China's trade data posted overnight showed scant evidence of the Sino-US trade war with exports steady and imports on the rise. It is likely too early for the US tariffs to skew the data much yet, however, and another drop in Chinese equities shows that the situation is far from resolved.
Article / 03 November 2017 at 9:12 GMT

Monthly China Macro Outlook: “A Xi Jinping Thought”

Deputy Head of sales Trading Asia Pacific / Saxo Capital Markets
  • Xi Jinping exalts himself to Chairman Mao status 
  • But fails to give clear indications of whether he plans to lead for one or two terms  
  • The 19th Party conference lays out an ambitious agenda for reform and innovation 
  • He's still hyper-cautious of social and economic risks that could derail the Party 

China - Xi Jinping
 The Once and Future King. Photo: 360b/Shutterstock

By Andrew Bresler

Economic activity continues to moderate at the margins but remains robust. Examining the underlying data behind the headline numbers reflects quite clearly that China is accelerating its reform agenda, stamping out leverage in the SOEs, pressuring old China manufacturing models and pressing ahead with reducing systemic risks. Take for example the Fixed Asset Investment (FAI) data which shows investment into telecommunication and computing expanding at 28.5%, electric equipment at 9.7%, while investment in smelting & mining in ferrous and non-ferrous metals has fallen precipitously ranging from -8% to -29.5% y/y declines. This is of course not new news but the data confirms the rhetoric coming from the conference is already in motion.

Xi solidifies power with no clear successor

For the last few months, I have theorised that at the 19th Party conference, Xi Jinping would solidify his power base and set the stage for him to serve not just for another term but perhaps two more. In doing so, Xi would then opt to push forward aggressively with painful reforms that would slow economic growth more than the market expects, effectively choosing to take the pain now, rather than later.

In last month’s article, I highlighted three things to look out for, namely a “XI Thought’, Wang Qishan on the PSC and a constitutional amendment changing Xi from General Secretary to Chairman. Only one of those 3 things materialised, specifically the “Xi Thought” which exalted Xi to the status of Mao.

Does this mean then that my theory is now debunked? On the contrary, there were a few key nuggets which have been skimmed over that may in fact mean this theory still holds merit

While Xi’s key enforcer of his anticorruption campaign, Wang Qishan, hung up his boots and retired at this year’s party conference, the new PSC – consisting of Xi Jinping, Premier Li Keqiang, Li Zhanshu, Wang Yang, Wang Huning, Zhao Leji and Han Zheng – shows no clear successor to Xi. The interpretation by some has been that this sets the stage for another term for Xi.

Risks to the economy are risks to the party

For me, a very important softening of language in Xi’s speech hints that perhaps he is willing to tolerate near-term growth misses forfeited to increase financial stability. The argument most frequently put to me as to why my theory of a weaker economic outlook ahead may be incorrect is the promise made by Xi’s predecessor Hu Jintao to double 2010 GDP per capita by 2020. 
A promise that equates to roughly 6.5% annual growth rate, consequently allowing growth to fall below 6.5% as I have advocated would mean a failure on this promise. In Xi’s speech this year he opted for a subtle softening, to stick with previous commitments of building a moderately prosperous society by 2020. While this subtle shift may be discounted by most, to me it signals the potential that China will be less concerned about the quantity of growth numbers and more concerned about quality.  

Removing risks to the economy has perhaps a more important by-product, the Party. According to a research note from Capital Economics, Xi mentioned the “Party” 331 times in his three-hour address, far more than any of his predecessors. This in conjunction with 128 occurrences of “preserve” and 186 of “China” perhaps reflect the true agenda. Xi has sought to re-enshrine the communist message while actively working to reduce risks he sees to this message namely, financial stability and pollution related social discontent.

On the periphery of the conference Peoples Bank of China governor Zhou caused market jitters by commenting that corporate debt in China was very high and household debt rising quickly. He commented how a lack of caution about the rising pile of debt could lead to China’s own “Minsky moment”, whereby asset prices fall as boom leads to bust through too much leverage within the system. Markets took this as particularly cautionary with the Hang Seng falling near 2%. Perhaps this was a window into what a world where China pumps the breaks harder than expected looks like?


It is hard to argue the growth outlook at present is anything other than booming, 6.7% GDP expansion is not to be sniffed at. As mentioned above, the innovation/new China sectors are gathering momentum with the focus on being the global leader in innovation in less than 20 years.

It’s entirely feasible that through increased targeted regulation and a focused tightening of financial conditions on areas that are running a bit hot, the authorities will manage to slow debt creation down and enact reform to reduce leverage in the system without shaving too many basis points off GDP.

However, reform takes a long time and if Xi is to be successful, more near-term pain may engender even better long-term gain. What better time in the last 10 years could there be to deleverage the economy? Global growth momentum is as robust as it has been since the financial crisis. All 45 economies tracked by the OECD expected to grow this year, with over 73% of them accelerating from last year. Survey momentum is broad-based and trending high. Lastly, but possibly most crucially, Xi has just completed five long years of solidifying his base. If there was ever a time to make hard decisions it’s now.

– Edited by Clare MacCarthy
Andrew Bresler is deputy director of global sales trading APAC at Saxo Bank, Singapore.

Daniel CN Daniel CN
Xi started reforms like crazy even before he was the big helmsman. Its China. They think and do long term. Not "my-term", "Xi-term". The party chose him to lead over Bo. Bo was even more sing-old-Mao-songs like. Xi was the tough guy cleaning up monetary perversion. He did. He does. He will.


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