Party On? China’s 20th Party Congress
By Ewan Markson-Brown
Whereas the 19th Party Congress delivered a Xi ‘vision’, the 20th did nothing except to state that ‘Xi Jinping Thought’ is the best, and only, form of governance. Simply, this is the belief that everyone in the world will eventually follow/or at least accept, the ‘Chinese way’, in a non-Imperialist fashion, with peaceful and blind adherence.
Xi’s Key Messages
There is no successor: China now has one and only one leader. The public humiliation of Hu Jintao, a former president no less, was a sign to the other government factions (including The Youth League) that the game is over. There are no other factions allowed, Xi is government. Anyone who steps out of line will be humiliated, have their reputation destroyed, wealth redistributed and go to jail.
It is now clear that ‘Xi Jinping Thought’ is to replace Marxism. You are either with him, or you are anti-Party and, therefore, anti-China. Competence (or the lack of it) cannot be challenged. For example, Zero-Covid is the only option and there is no end in sight. There is no alternative until Xi decides there is. The Party becomes even more important to the people. The Party is religion.
Finally, the key focus is on core technologies, manufacturing excellence and self-sufficiency.
Implications for International relations and foreign investors
China continues its own version of Make China Great Again (with Chinese characteristics perhaps). Technology companies, innovators and industrial enterprises will be granted special dispensation, if they align with Party goals. This will also include overseas companies operating in China. This central vision means that China will continue in its endeavour towards economic self-sufficiency. Industrial companies and loyalists will be rewarded. Note how Huawei, for example, has never suffered any setbacks from government measures.
The so-called ‘wolf-warrior’ diplomacy will continue. It is no surprise that the Manchester Embassy beating took place during the Congress.
The belief is that the world needs China, while China needs the world but only on China’s terms. Foreign businesses no longer have special privileges unless they have something advantageous to offer such as the intellectual property that defines so much of the tech sector.
On Taiwan, there will be no military action for at least 5-10 years. Xi is smart enough to realise that China lacks the military capability for now. So the only solution is for Taiwan to surrender peacefully which, of course, won’t happen. Expect continued sabre rattling but no invasion.
The implication is that military tensions will remain high, not only with Taiwan but across the South China Sea. China says that ‘The Pacific is big enough for two’.
Hong Kong’s future lies as part of South China’s Greater Bay Area. Its significance is diminished despite retaining some importance as a financial centre. Expect asset prices to fall as interest rates rise and domestic growth slows.
Real estate, which has accounted for 30% of GDP, will remain in trouble. Expect a very significant slowdown with little government support forthcoming. Economic growth will be further hamstrung by the Zero-Covid policy and the global headwinds of further interest rate increases.
Ironically, the safest option for foreign investors is the domestic Shanghai market. It is barely influenced by foreign capital which owns less than 3% of the market. This makes it the safest option for foreign investors. In comparison, Hong Kong is dominated by foreign capital which is cutting exposure significantly as divestments by Texas Teachers show.
Conclusion
We know from history that a concentration of power and an exclusion of alternative views tends to lead to group think and eventual disaster. Of course, there are some notable exceptions. When hard, non-economic decisions need to be made: in war, in revolutions, in emergencies, in shifting economic structures, then leadership holds the key. A general rule of thumb is to short the third term of any leader, as prior success turns towards hubris.
What is most distinct and interesting from Xi's rise to complete dominion in China is that it has come after a term of abject failure, not success. This includes the Hong Kong protests, tensions over Taiwan, a US trade war, covid, zero-covid lockdowns, ineffective vaccines, US semiconductor bans, being blindsided and tricked into supporting Putin, Xinjiang horrors, faltering economic growth, high youth unemployment, a property market collapse, tech regulation over-reach and a looming demographic implosion.
Although Xi may believe that some of these are a necessary cost to achieve long-term aims, he, like Putin, knows that China is losing now on too many fronts. The question then is what does he do next?
One option is for Xi to bide his time building self-sufficiency, while waiting to see if Putin's theory that Western dominance is over due to US over-reach and the end of free money, and zero interest rates heralds a new world order. This is a fond hope.
However, the Ukraine war has shown that the defender has a material advantage, that Russia is not the fearsome state once believed and that the West is not weak and divided. Indeed, much less divided than anticipated.
As well, China's dependence on the world, in terms of food supply, hard commodities and semi-conductors is unlikely to ever be assuaged. Demographics are another weakness as the population is likely to have peaked this year. In fact, without significant economic growth, the chance of 'super power' status will slip further away year by year. China looks increasingly likely to get old before it gets rich and powerful.
Another option is for Xi to use his absolute power to improve economic growth by turning full circle and re-engaging with the US and other key trading partners, while scrapping zero-covid, targeting growth in high-tech manufacturing and domestic consumption. This would imply reducing regulation on tech companies and the real estate sector, while continuing to push for self-sufficiency.
We will find out by March 2023, when the Two Sessions are complete, which way Xi intends to go. Events in the Ukraine and the results of the US midterm elections will be pivotal.
Our base case at CRUX, is a gradual re-opening of the economy from zero-covid into the 2H of 2023. We also expect a compromise with the US and an opening up to Europe and non-aligned nations as part of a general mobilisation to expand technology manufacturing, including semi-conductors. This should see the economy begin to accelerate faster than any Western nation over 2023 to 2025.
We are overweight areas which, we believe, align with the Chinese government's long-term goals. They include industrial development in electric vehicles and automation; innovation; and energy self-sufficiency, notably through renewables, oil and other key commodities.
Please note the views and opinions expressed in this article are based on CRUX’s research and analysis and therefore represent the point of view held by CRUX at the time of publication.