of instability by financial markets. These moves are the first ones since 1989 and Tiananmen Square protests. These downgrades reflect the credit ratings agencies’ expectations that China’s financial strength will erode somewhat over the coming years, with economy wide debt continuing to rise as potential growth slows (see chart below). Since then, the CNY has appreciated vis-à-vis the USD (c. +6% between the end of May and the beginning of September) and then lost some ground. But more recently, the CNY has strengthened against the greenback to c. 6.6 which could be a sign of “overriding stability” ahead of the congress.

China: Real GDP growth vs. Private debt

Moreover, from a more prospective point of view, Trump’s commercial actions against China, North Korea escalating tensions and a hawkish Fed are the main downward risks for the CNY in the medium to long run.

At the end of the day, the current Chinese president could use the congress to write a new Xi Jinping-related body of ideology – maybe called Xi Jinping Theory – into the party constitution. This would put Xi in the same political league as revolutionary leader Mao Zedong and would be another sign of an intent to extend his rule beyond the customary decade. During the congress, Xi may decline to promote a successor, sending a message that he intends to remain in the top party post for a long time. This could be seen as evidence of political, economic and financial stability for China…