Macro Digest: The 19th Party Conference - The biggest Paradigm shift in 100 years?
paradigm shift : an important change that happens when the usual way of thinking about or doing something is replaced by a new and different way This discovery will bring about a paradigm shift in our understanding of evolution.
I think next week's 19th China Communist Party's Conference is the single biggest event this year – a confirmation a true paradigm shift
China leads world in credit creation, growth and now in most technology fields… My take remains that President Xi will focus on quality over quantity, that pollution reducing is the number one social issue and that The Party is taking more and more control. The net output will be:
· Lower than expected growth next 18 month (while China converts economy from export engine to one of productivity gains – President Xi wants 2010 GDP per Capita doubled (Rule of 72= 72/7% GDP per year = 10 years) which means objective of 7% growth per year, but most of this will be productivity driven which means investment first (hence lower growth) then higher
· Reduction of pollution = Electrification of cars – BDY says by 2030 100 pc of cars will be EV – this catapult China to leadership in battery, E-engines, and pollution reduction (Don't forget that from 1900 to 1910/13 the US went from 100% horse carriages to 100% cars!)
· High ratio of R&D and innovation to gain leadership China is already, but will be even more dominant in E-commerce, payments and Fintech. (See Mckinsey report below)
· Slow gradual openness in capital account, more access to market for foreigners and BIG FOCUS on converting global trade from US$ to CNY
· Weaker CNY post conference
· Big negative credit & growth impact on rest of the world
Changes comes much faster than we human beings like – our brain is simply not designed to accept quick changes, and one of the few short comings of the brain is that it likes (and uses) the recent past to extrapolate the future. We think linear but world evolves super log-normal. An excellent example is the pictures below from New York in 1900 and 1913. Notice the difference and that in the space of 13 years only.
I think the next 13 years will surpass those years in terms of change, dynamics and how we act, analyze and live
Source: http://www.businessinsider.com/5th-ave-1900-vs-1913-2011-3?r=US&IR=T&IR=T
The upcoming 19th Party Conference is highly anticipated but we technically know most of what will be said courtesy of the modus operandi of The Party and the excellent work by Charles Panton(*) "predicting" the President Xi speech at the 19th Chinese Party Confernece. Turns out most of is "given" and here is my copy-and-past (full article attached)
(*) Charles Parton worked as a diplomat in both the British and EU services, spending much of his career in China. Since retirement, he has set up his own consultancy, China Ink, as well as being London Director of China Policy and Special Adviser on China to the House of Commons Select Committee. He is shortly to return to Beijing as Internal Political Adviser to the British Embassy.
· …a constant theme of Xi Jinping‟s speeches is the need for innovation
· …he (President Xi) was in charge of the drafting of the Report delivered to the 18th Party Congress by his predecessor Hu Jintao.
· The deeper purposes of the Congress and the Report are to reaffirm the Party's importance to itself and to the nation
· „Ecological Construction‟, added „Making Great Efforts to Promote Ecological Progress‟. Neither addition is surprising, given that Party legitimacy would be threatened by popular dissatisfaction if areas such as education, health, social security, as well as pollution and food safety, were not put higher up the political priority list.
There is likely to be 13 major sections….(See below for 16,17 and 18th Conference comparison…)
The Past Five Years. To judge from the past, this section will aim to set a positive tone in order to remind the Party and people that only the Party could have achieved China‟s rise.
Party Theory and Ideology. This section is likely to be relatively short. It will restate the principal tenets of Socialism with Chinese Characteristics, and the need for and benefits of reform and opening up. Xi has spent much of his first term emphasising the importance of ideology and continuity with the Party‟s roots, so even if shorter, this section will be hard hitting.
Xi Jinping Thought, Theory or Concept? This congress may well see the apotheosis of Xi‟s „important series of speeches‟ into „Xi Jinping Thought‟, „Xi Jinping Theory‟ or the plain „Four Comprehensives‟, Xi‟s contribution to the CCP‟s canon of Marxist-Leninism, Mao Zedong Thought, Deng Xiaoping Theory, the Three Represents (of Jiang Zemin) and the Scientific Outlook on development (of Hu Jintao). The academic haruspex, gazing at the Party‟s liver to predict the future, will pronounce on the importance of the difference between an „ism‟, „Thought‟, „Theory‟ or just a simple description (as Jiang and Hu gained). In practice, what actually matters is that Xi is more powerful than his two predecessors at the start of a second term and may become more so than Deng: at the level of policy making and personnel, he is getting his way, even if at the level of implementation and down among those who hold real power in China, the 2,862 Party county secretaries, his writ runs less effectively). But for what it is worth, I think that we shall be hearing of „Xi Jinping Thought‟. Interestingly, an article in Research on Party Building magazine, a monthly publication on Communist theory, published an article in its July edition on "Xi Jinping Thought":
Building a moderately prosperous society in all respects'. Traditionally, this short section looks forward at the big tasks of the next five years, mainly in the area of the „Five Constructions‟ (economic, political, cultural, social and environmental). It is likely also to remind cadres of the importance of themes dear to Xi Jinping‟s heart, such as poverty alleviation, innovation, Belt and Road Initiative, corruption and Party discipline. And judging by the meetings of late July, the main theme, not surprisingly, will be稳中求进„progress amid stability‟iv, a phrase we shall see often.
The environment and ecology. This was a new section in the 18th Congress Report reflecting ecology‟s rise to become one of the five „constructions‟ and its addition to the Party Constitution. Quite apart from the lamentable state of the environment itself, a major driver for inclusion was the threat to social stability: according to some Chinese academics, around half of protests involving over 10,000 people had an environmental cause (NEW KEY SECTION in our opinion!)
Party building. This is always a lengthy and important section, hardly surprising, given that this is, after all, the Party‟s congress and given that „comprehensively [and] strictly govern the Party‟ is one of the „Four Comprehensives‟. The 18th Congress report was much harder and more urgent than its predecessors on ideals, faith in Party ideology, working for the people, corruption and discipline. This report is likely to be harder still. Over his first five years Xi has not just launched an unending and deep war on corruption, but also carried out a series of campaigns to instil discipline and cut abuse of public funds by cadres. It is traditional to have a section on intra-Party democracy and Party unity; we can expect the former to be more by way of lip-service, the latter to feature prominently. Xi will undoubtedly recommit to the war on corruption and is likely to doff his cap in the direction of the new National Supervision Commission, which is due to start work in earnest next March. Nor should it be forgotten that the Party Congress elects a new Central Commission for Discipline and Inspection.
Charles Parton concludes:
'…but it will give an idea of how he views progress towards those reforms, the priority of tasks needed to ensure their full delivery over the next five years, his political thinking, and perhaps his perception of problems. Foremost among those are implementation (by officials) and trust (of the people). Xi and Premier Li Keqiang have spent much time in the last few years railing against vested interests and failure to implement set down policies. Trust from the people in the Party is in short supply. One of the purposes of the Report is to show the people that it is right to entrust governance to a single party. Most people buy the line that under the CCP China has taken back its rightful place in the world; they are less persuaded by the claim that the Party rules in their, rather than its own, interests. That could be a worry if economic or environmental factors set back further progress towards prosperity'
It's important to understand that the "economic plan" for China in the next 5 years is already in place as the 13th Five-year plan was initiated in July 2016 – there is a mere 219 pp to read up for you…. (Link – China Five-year plan)
Here is a few take-away's:
· Marxism-Leninism, Mao Zedong Thought, Deng Xiaoping Theory, the Theory of Three Represents, and the Scientific Outlook on Development; and put into practice the guiding principles from General Secretary Xi Jinping's major addresses
· The Chinese Dream of the rejuvenation of the nation and the core socialist values have gained a firm place in people's hearts. China's soft power has continued to become stronger. Notable achievements have been made in military reform with Chinese characteristics, and new steps have been taken to strengthen and revitalize the armed forces. A new phase has begun in the all-around strengthening of Party self-governance, and significant headway has been made in improving Party conduct and building a clean government. New heights have been reached in China's economic strength, scientific and technological capabilities, defense capabilities, and international influence.
· However, the need has become more pressing to improve the quality and efficiency of growth and transform and upgrade the economy. As the economy is experiencing a new normal of growth, there is a clearer trend toward a more advanced form of growth, improved divisions of labor, and a more rational structure. With the structure of consumption being more rapidly upgraded, broad market space, a strong material foundation, a complete industrial structure, an ample supply of funds, and abundant human capital, along with the cumulative effects of innovation that are beginning to show, our overall strengths are still notable. A new style of industrialization, information technology adoption, urbanization, and agricultural modernization are experiencing deeper development, new drivers of growth are in the making, and new areas, poles, and belts of growth are becoming stronger. All-around efforts to deepen reform and make progress in the law-based governance of the country are unleashing new dynamism and bringing new vitality.
· Maintain a medium-high rate of growth While working to achieve more balanced, inclusive, and sustainable development, we need to ensure that China's 2010 GDP and per capita personal income double by 2020, that major economic indicators are balanced, and that the quality and efficiency of development is significantly improved. Production will move toward the medium-high end, significant progress will be made in modernizing agriculture, information technology will be further integrated into industrialization, advanced manufacturing and strategic emerging industries will develop more rapidly, new industries and new forms of business will keep growing, and the service sector will come to account for a greater proportion of GDP. • Achieve significant results in innovation-driven development We will pursue innovation-driven development, ensure that business startups and innovation flourish, and see that total factor productivity is markedly improved. Science and technology will become more deeply embedded in the economy, the ingredients needed for innovation will be allocated to greater effect, major breakthroughs will be made in core technologies in key sectors, and China's capacity for innovation will see an all-around improvement. Fulfillment of these goals will help China become a talent-rich country of innovation.
The focus on innovation and the progress of it is somewhat surprising, at least to me:
McKinsey & Company report: China's digital economy – a leading global force is almost shocking!
Note: China gones from 0.4% in 2005 to 42% in 2016, in mobile payment the Chinese does 11x more than the americans, and most surprising in Global Unicorns(start up > 1 bln. $) China has 34 vs. US 46 but mostly the same valuation!
In terms of investment China is also already a global leader:
The context here is that China is 1/3 of the global growth impulse (source: IMF) and indirectly 50% of credit - our own Christopher Dembik tracks the China Credit Impulse, which is the flow of credit:
This chart leads real economy by 9-12 month in other words… 9 month from now Mid-2018 China will be in severe slow-down, one which I believe China is creating through control of banking system, to set-up release of productivity investments, where China comes from a level which is 20-30% of the US. The next 5 years will be one big technology R&D and innovation drive under "Chinese charecterstica"
Source: Bloomberg LLP
Note: We see growth in 5.5% in 2018, 6.0% in 2019, and the current account @ 0% of GDP
Note: The slow-down in China is already dominant – add Credit Impulse and we have negative contribution to global growth
Note: CNY is small down as basket, but higher vs. US$ "naked" – overall China's basket will have drive lower in value to the tune of 1-2% pro annum.
This is all part of the plan and something President XI will be more confident in post the Conference which sees him solidify his power.
Conclusion:
China is changing and has changed more than market gives it credit for – the Anglo-saxon economist' keeps focus on banking system and debt, but unlikely western world China can accelerate growth through release of productivity – The US with President Trump has chosen to "retire" from the global economy on a fundamentally flawed concept of America 1st while China is growing its importance, probably best illustrated by this chart:
Source: Connectopraphy
Now China also wants new world order in commodities. China will allow exporters to avoid US$ payments for CNY or…. Gold! A new gold standard? (LINK: Crude, Gold, CNY)
China is enjoying US' indecision on foreign policy, which seems to be driven by indecision, spur of the moment changes and randomness opposite this sits China, with its One Belt, One Road, Asian Development Bank and the Shanghai Cooperation Organisation – There is in excess of 3 billion people in this alliance – and with Pakistan and India joining in 2015 that number will be 4 billion by 2050.
The future belongs to the countries and companies which can command the consumers, no one is better placed than China (and India)
We are witnessing a geo-political reality show where one hegemonic power, the US, almost voluntarily is given up its dominance. The result is clear to me:
The King Dollar is dead, Long live the King CNY!
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