What have we learned from the latest Communist Party Congress in China?
This week saw the 19th National Congress of the Communist Party of China, the twice-a-decade party congress which acts as a leadership transition event and an opportunity to outline plans for the coming years. In the past, the President has highlighted a growth target, but incumbent Xi Jinping opted not to do so. Instead, he stressed the importance to make China prosperous, democratic, harmonic, and beautiful by 2050. China, who in the past has shied away from taking a global leadership role, appears to be more willing to take on some of the responsibilities stemming from being the world's second largest economy.
We believe this is a sensible decision, given China's rapidly accelerating debt levels in recent years. It indicates a desire to tackle some of the excesses in the Chinese system and seek a more sustainable economic, political and environmental future.
Supply side reform appeared to be the principal economic policy, with a particular focus on further advancing the manufacturing sector. Some other potential growth sectors were mentioned, such as higher end consumption, innovation and green energy. President Xi expressed a desire to continue reforming the State Owned Enterprises ("SOE"), whether by increasing state control or moving towards mixed ownership. It was also clear that the policies to reduce pollution will not cease, and may well become firmer in the coming years.
With a few days left of the congress, there may be even greater clarity on policy aims but so far the reaction of markets to the proposals has been muted. Third quarter GDP came in line with expectations at 6.8% which indicates that the economy still shows decent momentum. We should expect this to gradually slow as reforms slowly get implemented. If China manages successfully to balance its debt pile with sustainable growth as indicated by President Xi, this should limit potential shocks to the global economy.
With European risk assets performing well, has the threat of populism seen earlier this year dissipated?
There were escalating concerns earlier this year with French, German and Dutch elections on the horizon and the rising popularity of far-right candidates in the opinion polls. After the UK's decision to leave the EU and the election of Donald Trump, the populist wave was particularly prominent and the issue received a lot of media coverage.
With the failure of right-wing candidates Marine Le Pen and Geert Wilders, fears for the most part subsided. Markets rallied as the threats passed, spurred by the pro-EU Emmanuel Macron taking office in France. However, this reaction was premature as developments in recent months suggest the populist shift has not been quashed.
In the German election a few weeks ago, Angela Merkel's party lost a number of seats but remained the largest party. The far-right Alternative für Deutschland Party (commonly known as the AfD Party) made the most gains in the election, rendering it the third largest party in the Bundestag. In this fragmented political environment, Merkel is likely to form a coalition with the Free Democratic Party and the Green Party. Given the middle ground that will need to be found, it is unlikely that Germany will seek deeper integration with the Eurozone as desired by President Macron.
More recently, we have seen the independence referendum by the Spanish region of Catalonia, which was deemed illegal and unconstitutional by the government in Madrid. This has sparked violence and unrest in Spain in recent weeks leading to a suspension of the autonomous rule of the Catalan government by the Federal State. How and when this situation will de-escalate remains unclear. In the Austrian election, whilst the conservative Austrian People's Party won 31.4% of the vote, they are likely to end up in a coalition with the anti-establishment Freedom Party who won a lofty 26% of the vote. It will be the first time since the Second World War that Austria is being led by a party with far right views.
Looking ahead, there is an election due in Italy in the first half of 2018 and the populist, anti-EU Five Star Movement are leading in a number of the latest opinion polls. Thus, even though it is receiving far less attention as of late, it is clear that the populist threat in Europe seen earlier in 2017 has not fully subsided. Despite the elevated political risks, growth has firmed up in the Eurozone which have led equity markets substantially higher this year.
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