China National Congress

Nathan Cotton, Economist

What to expect

In last week’s Brief (The Power of China) we explored the need for reform in the Chinese economy and the likely direction of reform post this month’s 19th National Congress of the Communist Party of China. In this week’s Brief, we look at the mechanics of the Congress: what is its purpose; how does it fit into other high-level assemblies of the Chinese Communist Party; and what signposts to the future direction of reform of the Chinese economy might we see.

The 19th National Congress of the Communist Party of China will begin on 18 October 2017 and is the highest body within the Chinese Communist Party’s organisational structure. It normally meets once every five years to decide on major issues of the Party.

Most importantly, large changes to the Party’s top leadership occur at the Congress. Given that China is a one-party state, changes to the top leadership of the Party mean a change to almost all significant political positions in China, including the leadership of the Government. In many cases, senior leaders hold positions in both the party and government. As such, it is China’s most important political event in five years.

Although most appointments will have been decided in advance, the Party Congress will elect the new Central Committee. The Central Committee acts as the top forum for discussion of policy and convenes at least once a year for the Party’s Plenums, where new policy is determined.

The first Plenum of each five-year political cycle is held immediately after the meeting of the Party Congress, where the Central Committee elects the Politburo, and from it, the Politburo Standing Committee (PSC) and the General Secretary of the Central Committee (the top leadership position of the Party, currently Xi Jinping). The 25 members of the Politburo act on behalf of the Central Committee in implementing policy (i.e., running the country) between Plenums, with power centralised in the seven members of the PSC, the core leadership of the Communist Party. The PSC includes General Secretary/President Xi Jinping and Premier Li Keqiang.

The Party Congress (and subsequent Plenum) will result in a significant change in the composition of these leadership bodies. While President Xi and Premier Li will stay in their leadership positions, the rest of the PSC are likely to be replaced, along with half or more of the Politburo and a large proportion of the Central Committee. This will allow President Xi to fill these positions of power with his allies and protégés and will see a consolidation of his power.

The other major event of the Congress will be the delivery of the Political Report by President Xi at the beginning of the Congress. The Report will reflect on the performance of the economy and progress of reforms over the previous five years. Importantly, the Report will also provide hints on the nature and priorities of reform going forward.

While the Report won’t be an agenda of specific economic reforms, and will instead be vague and full of broad terms and catchphrases, it will give clues as to what reforms are most important, and could see existing targets reiterated and perhaps future targets (such as the second centennial goal: “Building a modern socialist country that is prosperous, strong, democratic, culturally advanced and harmonious by the middle of the 21st century)” made more specific.

President Xi will likely discuss a raft of reforms such as anti-corruption, environment (‘Beautiful China’), liberalisation of the financial sector (though possibly not the capital account), reform of State Owned Enterprises, financial market regulation, addressing debt risks, manufacturing/’Made in China 2025’, One Belt, One Road, and the Military. That said, if any material changes to policy are decided on or signalled, we must wait until next March’s National People’s Congress for any major changes to the pace or direction of reform to become clear.

Table 1: Financial market movements, 5 – 12, October 2017

Equity index

Level

Change

10-yr government bond

Yield

Change

Foreign exchange

Rate

Change

S&P 500

2,550.9

0.0%

US

2.32%

-3.0 bps

US Dollar Index (DXY)

93.06

-1.0%

Nikkei 225

20,954.7

1.6%

Japan

0.07%

2.1 bps

USD-JPY

112.28

-0.5%

FTSE 100

7,556.2

0.6%

UK

1.38%

-0.6 bps

GBP-USD

1.326

1.1%

DAX

12,982.9

0.1%

Germany

0.45%

-1.1 bps

EUR-USD

1.183

1.0%

S&P/ASX 200

5,794.5

2.5%

Australia

2.80%

2.2 bps

AUD-USD

0.782

0.3%

Source: Bloomberg


United States

Hurricanes hit payrolls data in the US

  • Non-farm payroll employment in the US dropped by 33,000 jobs in September, the first monthly decline in employment since 2010, after job gains had averaged 172,000 over the previous three months. The fall was due to the effects of Hurricanes Irma and Harvey, according to the US Bureau of Labor Statistics (BLS), who noted in particular a sharp employment decline in food services and drinking places. The weakness is likely to be only temporary as disruptions from the hurricanes passes, while recent business surveys indicate the growth outlook remains strong.
  • The unemployment rate dropped to 4.2% in September, a 0.2ppt fall from the previous month. The BLS reported no discernible effect on the unemployment rate from the hurricanes, noting that while many employees in the areas affected by the hurricanes were likely off payrolls during the reference period, they would still be regarded as employed in the household survey. In contrast, the same employees would not be counted as employed in the establishment survey which produces the estimate of non-farm payroll employment, explaining why this figure was affected.
  • On a brighter note, year-ended growth in average hourly earnings increased further to 2.9% in September, up from 2.7% in August and a welcome rebound from a slight dip in growth to 2.5% from April to June. However, the BLS noted that the change in earnings possibly reflected effects of the hurricanes as well as ongoing labour market trends.

US_payrolls


unemployment


US_average_wage


Euro area / United Kingdom

Industrial production continues to expand in the euro area

  • Industrial production grew by more than expected in the euro area in August, a sign that economic momentum is continuing in the third quarter. Industrial production grew 1.4% in the month, up from 0.3% growth in July, to be 3.8% higher than a year earlier (up from 3.6% annual growth in July). Germany continues to be a strong driver of euro area industrial production, with growth of 2.6% in the month and 4.7% over the year. This also coincided with strong growth in Germany’s factory orders and exports in August.

Euro


China / Japan

Trade growth rises in China

  • Year-ended growth in China’s trade rose higher in September, with export values rising 8.1% over the year, up from 5.6% annual growth in August, while annual growth in imports rose to 18.7% from 13.5% in August (both in US dollar denominated terms). This lead to a narrowing of the trade surplus to US$28.5b.

China_trade

Australia / New Zealand

Housing finance holds up in Australia

  • Housing finance was resilient in August, with the number of owner occupier loans rising by 1% in the month. The value of financing commitments for owner occupied dwellings (ex refinancing) recorded no growth in the month, though the value of housing finance commitments for investors recorded a strong 4.3% monthly gain. It should be noted however that investor loan data includes refinancing. The strong growth could therefore reflect investors switching from interest-only to principal and interest loans, given the additional restrictions placed on Banks’ interest-only lending by APRA in March, and the subsequent increases in interest-only mortgage rates.


Australia_housing


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