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

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 amid a restructured leadership group packed exclusively with loyalists to him. While that last part stirred much conversation and may have surprised some at the margin, overall the developments look set to extend the status quo versus some kind of huge shock.

Let us start with the smaller stuff: The delayed data. When China didn’t release trade data as scheduled on October 14—with no explanation—many feared terrible figures would come. Those fears grew more when it delayed GDP results last week, ahead of the Congress’s convening. But in the end, the data don’t support the 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.^[ii] 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. It appears 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.^[iii] 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. Meanwhile, retail sales (2.5% y/y), exports (5.7%) and imports (0.3%) decelerated in September.^[iv] That said, few analysts expect China to meet its 2022 growth target, and 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.

The bigger news Monday: Xi’s return for a third term, potentially cementing his presidency for life. As many outlets pointed out, his was the only position unchanged among 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. Xi’s status is no shock—it was widely expected he would break with recent practice, setting himself up for continued rule. As for the Standing Committee, that is more of a twist, although a shakeup isn’t a shock, either. The most surprising feature, arguably, is 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). That move seems to have stoked some concern.

Li Keqiang is widely viewed as a market-oriented reformer and comes from the CCP’s Youth League faction, which has long pushed for economic modernization. His successor, who takes over in March, has little national experience. The fear is this appointment (coupled with the Youth League’s expulsion from the Standing Committee) will shift policy radically, but 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. Hence, we see little tangible reason to think a new Politburo with Xi still at the helm likely changes much policy wise.

While short-term market moves are open to interpretation, we see Monday’s swing as sentiment-based amid an already nervous market environment. The associated headlines seem largely like efforts to read significance in those swings. Maybe there is some. Maybe not. But little here seems to pack fundamental surprise power at this point. Markets have long been aware of these issues, which should defang the effect some. The market 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.^[v] The MSCI World rose 1.2% Monday and 4.9% through the Chinese conclave.^[vi]