National Congress of the Chinese Communist Party

The Chinese Communist Party (CCP) is the ruling party of the People’s Republic of China. More than 2,000 party officials gathered last week (16th to 22nd October) for the National Congress of the Chinese Communist Party. This meeting is held every five years and sets the political, economic and social agenda for the next five years, as well as approving members of the Central Committee, the top decision-makers in the party.

Why is it important?

China is the world’s second-largest economy and one of the largest single contributors to world growth. Decisions made in China have an impact around the world. As we have seen over the last two years, COVID restrictions in China caused severe bottlenecks in the global supply chain.

The congress provides guidance on how the CCP will govern and who will hold the top positions over the next five years. Understanding whether certain sectors will receive support and if broad policy will be stimulating or tightening can provide clues about how to position portfolios.

What’s the impact?

Since the 1990s, the CCP has imposed a two-term limit for presidents, but this was abolished in 2018. This effectively allows the current President, Xi Jinping, to remain in power for life. Xi Jinping is already the most powerful person in China and this congress has only elevated his status further.

China has experienced slowing growth in 2022, largely as a result of its zero-COVID policy. These measures have undoubtedly saved lives, but also hampered growth. This is something the government has acknowledged but the leadership believe it is the right thing to do. Commentators expected that the congress would yield an announcement that the zero-COVID stance would be softened, but this did not materialise. Restrictions have eased somewhat, with citywide lockdowns replaced by smaller, targeted lockdowns where needed. However, the Chinese response is still in stark contrast to the rest of the world.

Difficulties in the property market have acted as another headwind over the last 18 months. The government’s objective had been to reduce speculation and rein in high debt levels, with the ultimate aim of benefiting homeowners. However, these changes created a crisis in which property developers failed to repay debts, property prices fell and many companies appeared to be pushed to the brink of collapse. The government introduced targeted measures throughout the year to support the sector, including lowering mortgage interest rates for first-time buyers and providing further liquidity in the market. Continuing action is expected to help support the property sector and maintain economic stability.

What are we doing?

During 2022 our equity positioning has been defensive, using equity income funds that invest in companies with strong balance sheets and robust cash flows. We believe these companies should be better positioned to weather any potential recession. Such strategies in Asia typically have a lower weighting to China and this has benefitted our portfolios.

Equities are trading at near historical lows, and we think that most of the bad news is already factored into share prices in China. With this in mind, we are considering increasing our weighting to Chinese equities over the next few months. We will do this either by using an existing manager who actively adjusts their weighting to a region, depending on prevailing market conditions, or investing directly in a China fund.

The chart below shows years where the returns for the MSCI China index were negative and the subsequent year’s performance. Over the last 20 years, every down year has been followed by an up year with equal or higher positive performance. This year and last year have been the only exceptions in the last 20 years and we believe that strong performance may return in 2023.

Source: Morningstar

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Scott Truter, Investment Analyst, 21/10/22

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Risk Warnings 

Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds. Our funds invest for the long-term and may not be appropriate for investors who plan to take money out within five years. The funds may have exposure to bonds, the prices of which will be impacted by factors including; changes in interest rates, inflation expectations and perceived credit quality. When interest rates rise, bond values generally fall. This risk is generally greater for longer term bonds and for bonds with higher credit quality. The funds invest in other currencies. Changes in exchange rates will therefore affect the value of your investment. The funds may invest a large part of its assets in other funds for which investment decisions are made independently of the fund. If these investment managers perform poorly, the value of your investment is likely to be adversely affected. Investment in other funds may also lead to duplication of fees and commissions. In certain market conditions some assets may be less predictable than usual. This may make it harder to sell at a desired price and/or In a timely manner. All or part of the fees and expenses may be charged to the capital of the funds rather than being deducted from income. Future capital growth may be constrained as a result of this.

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