China Still Investible—If You Know Where to Look

China’s 20th Party Congress concluded on October 22, 2022. Most of the commentary focused on the composition of the Standing Committee, the tone of Xi Jinping’s speech/opening statement and the amendments to the party constitution.

It’s important to remember that this is not the forum for key policy changes, but can set the tone for further action at future policy events, such as the Politburo/Central Economic Workforce Conference meeting in December and the “two sessions” in March.

On personnel, there was never any doubt that Xi would be effectively in charge. The domination of the Xi camp did surprise some, and had them worrying about “checks and balances”. I have to say that I don’t think one or two outsiders would really make any difference. Hu Jintao being led from the meeting was a strange, atypically unscripted moment, but we don’t know, and probably will never know what actually happened. There are rumors that he is ill (Alzheimer’s is the scuttlebutt), so it may have been related to that.

What Are the Equity Implications?

I think the main takeaway is the emphasis on “security”—meaning, the focus on independence in the supply chain and a robust posture to perceived antagonisms from outside China. This implies further development of self-sufficiency in food, energy and technology. Whether this is by choice, or being forced that way by, e.g., Washington hawks or global events (Russia-Ukraine) is relevant, but the key is that the emphasis will be on the development of these sectors.

Meantime, the consumer sector, which is significantly impacted by the difficult property market and Zero-COVID policies, obtained no relief from the Congress, as these were barely touched upon. We didn’t expect any commentary/change in that right now, so that doesn’t change our emphasis away from pure consumption, in favor of industrials in areas like renewables and industrial automation.

China: Not Uninvestible

At the time of writing, Chinese stocks have regained most of the decline immediately following the Congress, a decline precipitated by unreasonable expectations of positive policy change in areas such as Zero-COVID. It’s important to note that China already trades on a significantly elevated risk premium compared to history, with some justification, due to structurally lower growth and higher geopolitical tensions. On standard metrics, it trades on approximately 1.5 to 2 standard deviations cheaper versus history. It seems to me that the marginal news in the next few months is likely to be positive for Zero-COVID and property, but patience will be required. For geopolitics, I think we should be studying Washington rather than Beijing because if there is a significant increase in tensions and the “balkanization” of key industries, it will come from that quarter.

Net/Net, the Congress was just a reflection of realities: that Xi is in control, and that there will be a significant emphasis on key parts of industrialization. This does not make China “uninvestible”, but rather guides where the best areas to invest are located.

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