As expected, Xi Jinping took advantage of the 20th Congress of the Chinese Communist Party to consolidate his power. A real enthronement which worries the markets and is even beginning to affect Western companies active in China.
The first leader to be re-elected for a third term since Mao Zedong, Xi Jinping now personifies the Chinese regime. The eviction in full congress of his predecessor, Hu Jintao, sounds like a warning to anyone who would seek to oppose his authority. Xi Jinping has also surrounded himself with followers within the Standing Committee of the Politburo, an all-powerful body holding all the levers of power in China. The promotion of Li Qiang, tipped for the role of Prime Minister, was particularly challenged when the ex-governor of the province of Shanghai was decried for the recent chaotic confinement of the first city in the country. For many observers, this is a sign that loyalty to Xi Jinping was the most important criterion when renewing instances.
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The first leader to be re-elected for a third term since Mao Zedong, Xi Jinping now personifies the Chinese regime. The eviction in full congress of his predecessor, Hu Jintao, sounds like a warning to anyone who would seek to oppose his authority. Xi Jinping has also surrounded himself with followers within the Standing Committee of the Politburo, an all-powerful body holding all the levers of power in China. The promotion of Li Qiang, tipped for the role of Prime Minister, was particularly challenged when the ex-governor of the province of Shanghai was decried for the recent chaotic confinement of the first city in the country. For many observers, this is a sign that loyalty to Xi Jinping was the most important criterion when renewing instances. On the sidelines of the congress, Xi Jinping set ambitious development goals. It aims to make China a (moderately) developed country by 2035 through continued improvement in per capita income and to elevate the nation to the rank of world power by 2049, the regime’s centenary year. This did not at all convince the financial markets, whose sanction was implacable. The yuan fell to its lowest since 2008 against the dollar. The CSI 300 index of the Shanghai and Shenzhen Stock Exchanges lost more than 3% in two days. In Hong Kong, the Hang Seng index had its worst session in more than 10 years and is at its lowest since 2009. Chinese stocks listed on Wall Street plunged 14% as the Chinese president’s stranglehold risks increasing tensions with the United States. In mid-October, Beijing even announced the postponement of third quarter GDP figures. These were published last week but this suspension has highlighted the weight loss undergone by the Chinese indicators. According to data compiled by John Burn-Murdoch of the Financial Times, China’s statistics bureau published 80,000 indicators (national, regional and local) in 2012 at the start of Xi Jinping’s first term. By 2016, half of them had already disappeared and the trend continued. The areas most affected are industrial production, investments or monetary indicators, aspects which are nevertheless crucial. This opacity reinforces the mistrust of the markets in relation to Chinese economic figures. Helen Qiao, chief China economist at Bank of America, admittedly believes that President Xi Jinping’s concentration of power “could lead to more effective policy execution and little resistance to bolder reforms or changes in policy.” existing political positions”. But this optimistic vision is increasingly isolated. Many observers fear above all the risk of autocratic drift. Victor Shih, associate professor of political science at the University of California, points out that the members of the Standing Committee have “achieved the highest level of power by agreeing with Xi Jinping on everything and consistently siding with him. They will therefore not challenge his decisions, regardless of the merits of these. The most pessimistic point out that Xi Jinping’s nationalism could exacerbate tensions with the West, especially if the economic results do not follow. At this level, there are many doubts. First of all, Xi Jinping gave no indication of a change of course with regard to the two main brakes on growth, namely the zero covid policy and the real estate crisis. This annihilates any hope of rapid acceleration for an economy already affected by a level of global indebtedness (households, companies, government) which has doubled since 2009 and a slowdown in population growth. This demographic aspect worries more and more, the abundance of labor having been at the center of Chinese development for 40 years. According to the latest United Nations forecasts, the working-age population (defined as people aged 15 to 64) in China is currently stagnating and will start to decline by the end of this decade. By 2100, it would thus melt by more than half. In comparison, it should globally stagnate in the United States. Moreover, Xi Jinping’s promises of economic liberalization have not found an attentive ear. Especially since the Chinese president promoted a few days earlier “a spirit of frugality” and called for “balancing development with security”, pointing out that growth can be sacrificed for self-sufficiency in advanced technology and national defense. , especially when it comes to “reunification” with Taiwan. For Peter Garnry, head of equity strategy at Saxo, the 20th Communist Party Congress is “arguably the culmination of a long transformation in which China has increasingly emphasized the importance of public sector versus the private sector, as demonstrated by China’s ‘common prosperity’ policy”. Gary Dugan of Global CIO Office, a Singaporean investment services firm, believes China has turned its back on “a hybrid model of moderate capitalism and reformist communist philosophy”. Recent events “only heighten fears that Xi Jinping is turning Chinese politics back towards communism.” After decades of openness marked by China’s accession to the World Trade Organization (WTO) in 2001 or the inclusion of Chinese A shares (stocks in yuan listed on the Shanghai and Shenzhen Stock Exchanges) in the prestigious MSCI indices, China indeed seems to be closing in sharply. The best illustration is undoubtedly the positioning of Western investors vis-à-vis Chinese A-shares. When MSCI included them in its indices (China, emerging countries and all countries), it provided for an inclusion factor so as not to destabilize the indices (Chinese equities would have weighed nearly half of the MSCI Emerging index). In 2018, this factor was set at 5%. It was then raised to 20% in 2019. At the time, many investors anticipated a further increase in the inclusion factor until full integration (100%). Since then, MSCI has not touched it. Recently, the trend is even rather to the reduction of the airfoil on the side of the investors. Zevin Asset Management, an American asset manager concerned with sustainability aspects, reduced its exposure to China to zero. In Texas, the manager of a $184 billion public pension fund cut its benchmark allocation to Chinese stocks in half. Fundamentally, however, Chinese stocks are extremely cheap. The Hang Seng index, for example, quotes less than seven times earnings, a discount of 45% to European markets and 60% to Wall Street. However, this discount is not new and is no longer enough to attract investors, mainly because of Xi Jinping’s policy, which does not seem to want to change its tune. Concern is even growing and is beginning to affect Western companies. active in China, as noted by Peter Garnry: “Does a dollar of cash flow in China have the same value as a dollar of cash flow in the United States or in Europe? Probably not”. For the Saxo specialist, this difference appears clearly today in the valuations of players in the semiconductor industry, in particular because of the American restrictions on exports of electronic chips. “But that hasn’t (yet) been fully reflected in more consumer-oriented stocks like Apple and Tesla. With around 20% of its revenue coming from China, Apple’s risk profile could rise. Tesla makes 25 % of its turnover in China and is therefore also very exposed to this country.” We could obviously add many other examples, starting with Ageas on Euronext Brussels. The insurer warned last week that its third quarter results would be below expectations due (largely) to market conditions in China.
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