Three takeaways from China's 20th Communist Party Congress

Before we delve deeper into the details, please allow me to take a step back to explain why the 20th Communist Party Congress is so important. The meeting takes place every five years and attracts significant attention from global investors, as it’s the main platform for the Communist Party to announce changes in leadership and ideology.??

This time round was especially critical, as Chinese President Xi Jinping was vouching for an unprecedented third term; while most members in the Politburo – which is the main decision-making body of the Chinese Communist Party – and smaller Standing Committee stepped down, paving the way for a new generation of leaders.

Such a momentous shift in leadership will inexorably fuel rising uncertainty, requiring analysts like myself to spent countless hours inferring the future policy stances of the newly anointed officials. However, this task is usually aided by the presence of cues, presented during the President’s opening remarks. We have a lot to unravel, so let’s get started:?

Sweeping power consolidation

In first place, President Xi consolidated power, securing an unprecedented third term in the process, as expected. The personnel changes will not be confirmed until the National People’s Congress (NPC), which usually takes place around March. However, we can deduce the new hierarchy of the Politburo Standing Committee based on the order in which the members ascend the stage at the closing ceremony.?

According to state media, the new hierarchy of the Politburo Standing Committee is therefore: 1) Xi Jinping, 2) Li Qiang, 3) Zhao Leji, 4) Wang Huning, 5) Cai Qi, 6) Ding Xuexiang, and 7) Li Xi. This means that Li Qiang, who until now served as Communist Party chief of Shanghai, could become the next Premier, a position that is usually reserved for the second highest ranking Politburo Standing Committee official. Moreover, all members belong to the ostensible “New Zhijiang Army” faction, prominently people who held important provincial and local posts during President Xi’s tenure as Communist Party Secretary of Zhejiang province. In other words, President Xi was able to consolidate power meaningfully, paving the way for him to usher a new era of “Common Prosperity”.?

Reading the tea leaves

Which brings me to our second point – President Xi’s opening remarks. Although there were no major deviations from the long-term policy objectives outlined under the 14th Five Year Plan and Vision for 2035, textual analysis confirms a shift in emphasis towards modernisation and security themes, and away from the economy and reforms. Most notably, the target to double per capita Gross National Income levels by 2035 was not mentioned, with President Xi opting to keep things ambiguous instead. This confirms a move towards quality over quantity of growth under the new paradigm of “Common Prosperity”, and I would not be surprised if GDP targets are deemphasised – if not dropped entirely – going forward.?

This confirms a move towards quality over quantity of growth under the new paradigm of “Common Prosperity”

Indeed, this offers clear advantages for President Xi, as it frees up space for China to pursue other priorities under the “Common Prosperity” and “Dual Circulation” strategies. Nevertheless, GDP growth will not collapse in practice, as a significant slowdown would be detrimental to social stability and could aggravate structural fragilities. For example, although the third quarter of 2022 bottomed an inflexion in terms of growth, with GDP improving more than expected to 3.9% Y/Y, we observed a deterioration in labour conditions, with the surveyed unemployment rate rising to 5.5%, and higher stress in debt service.?

To put it in another way, the pace of recovery remains too sluggish. Without some economic pragmatism, President Xi will face mounting challenges in pursuing his ambitious political agenda. Therefore, we are assuming an implicit growth floor of 4.0% per annum between now and 2035.?

National security takes center stage

Lastly, we do expect that Security will become a more important driver of policy in the future. The term was mentioned more than 15 times during President Xi’s opening remarks, significantly more frequently than in previous instances and reflecting budding concerns about a tougher external environment. However, we need to think about Security in broad terms, not just militarily. For example, China remains dependent on foreign components to meet its technological advancement needs, with semiconductors overtaking crude oil as the largest import since 2014. The main chokepoint in terms of semiconductor supply chains is high value-added equipment manufacturing, where the United States enjoys 40% of the global market share. However, it is unlikely that China will stop at that, seeking instead to encourage domestic innovation to alleviate bottlenecks across all major supply chains, including technology, food, and energy.?

China will continue to pursue its carbon neutral objective by 2060. However, President Xi specifically mentioned that China would not stop burning fossil fuels until clean energy can reliably replace them. China invests more than any other country in renewables, but this has not been sufficient to meet its energy and efficiency needs. Other core technologies will have to step in to wedge this gap, benefitting from stronger policy tailwinds under China’s renewed emphasis on security under its “Common Prosperity” and “Dual Circulation” strategies.?

China will encourage domestic innovation to alleviate bottlenecks across all major supply chains.?

The bottom line is that slow but steady growth is preferable to a faster pace of expansion that leaves you exposed to risks under a more complex geopolitical landscape. Still, it remains to be seen whether state-led innovation will succeed in achieving this goal.??

For the podcast version of this article, please click here.