President Xi is the first President since Mao Zedong to have his ‘Thought’ incorporated into the communist party charter (other presidents have had their contributions listed with lesser titles of ‘Theory’ and ‘View’).
The National Congress is held every five years and is the forum for the announcement of senior leadership and committee changes, as well as changes to the Party’s constitution. The outcomes of the Congress provide a critical insight into how China is expected to be governed over the medium to long term.
Much of the media attention surrounding this gathering has centred on the lack of a clear successor being appointed to the inner-most seven member Politburo Standing Committee, along with that committee now having a majority clearly aligned with President Xi.
However, we believe that the part that investors should focus most on came through a three and a half hour opening address to the congress in which President Xi set out a vision to make China “prosperous, democratic, civil, harmonic and beautiful” by 2050.
One key piece of the puzzle in achieving this ambition is the Belt and Road Initiative (BRI), a 21st century ‘Silk-Road’ framework aimed at developing better infrastructure between China and Europe. The BRI was also enshrined in the Party’s constitution.
In addition, the Chinese government is looking to encourage investment in areas such as high-end information technology and artificial intelligence, as well as in healthcare.
Outcomes for Australian Investors?
We see at least three clear positives for Australian businesses and investors. The Belt and Road Initiative should support on-going demand for commodities used in the construction of roads and railways for many more years. It may also provide a base level of demand should the government seek to slow the rate of development in some urban areas.
This is a positive for Australia’s big three iron ore miners: BHP, Rio Tinto and Fortescue Metals Group.
In addition, Australian health care businesses such as Ramsay Health Care and CSL are already entering into partnerships with Chinese counterparts. CSL’s approach involves buying access to a very large market place with unique needs (as seen with its acquisition of plasma-derived therapies manufacturer ‘Ruide’).
Ramsay Health Care has sought joint ventures in China to develop hospitals however this has yet to bear fruit. Each of these models could provide a long term base for each to grow in China.
Chinese outbound investment is also being seen in Australian health care. Primary Health Care is 15.9% owned by Jangho Group of China, while the third largest player in Australia’s private hospital market (Healthe Care) is owned by China’s Luye Group.
Finally, Australia as a high quality producer of foods and fibres, agricultural exporters remain well-positioned to benefit from an increasingly prosperous China (either via direct exports or through intellectual property partnerships – Costa Group).
Beware of complacency
On the sidelines of the congress, the soon to retire governor of the People's Bank of China, Zhou Xiaochuan, noted that there was no room for complacency, "If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a 'Minsky moment'. That's what we should particularly defend against.“
Minsky moment: A bursting financial bubble. An economy that's apparently booming is suddenly exposed as vulnerable. Money flees risk, prices collapse, outstanding debt becomes unaffordable, mass bankruptcy ensues and recession follows.
On some estimates China’s total public and private debt to GDP is over 300%, adding a degree of financial risk to the ambitious plans of the government.
China thinking well beyond its next five years
Whether or not the 64 year old President seeks a third term in that capacity, he has cemented his ability to influence Chinese policy for decades to come. While this is very early days we believe Australian businesses continue to be well placed to profit from China’s economic development.