Markets had been waiting for Xi Jinping's speech at the 20th Chinese Communist Party (CCP) Congress with expectations that it would give clues about short-term economic measures and when the ‘zero-COVID’ policy will be relaxed. These hopes were dashed but, nevertheless, the speech contained some hints about China’s longer-term path which are worth highlighting.

The Chinese economy is likely to post ~3% GDP growth in 2022, impacted mainly by the country’s ‘zero-COVID’ policy and a depressed property market. In his speech, Xi Jinping defended China's health policy and did not give any indications about if and when ‘zero-COVID’ will be relaxed. As China needs to expand domestic consumption, Project Blue assumes that the most restrictive measures will be gradually lifted over the coming months, with ‘gradually’ remaining the operative word.  

The market took some comfort in the fact that economic development remains a ‘top priority' for the Chinese Communist Party, although balanced with ‘security’. It confirms that China’s future economic growth will be more ‘qualitative’ than ‘quantitative’ as already highlighted in the country’s 14th Five-Year Plan. Gone are the days when China stimulated its economy through massive infrastructure spending. Project Blue believes that targeting GDP growth will not be as important as in the past, making the Chinese economy more cyclical. Longer-term, China's domestic consumption must become the economy’s main driver, implying pension and other social reforms.  

‘Science and education’ were highlighted in Xi Jinping's speech as well as innovation and nurturing talent. These are not unfamiliar themes with the 14th Plan centred on new technology, AI, robotics, avionics and green energy.  The deterioration of Sino-US relations is reinforcing China’s commitment to rely less on Western technology. Xi Jinping also vowed to modernise China’s military, which would benefit from China’s technological push.

Last but not least, Xi Jinping comments about Taiwan should be a reminder that this issue is deeply emotional for China and will remain a potential source of conflict going forward. Geopolitical risks endure.

As expected, Xi Jinping’s speech was high-level, confirming longer-term objectives rather than bringing details about short-term economic issues. The coming year will still be dominated by the depressed property market and by uncertainty regarding the ‘zero-COVID’ policy. Xi’s third term in power begins with an urgent need to address growth without reliance on property and infrastructure.  Exports may also be cause for concern in Q4, as the ROW heads for recession.  To counter these challenges, China does have levers to pull.  A relaxation of the zero-COVID strategy would almost certainly lead to a spike in consumer demand, while further stimulus would boost property, construction and related industries. The speech, however, gave no indication that these measures were likely in the near term.  

A changing China will also change China’s positioning in the commodity sphere. Steel and iron ore will clearly matter less in the future, but commodities exposed to energy transition will likely be driven by China despite Western efforts to diversify supply chains. The type of commodities may change, but more than ever, China matters.