Policy continuity to maintain steady growth
The 19th National Congress of the Communist Party of China is scheduled to begin on Oct 18. It is expected to signal the policy direction for the next five years, and to maintain steady growth, policy continuity is likely.
Attendees will discuss the strategy for building a "moderately prosperous society", decisions that will have a significant impact on the country's development.
The CPC has profoundly shaped the destiny of Chinese civilization, and the national congresses have been paramount in plotting the country's course. The Third Plenum of the 11th CPC Central Committee in 1978, for example, ushered in the reform and opening-up.
Since 1980s Party congresses have ushered in three generations of leaders, Jiang Zemin, Hu Jintao and the current General Secretary Xi Jinping.
Given Xi's objective since he assumed power at the 18th Party Congress in 2012 has been to double per capita income by 2020 from the 2010 level, the government will probably continue to pursue a growth target of around 6 percent over the next three years.
Since his "Four Comprehensives" instruct the party to comprehensively build a moderately prosperous society; comprehensively deepen reform; comprehensively advance the rule of law; and comprehensively and strictly govern the Party, the new generation of leaders will be more inclined to develop the economy following the Party Congress.
We believe deleveraging efforts will expand from the financial sector to the real economy and from the traditional to online financial sector.
Liquidity remained relatively stable at the end of the third quarter, despite rising borrowing costs and slowing credit growth. The central bank announced on Sept 30 a targeted 50 basis points reserve requirement ratio cut for banks if new or outstanding lending to small-and medium-sized enterprises exceeded 1.5 percent of their total loans in 2017. The cut will have no immediate effect, but it will release 400 billion to 500 billion yuan in liquidity when it comes into effect early next year. Fiscal policy remains supportive of economic stability, with infrastructure investment by local governments slowing due to deleveraging efforts.
We believe the overarching themes and strategies will remain the same. As such, we expect a continuation of economic policies that promote financial deleveraging and the curtailment of property market bubbles, strengthened environmental protection, and the transformation from an investment and manufacturing-driven economy to a services and consumption-oriented one.
We expect the need for SOEs, fiscal and financial reforms and housing policies to be reiterated during the congress, themes that should play out in the next 6 to 12 months.
The SOEs reform discussions will likely focus on industry consolidation to reduce overcapacity and improve efficiency and the implementation of a mixed ownership structure. We believe the objective is to make central SOEs bigger and stronger via favorable policies, tax incentives and access to funding. Meanwhile, the budget reform should strengthen the government's supervision of local government debt and limit irregular local government borrowing. Local government officials will probably be tasked with taking lifelong accountability and retrospective responsibly for any local government debt problems.
Despite their political importance, Party congresses have not been key events driving the market in the past and the 19th is unlikely to have a strong fundamental impact on the market. The market conditions and macro environment and the policies that follow the event will play a bigger role.
We expect important economic policies and key development objectives for 2018 to be announced at the Central Economic Work Conference this year. More specific policy details, including the 2018 growth target, monetary and fiscal policy guidance, and reform plans will likely be covered at the National People's Congress in early March 2018.
The author is equity analyst at UBS Wealth Management Chief Investment Office.
