Xi Jinping warns of ‘dangerous storms’. Should you sell your Chinese stocks?

Xi Jinping made a 2-hour speech at the twice-a-decade Communist Party Congress today. 

In the speech, he warned that with a more unstable international environment, China must be prepared for “strong winds and high waves and even dangerous storms.”

Investors have been awaiting the Congress to find out if there will be any shift in policies that may change the prospects of the Chinese economy. 

Let’s take a look at some of the key takeaways from Xi Jinping’s speech

What we learnt from Xi Jinping’s speech at the Communist Party Congress 

#1 – No change to Zero Covid policy

For investors hoping that there would be a reversal in China’s zero covid policy, there was little sign of it coming out of Xi Jinping’s speech.

Xi Jinping indicated that the zero tolerance approach China has pursued is going strong, and that China has even won international praise for how it has brought the pandemic under control.    

 “In responding to the sudden attack of Covid-19, we put the people and their lives above all else and tenaciously pursued a dynamic Zero Covid policy. We have protected the people's health and safety to the greatest extent possible and made tremendously encouraging achievements in both epidemic response and economic and social development.” - Xi Jinping

#2 – Economic development remains top priority

There were concerns prior to the Congress that Xi could prioritise national security over economic growth in his speech. 

This would have spelt trouble for its economic growth as it would mean that the Chinese government would be willing to tolerate a slower pace of economic growth to meet its other goals. 

Thankfully, Xi Jinping continued on his message from previous congress speeches that development remains the party’s top priority. 

This means that there is no significant shift from its economic targets. 

 “High-quality development is the top priority of building a socialist modern country in all aspects. Development is the party’s top priority in governing. It's impossible to build a socialist modern strong country in all aspects without solid material and technology foundation.'' - Xi Jinping

#3 – Common prosperity still an area of focus

The words ‘common prosperity’ are likely much dreaded by investors in the Chinese market. 

After all, the focus on common prosperity was a precursor to crackdowns in the technology, education and real estate sectors, which lead to a significant erosion of the market value of companies in these sectors. 

While the need to support the economy with Covid lockdowns has shifted the focus of the Chinese government  this year, Xi Jinping has made it clear that common prosperity is still high on his priority list. 

"We will steadfastly push for common prosperity. We will improve the system of income distribution. We will ensure more pay for more work and encourage people to achieve prosperity through hard work. We will promote equality of opportunity, increase the income of low income earners and expand the size of the middle income group. We will keep income distribution and the means of accumulating wealth well regulated." - Xi Jinping

What would Beansprout do?

The Chinese market is cheap and has become even cheaper with the further decline over the past weeks. 

In our simulated portfolio, we mentioned that we’d look out for any signs of China re-opening to change our view on the market. 

Unfortunately, there’s no indication of that in Xi Jinping’s speech.

China’s continued focus on economic development could provide some relief to investors who were fearing that pursuing growth could become less important compared to national security objectives. 

However, the continued emphasis on zero Covid and common prosperity may make it hard to spur a strong economic recovery. 

Overall, it may seem like while there hasn’t been any bad news that has come out from the Communist Party Congress so far, there is also not much that could help to drive a turnaround. 

As such, our view on Chinese stocks would not have changed with Xi Jinping’s speech at the Communist Party Congress. 

We’d keep our small holding due to the attractive valuation, but wouldn’t be buying more at this point. Here's what we'd do with our portfolio instead.