China – the meaning of XI

The legitimacy of the Chinese Communist Party (CCP) has been underpinned by rising living standards. But as trend growth rates slow, the picture becomes more complex. President Xi has moved decisively to manage these risks. He has re-asserted the influence of the CCP, centralised power, clamped down on corruption and sought to engender a new feeling of Chinese nationalism. That has created a political platform from which the required structural reforms can actually be delivered. But, shorter-term, the impact will be deflationary. The need to curtail the impact of deflation on the domestic problems of over-leverage, bad debts and misallocation of resources means that we should see a continuation of the decline of the renminbi against the CFETS currency basket. We remain short versus the basket.

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