China’s annual average GDP growth over the medium term (2018-2020) has just been revised up by the IMF – from 6.0% to 6.4%, on expectations of further increases in public and private debt. In a context of robust cyclical momentum, this year’s 19th Party Congress in early November will set the policy priorities for the next five years. This relative economic and political stability and systematic long-term approach are partly responsible for our overweight stance on Emerging markets.
The early-November 19th congress of the Communist Party of China will be an important milestone for two reasons. First, President Xi will present his Political Report, detailing the policy priorities for the next five years, including economic overhauls and structural reforms. Addressing economic stability and growth, the report is expected to highlight key development areas and dig into well-identified structural problems (housing market, inefficient SOEs, less competitive export sector, rising debt and leverage). Second, among the series of imminent elections is the likely selection of five new members of the seven-strong Politburo Standing Committee. Hence, any decisions taken at this year’s congress are likely to reverberate well into the next decade (President Xi Jinping and PM Li Keqiang could remain for another five-year term).
From a short-term perspective, the congress is likely to take place amidst a supportive economic context. Over the past 18 months, the Chinese economy has gathered steam, ending a five-year-long period of producer price deflation and contributing significantly to faster global growth. The robust activity is best encapsulated in the Li Keqiang index, which reflects growth in total loans, electricity output and freight turnover. As a result, and helped by a weaker USD vs. CNY, Chinese foreign reserves have halted their decline while prices of industrial metals (e.g. iron ore, copper) have also acknowledged the rebound in activity.