Xi has made it clear that China will continue his policies of central control of all aspects of the economy, including pricing of the yuan on FX markets.
The world has been watching developments at the National Congress of the Chinese Communist Party, the twice-per-decade meeting of China’s political leadership. The Congress ended with the approval of Xi Jinping’s historic third term in power and significant changes in personnel in the seven-person Standing Committee and the 24-member Politburo.
When I visited Shanghai in 2010 to help celebrate the expansion of futures trading at the China Financial Futures Exchange, the financial community was excited by the prospect of modernization of the Chinese economy. The government had issued a plan to make Shanghai an international financial hub like New York or London, with the yuan becoming a currency that would trade freely in FX markets. Xi’s rise to power in 2012 led to an ideological renewal reminiscent of Maoist China—less focus on the free market and more government control of the economy. China’s leadership just signed up for at least five more years of the new status quo.
Change and Implications
Change: Xi broke precedent by taking a third term as president despite being at the age (69) when Chinese politicians traditionally retire from public office.
Implications: Expect all elements of Chinese financial policy to be driven by Xi’s ideology for at least the next five years. Xi has largely abandoned policies that helped China rapidly develop over the last 30 years.
Change: Li Qiang, the former Chief of the Shanghai Communist Party, will take over as Premier in March 2023.
Implications: Li is a Xi loyalist, so he will follow the dictates of his leader. Li is unlikely to push back on any elements of financial policy, which is further evidence that ideology will triumph over financial pragmatism.
Change: Four of the seven members of the Politburo Standing Committee were replaced with Xi loyalists. Analysts are referring to this action as a Mao Zedong-style purge.
Implications: Several ousted members were described as “financial technocrats” and were largely responsible for China’s economic policy over the last decade. Their replacements are ideologues who will follow a less pragmatic approach and be driven more by political considerations.
Financial Markets Reaction
The mainland China stock market dropped by over 3% on the first trading day after the end of the Congress. Hong Kong’s market dropped by 7% that day, hitting lows last seen during the early days of Covid. Chinese tech stocks bore the brunt of the selling, with big names like Ali Baba and Baidu dropping to multi-year lows.
The Chinese yuan (USDCNH) dropped to lows last seen in 2008. It does not appear that the People’s Bank of China attempted to stop this move. The Xi regime is committed to an ongoing policy of managing the price of the yuan. Still, the sizes of currency flows and market forces will make it impossible to maintain a strict peg as China once did.
Takeaways
- Expect the Chinese to maintain tight control of the yuan. The recent drop in the currency’s value is best viewed as keeping it in line with China’s Asian competitors (Japan and South Korea) rather than a reaction to the U.S. currency.
- Xi has made it clear that ideology will be more important than economic growth. China’s multi-decade focus on economic development will be given a much lower priority. It is expected that foreign investment will not be as actively encouraged, and doing business in China will be more difficult.
- China will no longer have robust export-oriented policies. That could end the world’s reliance on inexpensive consumer products made in China. This is important because, for the last 30 years, the availability of low-priced goods from China has had a disinflationary effect on the U.S. and European economies.
- Xi’s choice of Standing Committee members ensures that there will be no dissident voices regarding policy. As Victor Shih, a professor at UC San Diego, said, “These are all officials who got to the highest level of power by agreeing with Xi Jinping on everything and by siding with him consistently. They will not start to challenge his decisions regardless of the merits of these decisions.”
