Is China setting the stage for long-term reforms?

Looking ahead to China’s 19th Party Congress

The 19th party congress on Oct. 18 marks the beginning of Xi’s 2nd 5-year term as China’s political leader. As more than 60% of the Communist Party’s Central Committee will rotate and possibly 5 of the 7 all-important Politbureau Standing Committee members will retire, this marks undoubtedly a landmark moment for Chinese politics, giving Xi — already one of the strongest Chinese leaders  of the last decades— the possibility to consolidate his power further. The reshuffle gives him the opportunity to promote his supporters. More specifically, it could mark a generational shift in terms of Chinese leadership, as many – including the central bank governor – of the Hu Jintao generation will step back.

Traditionally, the 2nd term of China’s President’s is where most changes are implemented. This is why it is so important, as China is facing the structural challenges of a high and rising debt combined with slowing growth potential and risks being caught in a middle income trap. As a reminder, growth is normally seen as debt killer number one. What the Party reshuffle will mean in terms of concrete policy changes that address these challenges will probably not be seen before the National People’s Congress in March 2018. So far, the government has not found convincing strategies to cope with its economic challenges.

All that being said, from a market perspective these party congresses tend to have no large impact as such. Why could things be different this time around? The global recovery has been very much China driven, in our view. Therefore, the global cyclical situation probably hinges more on China than ever before, as it is delivering by far the biggest contribution to global growth. In October, we will learn more how the Chinese leadership will change, i.e. focus will be mostly on pure politics. The economic impact of this, while all important, will probably not be clear before early next year. In the meantime, we expect the leadership to prioritise financial and social short-term stability concerns over the need for long-term reforms limiting the dependency on debt as a growth driver. In other words, debt will continue to grow, albeit with a changing composition. Growth will slow without falling off a cliff. Stay tuned.

Figure: Chinese growth is slowing, while debt is rising

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About Nordea Asset Management
Nordea Asset Management (NAM, AuM 219 bn EUR*), is part of the Nordea Group, the largest financial services group in Northern Europe (AuM 332 bn EUR*). NAM offers European and global investors exposure to a broad set of investment funds. We serve a wide range of clients and distributors which include banks, asset managers, independent financial advisors and insurance companies.

Nordea Asset Management has a presence in Cologne, Copenhagen, Frankfurt, Helsinki, London, Luxembourg, Madrid, Milan, New York, Oslo, Paris, Sao Paulo, Singapore, Stockholm, Vienna and Zurich. Nordea’s local presence goes hand in hand with the objective of being accessible and offering the best service to clients.

Nordea’s success is based on a sustainable and unique multi-boutique approach that combines the expertise of specialised internal boutiques with exclusive external competences allowing us to deliver alpha in a stable way for the benefit of our clients.  NAM solutions cover all asset classes from fixed income and equity to multi asset solutions, and manage local and European as well as US, global and emerging market products.

*Source: Nordea Investment Funds, S.A., 30.06.2017

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