On Sunday, China’s quinquennial Communist Party Congress ended with President Xi Jinping unveiling a new leadership team as he tightened his grip over the ruling party and was re-elected for a third term.
On Monday, markets were in turmoil. Hong Kong’s benchmark Hang Seng Index dropped about 6.3% and followed up with a much smaller 0.1% fall on Tuesday.
The Nasdaq Golden Dragon Index, which tracks US-listed Chinese companies, tumbled 14.4% on Monday. International investors also shed about Rmb17.9bn ($2.4bn) of Mainland shares through the Hong Kong stock connect on the day, the first sell-off of such proportion this year.
International investor fear largely stemmed from Xi’s line-up of the elite seven-member group of the Politburo Standing Committee. This is effectively the most powerful political body in China, the members of which will be responsible for decisions on everything from reforms, policy and tackling Covid to reviving the indebted property sector and the stressed technology industry.
The criticism goes that the group comprises only those loyal to the president — meaning his hard stance on critical topics could go unchallenged.
Some of the investor jitters are justified. The congress meetings failed to bring any clear-cut measures through which the authorities planned to stabilise the shaken property market, which has seen a spate of bond and loan defaults, onshore and offshore, in the past year.
It also didn’t explicitly pave the way for an end to the crackdown on the technology sector, which has wiped out billions in valuations from leading tech stocks, brought an end to their China-into-US listings spree and made investors wary of investing in the sector.
But the broad based sell-off seen on Monday belies one critical thing: that the fundamentals of China’s stock market haven’t changed in the past 24 to 48 hours.
Rather, the investor exodus is overblown, especially as China did clock a 3.9% year-on-year growth in GDP in the third quarter — higher than the 0.4% in the second quarter and 2.5% in the first half — suggesting economic growth will steady further as the country slowly emerges from its rampant Covid-linked restrictions and isolation. That could offer some broader respite to the market, and lead to an eventual bounce back in risk appetite.
Market participants would be better off viewing the leadership shuffle as a signal that policy coordination will be better and stimulus measures more efficient and streamlined as the top leaders look to tackle together some of the unprecedented challenges facing China, its economy and its markets.
It’s also worth remembering that two critical meetings will take place before the end of the year: the Politburo meeting and the central economic work conference are both scheduled to be held in December.
Both are important economic events and will provide guidance on the priorities of the regulators and how they plan on pushing growth, stabilising the real estate market and boosting the private and technology sectors. Those, more so than the national congress, will offer clearer indications for investors on things to come.
In the meantime, however, communication from China will be key to soothing investor angst.
Every scrap of information from the key decision makers over the next few days, and indeed in the run up to the December meetings, is sure to be scrutinised by both domestic and global investors.
This means it’s more vital than ever that China’s top financial leaders and regulators feel the pulse of investor sentiment. Their next bits of communication and media statements will have the power to move markets. Whether it will go the bullish or bearish way is entirely down to them.