Analysts anticipate President Xi will further consolidate his power base by ensuring that his
political loyalists are appointed positions within the Politburo structure. Because the congress
convenes every five years, those moving into the higher ranks are among the leadership
cohort that will emerge as China’s senior ruling class. Given the country’s weak economy, due
in large part to stringent zero-COVID-19 measures that have led to strict and prolonged
lockdowns, coupled with a debt-laden property market, authorities in Beijing and throughout
the Chinese provinces will need to focus on reviving the country’s economic underpinning.
Moreover, the 20th national congress will most likely be assessing, and perhaps even
debating, the trajectory of its future as it seeks military dominance in East and Southeast Asia,
technological leadership, and an economy that embraces both capitalism and authoritarianism.

Modern China grew at a dizzying pace as it embarked on opening its economy to the West.
Market reforms, trade with the West, and allowing foreign investment led to an economic boom
that was characterized by the World Bank as “the fastest sustained expansion by a major
economy in history.” China’s trade relationship with the United States grew at such a rapid
pace that it became the chief manufacturer of most imported goods. At the same time, U.S.
financial services companies, automobile manufacturers, and leading national brands worked
towards negotiating agreements to partner with Chinese companies.
Similarly, Chinese entities, especially real-estate companies, invested throughout the U.S. and
Europe. But much of China’s expansion in real estate domestically and abroad was fueled by
enormous debt that ultimately led to bailouts and various forms of receivership by the Chinese
The real-estate industry in China is vast and includes intricate partnerships within other
industries. According to Moody’s, the entirety of the industry is responsible for over a quarter of

China’s nearly $17 trillion economy. Since early 2022, as cracks in the real estate market
became more severe, Moody’s downgraded 91 high-yield Chinese property developers.
Evergrande, a major property developer with vast holdings throughout the country, was placed
on Moody’s “B3 negative list.” The list underscores the speculative and high-risk environment
that hovers over much of the property market. Given its size and complex relationships across
industries, Evergrande exemplifies the depth of the heavily indebted real estate industry. In
December, Evergrande defaulted on its debt along with other real estate developers, while
many others continue to have trouble making interest payments on time. With over $300 billion
in debt obligations, Evergrande’s foreign investors hold approximately $20 billion in notes.
More worrisome are the billions of dollars in dollar-denominated debt issued by other Chinese
In addition, over the past year and a half, individual investors have refused to pay monthly
mortgage fees on condos in unfinished buildings. Property values continue to fall and indicate
few signs of abating. To provide a modicum of assistance, policy banks have been lowering
five-year mortgage rates, and one-year prime rates are also being eased in an effort to provide
relief to builders who cannot secure private financing. The People’s Bank of China (PBOC),
China’s central bank, is also trying to help by allowing cities that are most vulnerable to the
property crisis to cut mortgage rates for first-time buyers.
Consequently, if the endemic problems of the industry are not resolved, there are fears that
China could undergo its own version of the sub-prime mortgage collapse that engulfed markets
globally 14 years ago.
At the end of September, the World Bank downgraded its 2022 economic growth projections
for China to 2.8% from an earlier forecast of 5%. Global investment banks are also lowering
their GDP estimates. For the first time in 30 years, China’s economic growth is lagging the rest
of the Asia-Pacific region. World Bank data expects the other 24 countries encompassing the
area to grow a cumulative average of 5.3%. China’s stringent measures to control the spread
of COVID-19, the “zero-COVID” policy, are being blamed for the marked slowdown of the
world’s second largest economy. Business leaders hope that the upcoming plenum will result
in a significant easing, if not a full abolishment of the strategy.
Doubts are growing, however, that President Xi is prepared to abandon the policy that includes
mass testing, extreme tracking, and isolating areas where there are outbreaks. Shanghai, with
a population of 25 million residents, was shut down for two months this past spring. The
restrictions stemming from the shutdown exacerbated global supply chain challenges given the
region’s economic importance, but also included disturbing reports of citizens worried about

food supplies. And throughout China, lockdowns and quarantines have created an
environment of uncertainty with regard to business planning, investing, hiring, or borrowing, not
to mention anxiety for the general population.
There is mounting concern that President Xi views his zero-COVID-19 policy, and its ability to
eradicate the virus, as a key goal for the country and his platform. That it is increasingly
perceived that he remains wedded to maintaining the strict measures clearly indicates that it
takes precedence over economic considerations.

China’s continued economic weakness spilled over into the services sector last month, where
intensifying problems in the property market and continued lockdowns are slowing activity in
the retail, food services, and transportation sectors. The National Bureau of Statistics reported
that the sub-index that measures services fell to 48.9 in September from 51.9 in August.
Manufacturing, however, improved slightly.
Weakening global demand presents a major headwind for China as an important exporter to
the world. In August, the statistics bureau reported a continuing decline in exports, with new
export orders weakening in September. Cargo and container activity for export shipments
contracted by 15% compared with a year ago. Expectations are that if a global recession does
unfold, the economy will contract more dramatically.
Compared with the previous national congress in 2017, where economic growth stood at 7.0%,
the multitude of problems facing party members this year is far greater, while the global
backdrop does little to offer help [Figure 1]. Much is expected from this year’s meeting in terms
of stimulus, programs for development, and viable solutions to the debt overhang that
permeates nearly all sectors of the economy

As global central banks struggle to thwart rising inflationary pressures by raising interest rates,
the PBOC has lowered rates to help its struggling economy. Expectations for infrastructure
projects are most likely to be announced during the congress. Also, with technology expertise
within all sub-sectors a top priority, there will probably be comments about how technology is
transforming the economy and the country at large.
But economic considerations aside, the continued build-up in the Chinese military highlights
that the very top priority for Chinese leadership, where dominance in the region is paramount
and military overtures towards Taiwan continue on a daily basis, military spending will not
shrink despite the towering problems inherent in the domestic economy. Early in its rapid
modern growth period, leaders referred to the country as the Peaceful Giant. Today, under
President Xi’s authority, it sounds like an anachronism. In the West, any leader with such a
dismal economic record would likely be voted out, and even in many authoritarian regimes,
there would likely be popular revolts to topple leaders.
Clearly, the goals in China are starkly different. Keeping the population from uprising has been
a fundamental priority since Tiananmen Square. In essence, the contract with the population is
that they will be taken care of (the COVID-19 policy is considered to be an integral part of this
contract by Xi) in exchange for a compliant population.
To Western observers, it seems incomprehensible that the zero-COVID-19 policies would
continue without a leadership change, but the military strength registered under the Xi regime
is decidedly more important than the economic weakness wrought by the severe lockdowns.
Over the next five years, China will likely be forced to focus on fixing its domestic problems as
it tries to balance its capitalist designs with its inherent authoritarian posture. Although the
Peaceful Giant has long ago now left the stage, the world is watching to see what the plans are
for the next phase of China’s transformation.
Investors are anxiously awaiting the results of the plenum, as they are every five years. Given
the challenging global backdrop accompanied by market volatility, it would be prudent to wait
for reports stemming from the meeting to see in which direction China is headed. LPL
Research maintains a cautious view of emerging markets equities.

This material is for general information only and is not intended to provide specific advice or recommendations for any
individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive
outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as
predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are
unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance
of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no
guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of
their products or services. LPL Financial doesn’t provide research on individual equities.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness
or accuracy.
US Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit,
and market risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest
rates rise and bonds are subject to availability and change in price.
The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance
of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major
The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit
earned by the firm per share. It is a financial ratio used for valuation: a higher PE ratio means that investors are paying more
for each unit of net income, so the stock is more expensive compared to one with lower PE ratio.
Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS
serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important
variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.
All index data from FactSet.

Website by FIRE PIXEL