China's 19th Party Congress

Even with undisputed power, Xi Jinping seen wary to push China reforms: Economists

People walk past a poster featuring Chinese President Xi Jinping in Beijing on Oct 16, 2017. Markets will be listening when Mr Xi addresses more than 2,000 delegates in Beijing to kick off the conclave.
People walk past a poster featuring Chinese President Xi Jinping in Beijing on Oct 16, 2017. Markets will be listening when Mr Xi addresses more than 2,000 delegates in Beijing to kick off the conclave.PHOTO: AFP

BEIJING (BLOOMBERG) - President Xi Jinping is expected to emerge from the twice-a-decade Chinese Communist Party's congress that starts on Wednesday (Oct 18) as the most powerful figure in Chinese politics since Mao Zedong.

Far less certain is what he will do with all that enhanced political clout. 

Global investors and executives hoping an emboldened Mr Xi will tackle the big structural challenges facing China - from sprawling and inefficient state-owned companies to a massive corporate debt overhang - may be disappointed, according to analysts.

"The most likely scenario is a continuation of what we had in the last five years," said Mr Frank Benzimra, head of Asian equity strategy at Societe Generale.

Playing it safe makes political sense for Mr Xi at a time when the economy is delivering positive surprises - growth has beat estimates for three consecutive quarters - and the international environment features saber rattling over North Korea's nuclear programme.

But by delaying reforms to avoid short-term hiccups, Mr Xi could also miss an opportunity to put the world's second-biggest economy on a more stable long-term footing.

Markets will be listening when Mr Xi addresses more than 2,000 delegates in Beijing to kick off the conclave. Among the existing priorities he will likely spotlight are the Belt and Road Initiative to promote infrastructure projects with trading partners in Asia and Europe and plans to spend two trillion yuan (S$410 billion) building a new city near Beijing.

"We believe the overall policy direction will inevitably lean towards the more cautious and conservative side," economists Kevin Lai and Olivia Xia of Daiwa Capital Markets Hong Kong wrote in a report published last month (September).

"The reform agenda could ultimately give way to the continuous quest for stability, and hence more control is more likely than more liberalisation," they wrote.

Underlining how the economy has stabilised, a gauge of manufacturing in China rose to a five year high in September, while data released on Monday showed factory prices gained a more-than-expected 6.9 per cent last month. Industries that stand to benefit from increased government support include health care, semiconductors and telecommunications equipment, according to Societe Generale's Mr Benzimra.

Mr Xi may also emphasise the strategic importance of reforming state-run companies, with the government taking steps to create globally competitive multinationals in strategically important industries like telecommunications, energy, financial services, said HSBC Private Banking's head of Asia investment strategy and advisory Fan Cheuk Wan.

However, bigger economic policy issues might also need to wait for other meetings later this year and next year, including a gathering of the Party's Central Committee known as the Third Party Plenum, according to equity analyst Hyde Chen at UBS Wealth Management. He expects Mr Xi to stick with current policies designed to support so-called "new economy" sectors and address environmental problems across the country.

"For the big reform policies, such as financial reform and SOE reform, they will be announced in the third plenum, which will be held in November next year," he said. "That's more critical."

 
 

At the most recent Party Congress in 2012, Mr Xi's predecessor Hu Jintao outlined ambitious goals like doubling per capita income between 2010 and 2020, targets that have formed the basis of economic policy in the years since, according to Mr Louis Kuijs, head of Asia economics for Oxford Economics.

Mr Xi will likely focus on well-known priorities of his such as the anti-corruption campaign, the Belt and Road Initiative, and Made in China 2025, a plan to promote manufacturing innovation, Mr Kuijs wrote in a report published on Oct 3. Mr Xi is unlikely to make significant moves to promote speedy reform of struggling state-owned enterprises or financial markets.

"In all, we expect reforms to continue, gradually, but see little appetite for steps that are economically or politically risky," he wrote.

Also potentially affecting Mr Xi's appetite for bolder changes are the notable missteps of his first term. A surprise devaluation of the yuan in 2015 roiled markets worldwide and helped fuel record capital outflows. Shanghai's stock market today is about two-thirds of its mid-2015 highs and China's foreign exchange reserves in September were US$3.1 trillion (S$4.2 trillion), down from a peak of nearly US$4 trillion in 2014. Economic growth decelerated from 7.9 per cent in 2012, when Mr Xi took the party's top job, to 6.7 per cent in 2016.

Setbacks during Mr Xi's first term demonstrated the conflict between reform and stability, according to Bloomberg Intelligence.

"An equity market boom and bust and botched exchange-rate reform dented reputation for policy competence," economists Tom Orlik and Fielding Chen wrote in a report published on Oct 11. "With policy space reduced, the second five years could be harder than the first."