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01.09.2023

Chinese Communist Party Update

Chinese Communist Party Congress Recap

Markets haven’t appeared to be particularly enamored as Xi Jinping secured an unprecedented (in modern times) third term as head of China’s Communist Party.  The China 300 Composite index ended down more than 5% in the week since his dominant reign had been extended.  Hong Kong’s leading Heng Seng Index was down over 8% in the same period, and this was perhaps more indicative of the Westerners’ fear of Xi’s growing power given the relatively easy access available to the Hong Kong market.     

aperture1
Source: Bloomberg

As Robert Armstrong of the FT pointed out, the outcome of the Chinese Communist Party Congress (CCPC) was pretty much as everyone had expected, though some were clearly betting on a positive surprise.

Ours isn’t to lament the outcome of the recent Chinese Communist Party Congress (CCPC), but rather to consider its investment implications as we look for investment opportunities across the globe.

Maybe the easiest way to understand the results is to use the symbolism of Hu Jintao being ousted from the proceedings as a metaphor for the party and government entering a new era where a different tone of leadership is required.  The party is in essence turning the page as they start the next chapter of their growth and development on the world stage.  Perhaps as prologue to the anointment of Xi and his cadre was the typical “State of the Union” type statement that characterized the current policy environment:

Current: There are dangerous storms on the horizon, and China’s external environment is unprecedentedly perilous.  Opportunities exist but with risk, challenges, and uncertainty, and it is necessary to be wary of hegemonic western forces.

Contrast that description with those of other less recent CCPC gatherings where environment was viewed as more being benign:

Prior: Peace and development remain the themes of the era, and this is a time of important strategic opportunity with limited threat of material threat or major conflict.

[Note the words of both statements are mine, but I believe the tone is generally accurate.]  Rightly or wrongly, the Party faithful seem to believe firm leadership is currently the best way to navigate the future. Western political views of the new leadership team might be less than favorable, and market participants’ fears may continue to hamper investment flows into the region. That said, we are interested in the particulars and impact of governmental rubric and policy narrative on the Chinese operations of global companies like Coca Cola and L’Oreal, as well as on domestic companies like China Resources and Proya.[1]  Unfortunately, the first and most readily notable policy (and what we believe was the drive of most of the weakness in Chinese markets this past week) is the continuation of Covid Zero policy – in effect, dashing the hopes and stock prices of many companies that were positioned to benefit from China finally reopening.

The reality is that this recent CCPC platform was not terribly different from what governmental officials have outlined for quite some time. It still provides insight to the direction policy framework, which may be instructive to investors in China and other more autocratic governments that it is generally more profitable to invest alongside government rather than against it.  Follow the money. 

So where have we been told that China be putting its effort and its money:
  • Accelerated investment and development in core technologies
  • Modernize the military and upgrade nuclear capabilities
  • Promote its own solutions for global security and development
  • Reunite with Taiwan, preferably peacefully and by 2049 (which is the 100-year anniversary of the founding of the CCP) but could be compelled to use less peaceful means.
  • Invest in self-sufficiency in food
  • Improve public service systems
  • Fairness in income distributions, where people will get paid for hard work and will continue to raise standards of living [wage rates will continue to rise, taxes will be higher (income, property, and inheritance)]
  • Infrastructure, technology, industrial, and military spending will be priorities, not speculative housing
  • Common prosperity for all; domestic consumption will be encouraged, while frugality is also seen as a virtue
As for Covid Zero, the policy will continue at least for the time being.  While we don’t have any insight, we might hazard a guess that strict Covid policies could be relaxed by the time the Chinese New Year travel season arrives in late January.

Now, with Chinese leadership fully composed of Xi’s hand-picked proteges, they will bring to policy a unified and consistent “voice”.   One could suggest it's analogous to our own nationalistic re-prioritization (i.e., "Make America Great Again," "Build Back Better"). Apropos? Hard to say.  If Xi and his Cadre have complete control over all aspects of the government, I like to think they are huddled in their mission control emulating the Borg by broadcasting “resistance is futile, you will be assimilated”.


Analysis provided by Bill Kornitzer.
 

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[1] As of 9/30/2022, Coca Cola and L’Oreal comprised 2.77% and 1.18%, respectively, of the Aperture International Equity Fund (AFORX US Equity).

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