China: President Xi to consolidate position at Party Congress

02 October 2017

The 19th National Congress of the Communist Party of China (NCCPC) will be held in October 2017, and will likely see President Xi Jinping further consolidate his position. The Congress will set the economic agenda for the coming years and efforts to tackle corporate debt levels are likely to be a priority. The risk of an interstate war with India will remain low, despite a military stand-off on the Doklam plateau between June and August 2017.

Security Environment

Between June and August 2017, China and India were involved in a military stand-off on the Doklam plateau, which is claimed by China and Bhutan, an Indian ally. The incident began when Chinese companies began construction work to extend a road from Yadong, Tibet to the plateau. Bhutan requested Indian assistance, leading to the deployment of around 350 Indian military personnel to
Doklam. 

The later deployment of Chinese personnel raised concerns of an interstate conflict between the two states, with both sides demanding the other unilaterally withdraw. On 28 August 2017, the Indian government announced a negotiated withdrawal of troops from Doklam, before both countries agreed on 5 September 2017 to improve bilateral relations on the side-lines of BRICS summit.

The stand-off is indicative of the growing overlap between Indian and Chinese strategic objectives, as expanding Chinese outbound investment brings the country into India’s traditional sphere of influence. However, the risk of even a limited military conflict between India and China is small, with China keen to maintain its image as a peaceful regional power and sustain investment opportunities for Chinese firms in India. This should mitigate the likelihood that foreign investors will be exposed to conflict risks in China, although a renewed stand-off is possible if construction work is restarted.

Trading Environment

The NCCPC is due to be held in October 2017. Held every five years, the NCCPC will see the ruling party set China’s political and economic path for the coming years. President Xi is expected to further
strengthen his position during the Congress, allowing him to renew China’s focus on reducing economic and financial risks. Since 2008, China has experienced rapid debt growth, with the overall debt-to-GDP ratio standing at 257% at year-end 2016, compared to 141.3% in 2008. 

Debt is concentrated in the non-financial corporate sector, which accounts for 64.7% of the overall total. This has elevated country economic risks and raised concerns of a financial crisis. Tighter credit conditions should be expected in the medium term, with monetary policy likely to tighten in the coming months. Action has already been taken on this front in 2017, with the government raising short-term rates used for open market operations. 

The central government is also likely to take action on local government debt, increasing scrutiny of off-balance local government financing vehicles (LGFV). Between 2009 and 2016, the gross debt issued by LGFVs in Chinese bond markets grew at a compound annual growth rate of 42.9%. Regulators have already mandated that local governments must set up debt management teams to enhance transparency of financing vehicles. Whilst concerted efforts on debt and credit growth should help to de-risk the Chinese economy, economic growth rates will be below potential in 2018, with real GDP forecasted to grow by 5.8%. 

Investment Environment

Since 2012, Xi has overseen a wideranging anti-corruption drive, which has resulted in the dismissal of hundreds of officials. At the peak of the campaign in 2014, 387 officials were investigated for corruption. Anti-corruption measures are likely to continue beyond the NCCPC, although at a slowing pace. 

In an indication of continued high-level support for the campaign, the chairman of China’s anti-corruption agency Wang Qishan stated in a July 2017 article that t must continue beyond the Congress. Measures may include the strengthening of the national supervisory commission, which was created in January 2017. 

However, corruption risks will remain elevated in China. Anti-corruption efforts have done little to tackle the causes of corruption, focussing instead on removing individuals from position. Foreign firms may be exposed to bribery, particularly when engaged with state-owned enterprises in the power, infrastructure and oil and gas sectors.

In August 2013, British-firm GlaxoSmithKline was accused of bribery, after extra scrutiny was placed on foreign firms operating in the Chinese pharmaceutical sector. The firm was fined USD 490 million, whilst its head of Chinese operations was given a suspended prison sentence.

China: President Xi to consolidate position at Party Congress

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