Conclusions or No Conclusions from China's NPC
China’s 20th National People’s Congress (NPC), an event which happens only once every five years, opened in Beijing on the 16th October and closed on the 22nd October. As was widely expected, President Xi Jinping won an unprecedented third term, making him the country’s most powerful leader since Chairman Mao Zedong. The Central Committee also voted for the 25-person Politburo and its seven-member Standing Committee. In addition to his individual win, President Xi secured six strong allies as members of this committee, which is known to be China's highest leadership body.
It is worth remembering that the NPC is not a policy-setting meeting. Rather, it is there to form very broad directions for the country. As such, investors cannot easily gauge any near-term policy directions and their associated long-term implications. Despite this, the initial news coming out of the NPC appeared to bring much caution and panic to financial markets. The concerns were largely surrounding dividing views which could lead to a number of policy mistakes in the country.
This was evident with Chinese stocks massively struggling on the 24th October. The Hang Seng Index fell 6%, its worst daily decline since the 2008 financial crisis, the Shanghai Stock Exchange declined by 2% while the Golden Dragon China Index fell 14%, its worst daily decrease since 2004. Despite these losses, the markets did bounce back partially in the days and weeks following.
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In addition to this near-term volatility, there are also some longer-term themes that could play out on the back of this NPC. For a start, looking at the composition of the 25-person Politburo, there is a concentration at the top with respect to power. While international investors may see this power concentration as a negative, domestic investors are likely to view this favourably as it means quicker decision-making and policy execution. Because Chinese equity markets are dominated by domestic investors, this sentiment could be favourable for Chinese stocks.
Further, the majority of the Politburo now have science and tech backgrounds. This is a big shift from the previous NPC, where the majority came from financial backgrounds. This is a clear signal that the nation wants to focus more on technology, and this may come in the form of more investment in the sector or even reduced regulations for the sector. Ultimately, it could be beneficial for technological or software stocks within China.
One of the big issues that investors sought clarity on was China’s zero-Covid policy. The expectations were that these policies would be relaxed further, but investors will now have to wait until March 2023, when the nation’s “two sessions” (or Lianghui) annual meetings will be held, for that. In the short-term, though, as President Xi signalled, it is unlikely that these policies will come to an end, although they may be more focused on communities instead of cities. The likelihood is that there may be some relaxation at the March 2023 meeting but no complete respite until the end of 2023.
Another significant worry that came from the NPC was President Xi’s mention of Taiwan in his opening speech. He stated that Beijing would "never promise to renounce the use of force" and that "complete reunification of our country must and will be realised." This may worry investors, particularly from abroad, about an escalation of geopolitical tensions in the region. And, if these tensions do rise, it’s not only Chinese markets but global markets that can be significantly impacted, something we saw earlier in the year with Russia’s invasion of Ukraine.
The overall conclusions that investors are likely to come to following the NPC are that there are perhaps no conclusions. There is some reason for optimism as mentioned above, but there is also much uncertainty around the potential headwinds in the form of zero-covid policies and Taiwan. We believe that, in the short-term, the case for China looks appealing, especially given where Chinese equity valuations currently are, particularly in the technology sector. Moreover, many investors are significantly under-allocated to China and will be looking to buy back at attractive levels, which should support the market. Another factor to consider is a potential weakening of the US dollar, which we believe is on the horizon, a factor which will be favourable for China, as well as emerging markets in general.
10 November 2022