we're talking about the five things you need to know about. One of the most watched events on the chinese political calendar. China's National congress is held every five years and it's coming up mid october. I'm sonar a mess from the money mine team. My guests victor Shiff, associate professor of political science at the University of California san Diego and Rory Green, head of china and Asia Research at T. S. Lombard.
That's a macroeconomic forecasting consultancy victor. Let's start off with, why is this year's meeting so important And what clues should investors be looking out for
Once every five years? The party congressional delegates who are 2200 of the most senior officials in China will convene to and they elect a new slate of central committee members. And the Central committee is a little bit like the Congress of the Parliament. These are 200 of the most
senior officials in china. But then the Central committee in turn will immediately elect the new politburo, the new politburo standing committee as well as elect or re elect in this case, the new secretary general of the Chinese Communist Party, the most important officials in the Chinese Communist Party. Therefore the most important officials in china will be elected
or is selected. Some would say at this Congress and also a new set of agendas for the next five years will be announced in the political work report, which will be read out loud. She Jinping himself.
Yes, a lot of important signals, particularly around the economy that will come out at the 20th party Congress. More important for the longer term. Less. So the short term. And really, I think there's going to be strong signals from the party Congress around changes to the constitution. Party Congress work report and the personnel governing the economy particularly And all these shifts will basically confirm the sides. We've
seen that common prosperity more status. Government intervention is going to be the key for China's emerging growth model, particularly around the personnel, li Keqiang, the premier lieu, the top guy on the economy in china, both likely to step down. So it is a real key change here around the party constitution, the political economic framework and the people that are actually implementing these policies. It could be a very big shift here.
The main change in the party constitution is to, we think, to have xi Jinping thought added to the constitution and this would elevate she to the same level as Mao Zedong and the only other party leader to ever have that accolade and really move into almost an unassailable position.
He's already in an incredibly strong, powerful position. But this putting him level with Mao in his own lifetime, would be an extremely powerful move guarantee his continued leadership and through that flows his continued input into political economy and china's growth model.
Do you
think the Congress will be an inflection point if you will
for key
policies in china in particular for Covid zero
until early this year. There has not been a lot of economic pain in china. So china control Covid pretty successfully. In 2020 2021 when the whole world had to speak covid pandemic. So the service sector did fairly well. But more importantly in 2020, Chinese exports grew tremendously because Chinese factories were still open and operating at a time when many factories around the world were shut down. So China became a main exporter of PPE. S, but also consumer electronics, clothing, etc.
This year, the economic challenges is greater. But because export is still doing very well, the leadership may feel that it can continue with pretty stringent zero covid policies and not suffer too much economic repercussions. But of course if export were to worsen a lot more from today's level, they may have to reassess their approach.
I think there are two. He breaks on removing zero covid policy in china. The first is political and the second healthcare. So after the Congress that does make it easy on the political side, I think we will start to see the propaganda and the state media messaging around zero Covid start to change and become a little bit softer. But the health care is the main barrier, the vaccination rate
needs to come up much higher. This china CDC says they need to get through a very difficult winter flu season stocking up on medical equipment and supplies for us. We think it takes until Q 2 2023 Q two of next year for a more substantial easing of covid 19 policies and once the party congress is out of the way, it'll be health care rather than politics, which is the main block on opening up. There are a couple of headwinds that we perhaps we
get onto. We call them the three Ds debt, demographics and de globalization and longer term these three structural headwinds will weigh on china's growth. But near time it's all about Covid
looking
further ahead the first of those deeds, you talked about
debt. Do
We have any clues on how the country might tackle the property crisis? It's a massive risk. It's 70% of household wealth, key source of revenue for local governments. Banks, collateral banks, assets are heavily weighted to property. So it is a major risk. A global financial crisis. Lehman moment is always very unlikely in china because the government controls the banks, controls most of the Corporates and with capital controls, keeps all the household savings in the economy so money
can be shifted around. But to actually get things around to generate growth, we really need to see improvement in confidence, particularly around presales
pre sales of this. This model where an uncompleted apartment can be sold for full value and that's the dominant sales model in china and it worked very well when prices were rising and developers could sell more of these to use the money to complete the older pre sold units, but now prices are falling and no one trusts the developers and the model is breaking down and the only way you can restore that model is greater confidence in the economy and the developers to deliver
these units. So Beijing could do a lot around this issue, It would need quite a bit of liquidity injected into these developers the banks, but the money is certainly that it's certainly doable. And it's a choice from Beijing that they don't want to Baxter The entire sector. They don't want to let moral hazard creep back in and give the developers a free ride.
So they're trying to do enough to keep the sector alive, but not too much to kick off another round of speculation, but I think they will have to do more to keep the sector going until they can remove the COVID-19 restrictions.
The real estate sector, some would say has been in a bubble territory for the past 10 years. Uh And I sort of feel that myself, but nonetheless, you know, the real estate sector kept growing, kept being able to refinance a lot of the debt from the banking sector in 2020 very draconian de leveraging policies for the real estate sector was implemented. The so called three red lines that curtailed property developers ability to borrow even more money from the banks to finance the next project.
Suddenly the whole bubble began to deflate very rapidly and real estate investment was still down sort of 2030% compared to last year. And that is a major headwind to the economy. I think they're trying to turn that part around, even if they don't turn around zero covid, they are definitely turning around the de leveraging policy for the real estate sector.
So this is what we can expect from China's 20th National Congress, the election of the most important officials, President Xi Jinping appears all set for an unprecedented third term in power. But who else is staying and who's leaving? Secondly, the meeting sets China's agenda for the next five years.
So will those stringent zero covid policies continue, analysts are also looking for changes in the constitution and any signals that the common prosperity policy as well as government intervention, are going to be key for China's new emerging growth model. Now, that's in the face of longer term challenges the so called three D's debt, demographics and de globalization. So victor tell us, what do all these headwinds mean for China's economic growth target is at all feasible this time around
In the short term. I think that the central government is gonna unleash a whole series of measures to try to convince the world at least that it has reached its growth target for 2022. Most independent analysts will say that there's no way China can reach this 5.5% growth rate By the end of this year. But I think we will see maybe a little bit more of this additional
stimulus after the party. Congress which plausibly can give them some excuse to say no. Actually we still came very close, you know, 5% growth, something like that, potentially the leadership change is going to introduce new leaders, a new premier of China, a new executive, vice premier of China who maybe A lot more friendly to dovish monetary policy, less prudential regulations over the real estate sector. This in the short
term will be bullish for growth. But as an economy that already is saddled with 300% of GDP worth of debt, any short term stimulus is going to result in higher debt level down the road. And again, the big is that we now live in a high interest environment. The interest payment could be quite onerous for all the different entities in china. It will be quite challenging for growth, maybe not in the next three or four months, but
a lot of these growth concern will come back. So if there's a mini stimulus the next three or four months, that's great. But then a year later there's still going to be these growth concerns because of high debt
chinese leaders have talked about common prosperity as a key strategic goal, Do you expect it to change the way china is run common prosperity is clearly very important and at the forefront of Xi's mind and the emerging ideology that will be confirmed at the party congress, but it's not very well
defined at all. It's still very nebulous uncertain concept to sort of try and characterize it very, very simply, it is a focus on slower, more sustainable, more equitable growth with a much greater role for the state in the economy. So this could mean some quite positive structural reforms around
the chinese welfare system. Labor mobility. On the flip side, it will see more of the regulatory crackdown that we have seen in the past, where areas that are unaligned with the common prosperity agenda like property sector, big rent seeking tech companies will be hit very hard from from the state.
So it's slower, more sustainable growth, trying to boost the middle class, trying to boost incomes and shift away from this kind of debt-driven property model that has dominated China the past 5 to 10 years.
Yeah, potentially it can be formalized and common prosperity, the manifestation of it has been kind of forced taxation from the billionaires, but the problem with common prosperity is that
it's really not redistribution, right? So the money that has been donated by billionaires by and large has gone to the chinese government and chinese government by and large has not redistributed to actually poor households, there was kind of an anti poverty drive a few years ago which read just read some resources to poor households in rural areas, but the common prosperity mainly just resulted in more money going to the chinese government coffer. So that doesn't stimulate
demand too much at the household level. What china needs actually is, if it's going to get into more debt, it has to be a demand side kind of stimulus program. China is the second largest economy of the world, but it can afford to give hundreds of dollars to ordinary people, really stimulate demand and that will be quite a boost to the economy and we'll get some of these troubled sectors like the service
sector going again. But despite a lot of discussion among the experts in china on this kind of policy, the government continues to reject a demand side. Stimulus instead prefers a supply size stimulus, more infrastructure, more subsidies to the tech sector. But then that ends up exporting deflation the rest of the world, which of course the world needs it. We live in high
inflation era, we do need a deflation from china. But in the medium term, that really doesn't help the world economy, how the world can benefit even more from china is if the 1.3 billion chinese consumers can become wealthy and prosperous and they can spend on goods and services produced in the rest of the world, we haven't seen hardly any of it because of the covid lockdown and because wages have not grown very much in china,
I think she didn't think actually recognizes that these are really big problems for china and this is why in some respects we're getting this common prosperity policy coming through? I think she didn't think knows that the growth model has to change cannot keep relying on debt and exports to a lesser degree to drive growth. He has realized that some of the external depend is that china has and this is why we have the dual circulation policy and a shift to rely more
on china internally. The realization that de globalization and certainly demographics as well, that is a big part of common prosperity, so boosting the growth rate so that there is a realization among the top leadership that china faces these very difficult headwinds. And I think common prosperity is an attempt to shift the political economic model to shift the growth model and also to change the source of the party's legitimacy for rule for governance. You can no longer rely on high growth,
high debt, rising property prices. The model there also has to change that china is going to be slower, more vulnerable to certain areas. So there needs to be a shift both in the growth model but also where the party too. Its legitimacy for rule. Common prosperity is an attempt to do both of these things changed a bit the growth model and change the source of part legitimacy as well. There will be clues at the party congress of how they're going to attempt to do this very difficult task.
But they are aware of the challenges. The rise of china has been this big story of the past few decades. What does it mean now if you're starting a new chapter where slower growth is going to be the new normal,
the Congress party understands that growth naturally slows down as an economy gets wealthier and wealthier. But for Xi Jinping he needs growth to be at a certain pace because the ultimate objective is to catch up with the United States in terms of nominal GDP, which of course most economists will tell you is kind of meaningless. Nonetheless, I think for china this would be a very important milestone. The leadership has talked about this
since the 19 fifties. It's like the great leap forward in 1958 1959 was all about surpassing Britain and also catching up with the United States and this has been the policy objective of generations and generations of chinese leadership. And for Xi Jinping this is no different. So this is why I think by statistical manipulation china will have a decent growth rate officially this year actually for almost for certain Only the US is going to pull ahead, China is
going to fall behind a little bit. But for the next few years as China seeks to catch up with the United States in the next 10 years or so. It has to maintain GDP growth. I think the numbers at least 3.5% to have a hope of catching up with the US despite all of these headwinds, the technocrats have to come up with some way to achieve this growth.
We do normally in a couple of areas and new normal in terms of the growth rate is going to be slower due to the three Ds. I talked about debt, demographics, de globalization that is structural. There will be periods of high growth around that cyclically
but longer term china is slowing. The second factor, which I think people are already adjusting quite quickly and partly thanks to Washington, what was led by trump but has been taken up by both sides of politics in the US is a more assertive china and china that is looking to not cut ties with the rest of the world as such, but to insulate the economy, the political system from outside levers of control and this is across finance, across tech across commodity
supply chains. So china would very much like to trade more with the rest of the world, wants to export more. But in terms of the imports and particularly around key choke points, there's a very strong push to to try and cut dependence with the rest of the world. That does seem to be making headway across c suites around the globe and in key capitals, that trend is just
getting started to be a long rumbling grind. People adjusting to a newer model in china and a new model in the The world as well as globalization comes out of favor to a certain degree. All of this isn't just important inside China, it's going to have an impact on the rest of Asia and the world. Do you think it will change the way investors and businesses look at China? That's a bit harder to gauge. China initially was the clear winner from the pandemic from 2020 until probably October
November last year. China was boo exports booming money flowing into its bond market flowing into the equity market from foreigners. But now it shifted and in line with some of the common prosperity and then the tech regulatory crackdown, there has been a change in view on china and investors are certainly wary of putting their money into china, both chinese financial assets and sort of longer term fixed asset investment F. D. I. I do think The flows into China will return after growth picks up
in COVID-19 fade away. But the caution that investors have gained around the tech crackdown around geopolitics of Ukraine and Taiwan and the more clearly authoritarian model that that is becoming evident will remain so the flows will come back but there will be caution and probably the level the pace of inflows will be less than we've seen in the past. So what will china due to meet its 5.5% growth
target for the year. World zero Covid policies continue. And how will china deal with longer term challenges, so called three days of debt, demographics and de globalization. All eyes on these possible inflection points. As china's top leaders meet for their milestone National Congress. We'll be looking for more clarity on the common prosperity policy and how this will change the economic direction of china. It's likely to mean slower but also most sustainable and equitable growth.
Now, how it's achieved will be closely linked to the political legitimacy of the chinese Communist Party presidency appears all set for an unprecedented third term in power. But who else is staying and who's leaving? That's five things to look out for at china's 20th
National Congress. Thanks to my guests victor shih, associate professor of political science at the University of California san Diego and Rory Green head of china and asia research at T. S. Lombard money Mind as every saturday at 10 30 PM on mediacorp C N A. Can also catch us online at CNN dot asia and on youtube.