Markets React Badly to CCP Congress

Government changes in China signal economic downturn

Chinese leader Xi Jinping speaks at the podium during the meeting between members of the standing committee of the Political Bureau of the 20th CCP Central Committee and Chinese and foreign journalists in Beijing on Oct. 23, 2022. Lintao Zhang/Getty Images

News Analysis

The reshuffle of the Chinese Communist Party (CCP) leadership and Xi Jinping’s speech to the 20th Party Congress in China has spooked investors, compounding an already suffering economy with no relief in sight.

On Oct. 24, markets reacted to the closing of the CCP’s 20th National Party Congress. Foreign investors sold $2.5 billion of Chinese stocks through Hong Kong, resulting in the greatest losses since 2008. At the same time, the yuan hit a 14-year low, breaking 7.3 to the dollar. The Hong Kong’s Hang Seng stock market index fell by more than 6 percent, while in the United States, the Golden Dragon index of Chinese companies listed on Nasdaq fell by 14 percent and lost $93 billion in value. Both the Shanghai Composite and the Shenzhen Component indexes lost about 2 percent, while the China CSI 300 was down 2.93 percent.

Internet companies were hit particularly hard. The Chinese technology sector is facing assaults from both sides of the Pacific. Xi’s crackdown has already caused the sector to lose $1.5 trillion, and the U.S. chip ban may drive losses down even farther.

During Xi’s address at the party congress, there was no indication that he would loosen his zero-COVID policy that is hindering China’s economic growth. The day after the conclusion of the conference, 28 cities were under various degrees of lockdown. These lockdowns have affected 207.7 million people representing 8.5 percent of the country’s gross domestic product.

People with a two-three hour pass from their residential compounds speak with locked down residents during a COVID-19 lockdown in the Jing'an district of Shanghai on May 27, 2022. Hector Retamal/AFP via Getty Images

Also in his address, Xi reiterated his goals for China to become a middle-income country and a modern socialist power by 2035, and to lead the world “in terms of composite national strength and international influence” by 2049.

The market reaction implies that investors are aware of the contradiction between Xi’s stated goals and his policies. An invasion of Taiwan also seems more likely now that Xi has publicly declared that China has the right to use force to annex the island nation. A war would put the finishing touches on an economy already in trouble.

The massive public debt, COVID-19 restrictions, and various crackdowns such as the one on tech were already calling into question the attainability of these goals. But after the changes in government, investors are reacting as if they believe Xi’s goals are unattainable.

The economy seems to be less of a priority for Xi, which makes the achievement of the 2035 and 2049 targets even less likely. Xi’s message suggests that he’s shifting his focus from the economy to security. In fact, the word “security” appeared 91 times during his speech to the CCP congress. He also stressed the view that Marxism works and that he wants to increase the CCP’s role in Chinese society and the role of state-owned firms in the economy.

None of that increased investor confidence in the Chinese economy’s ability to soon recover.

China’s budget deficit has reached nearly $1 trillion in the third quarter of 2022. This is three times what it was the same time last year. A decline in consumer spending and a 28.3 percent drop in real estate sales revenue are driving down GDP. These reductions, coupled with tax cuts meant to stimulate the economy, have decreased government revenue by 6.6 percent since last year.

Most analysts expect the CCP to continue tightening its grip on the economy, with tightened restrictions on tech and extended COVID lockdowns. Confronted by increased risk, investors will demand greater returns on Chinese investments, and with the current policies in place, it looks unlikely that those returns will materialize. So far this year, investors have sold off $16 billion worth of American depositary receipts for Chinese companies.

As Xi holds multiple top posts in the Chinese government and has packed the Politburo with allies, there’s no one to tell him that his policies are destructive. Having no need for accountability and no worries about being impeached or denied a fourth term, Xi has the freedom to do what he wants.

Xi is forgetting a lesson learned by Deng Xiaoping. Under Mao, power was concentrated in a single man who made catastrophic economic policies that caused tens of millions to die of starvation and hundreds of millions to suffer in poverty. When Deng came to power, he began deregulating the economy, which led to unprecedented economic growth and an improvement in the average standard of living.

Now, power is back in the hands of a single man who’s returning the country to the days of stricter government controls under Marxist principles. He’s replacing Mao Zedong Thought with Xi Jinping Thought.

Xi is now the “core of the Party” and holds absolute power over the economy and the people. And as the saying goes, absolute power corrupts absolutely.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.