The culmination of the Chinese Communist Party’s (CCP) 20th National Party Conference sent reverberations around the world as Xi Jinping was confirmed for a third term, surrounding himself with loyalists. Although Xi Jinping will be the first leader since Mao Zedong to sit for more than two terms, his re-election was expected. The elections to the highest decision-making body, the Politburo Standing Committee, however, were a greater cause for concern.
The Politburo Standing Committee is China’s top decision-making body, composed of seven members and headed by the party’s general secretary – Xi Jinping. Outside of the Standing Committee are the other 17 members of the Politburo, who are next in the line of succession for the Standing Committee.
Deng Xiaoping, who succeeded Mao, in an effort to prevent another lifelong dictatorship, restricted China’s presidency to two five year terms and introduced more collective leadership into the running of the party. Deng’s successor, Jiang Zemin, sought more advice from all members of the Standing Committee, which made decisions by majority vote. Hu Jintao, who took over from Jiang in 2002, took the party’s collective leadership even further and ruled with the consent of the nine members of the committee, with a single member able to veto any decision.
Over his first two terms, Xi Jinping has systematically unravelled the steady progression of the party’s collective leadership, aided by a longstanding anti-corruption campaign used to purge the party and silence internal critics. Previous committees have historically been composed of members with differing ideological views on the left-to-right political spectrum. Xi’s faction on the left remains committed to more orthodox Marxism; centrists support economic reform and limited political reforms; and those on the right advocate for a more market-based economy with less authoritarianism. The makeup of the latest Standing Committee (each member being a protégé or ally of Xi) is the starkest evidence yet, of his consolidation of power. Paving the way for Xi to become a lifelong leader, every member of the committee are 60 years and older. Being at least 65 at the end of this term significantly reduces the likelihood of any of the members ascending to general secretary in 2027 because they would greatly exceed the age cap of 68 at the start of a second term. The party’s “seven up, eight down” convention states that officials aged 67 or less at the time of the party conference can be promoted, while anyone aged 68 or over is expected to retire. At 69, this convention certainly hasn’t applied to Xi Jinping.
Xi’s sweeping victory and consolidation of power has raised the spectre of an intensification of domestic and foreign policies pursued over the last several years. Xi has in recent times broken from Deng’s dictum that China “hide its strength and bide its time.” Beginning with the Trump administration, China has increasingly challenged US hegemony. China has also increased military presence in the South China Sea, taken greater control of Hong Kong, and ramped up threats against Taiwan. Domestically, Xi has dogmatically enforced the zero-COVID policy.
Investment Implications:
The news of the Standing Committee appointments prompted a steep sell-off in Chinese equities listed in Hong Kong and New York on Monday. The Hong Kong Hang Seng index plunged 6% to a 13 year low and the offshore yuan declined over 1% to a 14 year low. Tech giants, Tencent, Alibaba and Meituan all tumbled more than 11%, driving Prosus and Naspers down 15% and 17%, respectively.
From an economic policy perspective, there was little deviation from what has been followed since the pandemic. Most significantly there are no signs that China will be relaxing its zero-COVID policy. In the absence of an effective vaccine, the policy raises the risk of more sporadic lockdowns in the country. The CCP’s newly elected second-in-command, Li Quiang, was responsible for coordinating the (shambolic) two month lockdown in Shanghai, which sparked public anger and rare protests. In the absence of an effective vaccine and a large aging population, demand from China for consumer goods and commodities will be increasingly volatile in the months ahead.
The biggest global tail risk continues to be Xi’s ambition to reunite Taiwan with the mainland through force. At the conference, after saying he wanted peaceful reunification, he went on to say that “we will never promise to renounce the use of force, and we reserve the option of taking all measures necessary.” Following House Speaker, Nancy Pelosi’s visit to the country, there was a lot of sabre rattling and military drills conducted in the Taiwan Strait, but China’s military stopped short of any serious provocation. Although a large scale invasion of the island remains an unlikely outcome, the threat of an invasion alone creates an uncomfortable risk for the world economy.
Despite Xi’s more Marxist skew, there was nothing in his speech that imperils foreign companies that have operations in the country. Although we anticipate the large technology companies to continue to face intense regulatory scrutiny, including the need to enforce the government’s strict censorship standards on their users, there weren’t any additional measures announced that are not already in place.
China’s foreign and domestic policy direction has become increasingly unpredictable under Xi Jinping’s leadership. The composition of the standing committee raises the risk of the country following Xi’s ideological and personal goals, and moving further away from the western system that many had hoped Chinese policy would inevitably converge with over time.