18th National Congress of the Communist Party of China

Finally, a date has been set for this event to take place on 8 November 2012. The CCP party congress takes place every five years wherein every second one would involve leadership reshuffle at the top. In other words, elected leaders get a two-year term. This is a renewal year. It seems that 10 years ago, the party congress was held on the exact same date, 8 November. At this last round, the 16th CCP party congress decided to switch to a collective leadership based on consensus building. To enable this change, the Politburo Standing Committee was expanded from 7 to 9, with the two new positions created then to take charge of propaganda and law enforcements. This change was widely felt to have led to inefficiency in decision-making and implementation. In fact, the general public felt that the current two top leaders – President Hu Jintao and Premier Wen Jiabao had done little to improve the fundamentals of the economy, leading to today’s wide income inequality, massive housing shortage and overladen local government debts.

Hence, it is widely expected that the Politiburo will be reduced back to 7 members. By limitations of age and term, only 2 members from the current PSC will be retained – Xi Jinping and Li Keqiang who are widely expected to be the incoming president and premier. Besides this big change at the top, about 70% of the central military commission and executive committee of the state council will also have to make changes.

After the party “elections”, the elected will have to wait till March 2013 to assume office. That’s about 6 months of waiting time.

Ok… now that we have got over the facts above, we can relax and discuss this more “casually”. The biggest reason being this – the mere announcement of the date for the party congress to begin suggests that whatever horse-trading during these past few months has been finalised – which is why Bo Xilai‘s expulsion from the CCP was announced at the same time. In turn, this means that whatever economic policy decisions being held up during this period of horse-trading can now proceed. That is, there is no need to wait for the new leaders to take office in next March before actions are implemented. This is a very important point since the economy is heading fast into the abyss – in case you haven’t noticed! The most important economic remedy needed – in my opinion – is monetary policy easing – cut interest rates and required reserve ratio. There is little time to wait for fiscal policy stimulus which would do little for the economy anyway as this tool has been overused for the last 5 years. How else did the local governments ended up with such mountain of debt – together, their debts are as large as the central government, which works out to about 30% of GDP. So you double that. This is the reason why despite the apparent success of the trial municpal bond issuance last September by the “best in class” local governments – Shanghai, Zhejiang, Guangzhou among them – the central government decided not to go ahead with allowing local governments to issue their own debts. The central government will continue to do so on their behalf and provide the explicit guarantee. Some of those trial municipal bonds in fact were issued inside of the central government’s bonds i.e. the coupons were below the latter.

Monetary policy easing is also needed as part of the monetary policy “reforms”. This basically means two, not just one, things – first, the liberalisation of interest rate controls and second, the introduction of proper market-based policy rate targets. That is the PBOC must stop targeting banks’ lending and deposit rates to non-bank customers, which was its way of protecting banks’ interest profit margin. The PBOC must start targeting interbank interest rates like what the Fed and other central banks do. In China’s case, the readily “targetable” market rates are the repo and reverse repo rates that the PBOC conducts twice weekly with banks. Watch this space as the PBOC has begun regularly conducting reverse repos (to inject liquidity to banks) since June. In the past, it only did repos (to withdraw liquidity) on a regular basis, leaving reverse repos to be done on an ad-hoc, bank-by-bank basis. Based on the fact that the current commercial lending and deposit rate target corridor is at 3-6%, with the leeway for banks to provide 10% premium on the deposit rate and 30% discount on the lending rate, there is definitely scope for the PBOC to cut repo and reverse repo rates from the current 3.5% region.

So, it’s a biggie. Friday’s announcement of the 8 November date for the CCP’s party congress. It’s as big as the big spring cleaning I just had in my bedroom. I even brought in my niece as the fashion police to weed out my stuffs… Why would I carry a Mango bag when I have a Prada? Why would I carry a cloth bag that is as good-looking as the rag? Why would I carry a bag that my mother shouldn’t even be carrying? So after the spring-cleaning, guess what one ususally does? Yup – you’re right. Shopping. This is what you can expect China to do.