Chinese Communist Party Congress and the Yuan

Every 5 years the Chinese Communist Party holds a congress at which they elect and appoint leaders and confirm or modify economic, social and monetary policy. The next Chinese Communist Party Congress is in October and currency traders are waiting to see how any policy and leadership changes will affect the Yuan. Bloomberg writes about China’s leadership shuffle and what it will mean.

“There are two big concerns among overseas investors who are interested in China — the yuan and the uncertainties around the party congress,” said Han Tongli, chief investment officer at DeepBlue Global Investment Ltd. in Hong Kong, which oversees $200 million. “Once the dust has settled and the uncertainties have gone post-congress, investors will re-evaluate market pricing.”

China’s policy makers have stressed the need for stability and order in financial markets in the lead-up to what will be the 19th congress, even as they persist with a campaign against leverage endorsed by the country’s top leaders. Investors have taken comfort in the strengthened yuan and buoyant stocks, betting officials will act swiftly to quash any signs of speculation or upheaval that could distract from the party’s message of prosperity and control.

Although the Chinese government tries to keep things calm leading up to these events there is often a lot of action on the backside as the government implements policy changes. Markets are typically volatile as new policies take shape and new managers assert control. The key issues facing China in the coming years are growth and debt.

Growth, Debt and Uncertainty

As the Chinese government pours stimulus money into the economy this has been a great summer for Chinese stocks but as CNBC notes troubles loom.

Experts have attributed the boost in Chinese markets to better-than-expected growth in the world’s second-largest economy. Stronger growth has been largely due to Beijing’s meddling in the markets and economy to prevent embarrassing swings ahead of a major leadership transition in the fall, experts say – but that playbook can’t be sustained.

“While state buying can support equities in the short term, over the medium term, the government’s interventionist mindset won’t help the market,” said Chang Liu, China economist with Capital Economics.“With valuations no longer cheap, we believe the upside for A-shares is limited,” he added, using a term to describe stocks traded in the mainland.

Analysts believe that the government is supporting banks and other industries to maintain calm running up to the congress but next year and thereafter China will need to deal with its debt burden and probably accept a lower rate of growth.

Hidden Debt

What killed the Japanese economic miracle a generation ago was hidden debt. That same problem may cause problems for China. The South China Morning Post writes that local officials in China are reluctant to reveal the extent of borrowing which makes it hard to deal with debt issues.

About 201 of China’s 295 cities released outstanding debt figures, including special bonds and general liabilities, but only 37 cities published breakdowns, according to research released by the Public Policy and Management School at Tsinghua University on Tuesday.

The average transparency rating in the appraisal, which checked local disclosure of a series of indicators, was only 20 out of 100. Some governments earned no credit in this aspect, according to the research.

“Local governments might be very sensitive to disclosure of any inappropriate debt raising given central authorities’ threat… of holding officials accountable,” Yu Qiao, who leads the annual study, was quoted by China Economic Weekly as saying.

The hidden time bomb of debt and the Yuan will likely be an issue for folks at the Chinese Communist Party Congress but observers will need to parse out the politispeak to know where things go next.