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Economic and Market Commentary

Continuity and Concrete Direction: Takeaways From China’s 20th Party Congress

Last month’s 20th National Congress of the Chinese Communist Party was the country’s most significant political event this year. It revealed China’s new leadership team for the next five years and laid out the government’s policy blueprint for long-term development.

President Xi Jinping will continue into a third term while six other members of the Politburo Standing Committee, the country’s highest-level leadership body, appear to have close working relationships with him, presenting a united vision.

As we expected, President Xi’s report to the Congress mainly focused on China’s long-term agenda: It continues the policy course set over the past five years, without disclosing much detail on near-term policies.

For the moment, it would seem prudent to assume that economic uncertainty remains high and the risk premium will stay elevated, as the country is still struggling with COVID-19, while a global recession is looming. Overall, we remain cautious across currency, rates and credit given valuations amid economic headwinds.

Below are six key takeaways from the Congress:

  1. Development remains the top priority, especially high-quality growth. This is consistent with the shift in policy focus from speed of growth to quality of growth, initiated by the 19th Party Congress five years ago. The growth target has been downplayed over the past few years, allowing the government greater leeway to push forward reforms and risk-prevention measures, including regulations over various economic sectors, deleveraging, and environmental protections. However, the President’s report still stated that China needs to achieve the long-term growth target of a “moderately prosperous” society by 2035. This implies an average annual growth rate of about 4% over the coming decade. In addition, the report reiterated the government’s intention to continue market-oriented reforms, foster a broader and deeper economic opening, and support the private sector ”unwaveringly”.
  2. High-quality growth aims to address the problem of “unbalanced and inadequate development”. Long-term strategies in the report include:
    • “Common prosperity” and rural revitalization to reduce income inequality and the regional development gap
    • Industrial modernization, continued economic opening to the world, and innovation to further develop the domestic supply chain and technology
    • Green development to support more environmentally friendly growth
    Authorities have repeatedly communicated these policies over the past few years, so they remain in line with market expectations.
  3. A greater focus on security. The concept of “holistic national security” was a keyword in Xi’s address, with emphasis on food, energy and resources, supply chains, and technology. Given rising geopolitical tensions and the trend of deglobalization (noted in our Secular Outlook: “Reaching for Resilience ”), the focus on security reflects China’s reaction to the paradigm shift in the geopolitical landscape. We expect further policy support in these areas in the years to come.
  4. Innovation as the core strategy of “Chinese-style modernization”. This is consistent with the 14th Five-Year Plan (2021-2025)  which calls for boosting the country’s technology capacity. The report pledged to strengthen fundamental and frontier research, and improve technological innovation. In addition, the report called for an “open innovation ecosystem” that would include fostering international research collaboration. With the U.S.’s imposition of export controls on high-end semiconductors to China, there is fear these controls may be a precursor to further and wider restrictions. China will have to increase its scientific and technological self-reliance.
  5. Manufacturing will regain importance. Manufacturing is crucial for China to safeguard supply chain security in a deglobalizing world, and can further enhance China’s competiveness, particularly in higher-end manufacturing. Meanwhile, low-end manufacturing will likely continue to be phased out as China already has sufficient capacity. With the 20th Party Congress calling for “supply chain security,” policies will focus on addressing weak links in supply chains, further modernizing industries, cultivating advanced manufacturing clusters, and developing strategic emerging sectors (high tech and new energy). Indeed, over the past two years capital spending in manufacturing has accelerated at the expense of real estate fixed asset investment.
  6. Reforms of the past few years should remain on course, but refinements are likely. For instance, the report called for a “proactive and steady” approach to decarbonization, which suggests that there may not be a repeat of last summer’s nationwide power rationing to meet short-term energy savings targets . China will likely take a holistic approach to establishing new capacity before decommissioning old power sources. While the Party Congress report did not reveal much about near-term policies, including COVID-19 controls and property market regulations, we expect some policy adjustments in the coming months to support growth and employment. However, the report reiterated that “housing is for living, and not for speculation,” demonstrating that the government’s long-term view on housing market regulation remains unchanged.

Investment implications

In the longer term, we believe China’s growth should moderate but remain largely stable and the united leadership team will ensure policy continuity. With development remaining the top priority, we expect the government will still strike a balance between achieving economic targets and its reform agenda. High tech and green sectors are likely to gain government support, while sectors related to social wellbeing, such as education, healthcare, and housing, would be subject to strict regulation. Global investors should also be mindful of geopolitical risk, with adverse policies towards China likely to be increased over time.

We remain cautious on the property market. While some policies have aimed to support housing demand, many private developers are still largely in distress. Over the longer term, a declining population and slowing progress toward urbanization will likely lead to lower housing demand, while the share of public housing may increase to support lower income groups.

In the near term, we will watch for key signals of China’s reopening. While we have not seen a clear roadmap, reopening is inevitable at some stage, and pent-up demand should drive an economic rebound and financial market rally.

For PIMCO’s outlook on the global economy, including China’s, over the next six to 12 months, please read our latest Cyclical Outlook, “Prevailing Under Pressure”.

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