Economic implications of China’s Communist Party Congress

Lawmakers around the world as well as international investors are eyeing the ongoing China Communist Party Congress for clues on the future trajectory of China. Bulls in the market were awaiting a slew of reforms during President Xi Jinping’s address, hoping that there would be a turnaround in China’s growth outlook. But it seems that Xi’s opening speech had little for foreign investors to cheer about.

After serving two five-year terms as the President, Xi is now looking to secure a third term as the leader of the China Communist Party, becoming even more influential. The country’s economy is reeling under the zero-Covid policy, the real estate crisis, and the rising unemployment among youth, all of which had little focus in President Xi’s speech.

“The changes being pushed through this week by President Xi are far-reaching. They are likely to make him the most consequential Chinese leader since Mao and that could have dramatic implications for the Chinese economy, its financial markets and, perhaps most importantly, for the future of US-Chinese relations over the contentious issue of Taiwan,” writes Tom Stevenson, Investment Director at Fidelity International.

What to make of the China Communist Party Congress?

“Yesterday’s speech confirms what many China watchers have long suspected — Xi has no intention of embracing market liberalization or relaxing China’s zero-Covid policies, at least not anytime soon,” Craig Singleton, senior China fellow at Washington DC-based Foundation for Defense of Democracies, told CNN. “Instead, he intends to double down on policies geared towards security and self-reliance at the expense of China’s long-term economic growth.”

The zero-Covid policy has been a major drag on the country’s economy, with restrictions hitting businesses hard. Over 4,800 companies listed in Shanghai, Shenzhen and Beijing posted a decline in the first half of 2022. Reports by China-based financial information services companies Wind and Choice showed that about 53% of Chinese firms had posted a decline in net profit during the first six months of the year.

Late last month, the European Union’s Chamber of Commerce in China said that Beijing’s strict restrictions hurt their business in the country, with a “massive uncertainty” having a “negative impact” on 75% of its members’ operations.

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But President Xi has other plans and signalled during his speech that the zero-Covid policy will continue, making China the last major economy in the world which is attempting to avoid infections by imposing border and travel restrictions, mass testing, and sudden lockdowns.

President Xi said that the zero-Covid policy was a “people’s war to stop the spread of the virus”.

China has a GDP growth target of 5.5% for 2022, but the World Bank, IMF and several other agencies have cut the growth forecast owing to the zero-Covid policy. The IMF sees China grow at 3.2% in 2022, while the World Bank sees GDP growth at 2.8%. The country posted a GDP growth of 8.1% in 2021.

The zero-Covid policy has caused frustration among Chinese citizens, with reports emerging of banners being displayed in protest of the policy. The banners read “Food, not Covid tests” and “Reform, not a Cultural Revolution. Freedom, not lockdowns. Votes, not a leader. Dignity, not lies. Citizens, not slaves”. There was a rare protest held in Beijing, images of which are circulating on social media.

Food inflation in China has been in focus over the past few months, with drought causing severe shortages in the country. Previously, President Xi had warned against food wastage. Beijing has already banned binge-eating videos, and President Xi talked about “frugality” during his opening speech at the China Communist Party Congress.

Taiwan and focus on technology

President Xi’s speech got the biggest applause from Beijing’s Great Hall of the People when he addressed the Taiwan issue, saying that Beijing will “never promise to renounce the use of force” and “complete reunification of our country must and will be realised”.

President Xi’s speech repeated the use of the words — “safety” and “security”. He said that China would ramp up its military expansion.

Separately, President Xi addressed the friction with the US over technology and chips and said that “technology self-reliance” will be a key area of focus. “We will focus on national strategic needs, gather strength to carry out indigenous and leading scientific and technological research, and resolutely win the battle in key core technologies,” Xi said during the speech.

“We believe that this echoes to US’s CHIPS Act. As such research spending on semiconductor technology should increase. Typically, policies are released after such important events in China,” said ING in a note. Earlier this month, the US enforced sweeping rules on technology exports to China, barring US firms from selling certain semiconductors for supercomputing and artificial intelligence, targeting the China chip industry.

Another pledge by President Xi Jinping is to make China a “medium-developed country” by 2035, which implies the country’s economy will double in size from 2020 levels, economists at UBS and Macquarie Group told Bloomberg. They add that China will need to have an average GDP growth rate of 4.7% by 2035 to reach the ‘medium-developed economy’ target. However, UBS in a note on Sunday said that it expects China’s GDP growth to average between 4% to 4.5% in this decade, with growth slowing after 2030.

The communist party congress and sustainability

President Xi during his speech furthermore stressed the development of new energy systems and the focus on climate change, even as China has denied giving a focused target for going carbon neutral.

“We should collectively promote decarbonization, pollution mitigation, afforestation and reforestation. We need to prioritize the ecosystem in our development, save our energy and resource, as well as facilitate green, low-carbon development,” Xi said added.

However, President Xi stressed on “establishing the new before destroying the old”. This may imply that China will continue to rely on coal over the next few years before transitioning to renewable sources of energy. Xi’s comment is significant as China is the world’s largest emitter of greenhouse gases and Beijing is already ramping up investments in coal-fired power plants. China has said that carbon emissions will peak by 2030, before moving towards carbon neutrality by 2060.

“Coal will be used in a cleaner and more efficient way and we will speed up the planning and development of new energy systems,” President Xi said during his speech.

“As such, the (20^th Party Congress’ Work) Report also gives a hint that the Chinese government is going to issue more bonds to support its growth plan. Though we believe that the fiscal health of the government is still in good shape, the increasing demand for fiscal spending and investments means that fiscal pressure is increasing, even if it is not imminent,” said ING.