Flanked by party leaders past and future,  President Xi Jinping on Sunday took center stage to present his grand vision for China, and in a speech running almost two hours, Xi let the world know that China wouldn’t change course and that by rallying around the party center – of which Xi is the core-  they would be able to ride out the storms and guide the country to “incomparable glory” as China restores the country to the forefront of global powers even as he highlighted the challenges and risks faced by the country and warned party members to brace for “dangerous storms” ahead. Instead, he declared the “rejuvenation of the Chinese nation is now on an irreversible historical course” and as Bloomberg notes, forcefully offered China up as an alternative to the US and its allies as he laid out the ruling party’s priorities on everything from Covid Zero to its ambitions on Taiwan and goals for tech sufficiency.

In his 105-minute speech on Sunday, which took months to prepare and gives the president an opportunity to review past challenges and achievements and lay out his grand vision and goals for the nation, Xi highlighted the challenges and risks faced by the country and warned party members to brace for “dangerous storms” ahead. But by rallying around the party center, of which Xi is the core, they would be able to ride out the storms and guide the country to “incomparable glory”, he declared.

This came as Xi, widely regarded as the most powerful Chinese politician since Deng Xiaoping, delivered his work report to some 2,000 Communist Party delegates gathered in Beijing for the twice-a-decade national congress. As SCMP reports, the speech marked the beginning of a weeklong session ending on October 22, when a new Central Committee to head the 97 million party members will be formed and ratified.

Some more highlights from Xi’s speech:

• By 2049, when the People’s Republic will hold centennial celebrations, China should become a leading power in all aspects, Xi said. To achieve this, the party will first aim to complete all modernization programs by 2035, turning China from the largest developing economy to a middle-to-high-income country, he said. This would mean that China will have successfully avoided the “middle-income trap”.
• Building on the momentum, China will strive to become a leading global power by mid-century. This power will not only be measured by the size of China’s economy but also by its achievements in the fields of science and technology and culture, Xi said.
• The Chinese military force, already the largest in the world, will become a “world-class fighting force”. On the environment front, China will also “largely eliminate pollution” and achieve carbon neutrality.

But what drew the longest applause from the audience, was Xi’s vow that the island of Taiwan – self-governed since a bitter civil war in 1949 – must be brought back into the fold. But he also said Beijing would show the “utmost sincerity and make the greatest efforts” to achieve such reunification by peaceful means, while stressing that it would not give up the use of force as a last resort.

Xi’s remarks indicate that China is ready to stare down a growing challenge from the US under President Joe Biden, who has moved to hinder Beijing’s ability to access advanced technology and sought to deter any military action against Taiwan – the biggest flash point between the world’s biggest economies. The Chinese leader hailed the nation’s “fighting spirit” and said the country was “well-positioned for pursuing development and ensuring security.”

“The message to the party is that China can develop its technological advantages without the United States, and is going to be able to withstand the policies that Biden and others are promoting to cut China off from certain high-tech goods like semiconductors,” said Neil Thomas, a China analyst at Eurasia Group Ltd., a political risk advisory and consulting firm. “Whether that’s going to succeed is a totally different question of course, but it’s certainly expressing confidence to those in the system.”

According to Bloomberg, Xi’s speech reflected a changed world from 2017, when he declared that China was “standing tall and firm in the East.” Since then, he’s faced a barrage of US tariffs, financial sanctions and trade curbs aimed at blocking China’s ability to grow even more powerful, culminating in a sweeping order this month restricting Beijing’s access to high-end chips used in artificial intelligence, supercomputing and other technologies set to drive the modern economy.

On Sunday, Xi vowed to “resolutely win the battle in key core technologies.” Pledging to speed up innovation in areas vital to “technology self-reliance,” he said that China “will move faster to launch a number of major national projects that are of strategic, big-picture and long-term importance.”

Xi’s defiant tone stood in stark contrast with the calamitous problems facing China’s economy. The country is facing one of its most challenging periods in decades as Covid Zero policies and a property crackdown place pre-pandemic predictions of a 5% growth rate out of reach. In addition to failing to make significant breakthroughs on chip technology despite spending tens of billions of dollars, the nation is also facing the slowest economic growth in more than four decades, excluding 2020’s Covid slump. Restrictive pandemic policies have cut off visitors and hurt spending, while youth unemployment is around record highs. A property crisis has also spurred a wave of mortgage boycotts.

Xi reiterated that economic development was the party’s “top priority,” even as he twice mentioned the need to “balance development with security” — a phrase suggesting growth can be sacrificed for goals like self-sufficiency and national defense. Noting “drastic changes in the international landscape,” he said the party “safeguarded China’s dignity and core interests.”

The speech delivered by Xi at the Great Hall of the People was an abridged version of his work report. This was a departure from tradition, as the party chief usually reads out the entire document. The only exception was at the 16th party congress 20 years ago, when the then-party chief, Jiang Zemin, aged 76, also opted for a shorter version. According to SCMP, Xi may have cut back his speech out of concern for the retired elderly party leaders who made a rare appearance to join him on stage. They included his predecessor Hu Jintao, 79, who looked tired and frail throughout the session. At 105, Song Ping was the most senior party elder to appear on stage on the day. However, the two most noticeable absentees were former president Jiang, now 96, and former premier Zhu Rongji, 93. Their names, however, are on the list of an ad hoc group set up to supervise the proceedings of the party congress.

While the influence of party elders varies over time, their appearance this time could be largely symbolic. While Xi had sought their views, the president has a free hand to make all key decisions. Yu Jie, a senior research fellow on China at Chatham House – an independent policy think-tank based in London – is among analysts who see the shortened report as an indication of Xi’s firm hold on power.

“The 20th party congress report speech is significantly shorter than the 19th, a clear indication of Xi’s success in centralising power,” Yu said. “The speech acts as a summary of the party’s achievements and future plans – expressed as the lowest common denominator of consensus between competing factions. A shorter report speech would seem to suggest smaller factional gaps in reaching consensus.”

While Xi did not mention the United States in his speech, he warned against a cold-war mentality – a catchphrase to describe Washington’s attempts to isolate China – as well as Western double standards, as he asserted that the country would not be bullied. Further elaboration of the point came in the full work report released shortly afterwards.

“The attempt to suppress and contain China’s growth could escalate anytime,” the report read. “We are entering a stage where great opportunities and risks coexist. Uncertainties and unpredictability are rising. All kinds of black swans and grey rhinos [unexpected and overlooked risks] could strike any time. We must have a keen sense of crisis and make thorough preparations. Only by doing that can we rise to the challenges ahead.”

To mitigate the risks, Xi said the party needs to strengthen its work on national security and improve the protection of all major infrastructure and networks, as well as data, biosecurity, nuclear and space assets.

“We must improve our capacity to counter foreign sanctions, interference and long-arm jurisdiction,” the report said. Long-arm jurisdiction in party-speak usually refers to the US imposing its own laws and court orders on other countries.

China also needs to increase self-reliance in the food, energy and technology sectors, Xi said, as he listed technological innovation and scientific breakthroughs as key to achieving the development goals outlined in the report.

“We must speed up technological progress and self-reliance. We must pool our resources and focus on key areas to achieve breakthroughs, so that we can win the race in core technologies critical to our national strategy.”

The party must also develop more open, inclusive and efficient talent schemes to groom and attract top talents to China, Xi emphasised.

Xie Maosong, a senior fellow at Tsinghua University’s National Strategy Institute, described the work report as a “galvanising call” to the party and the Chinese people. “This is the party’s first work report after its centennial celebration [in 2021], so it is not just meant [to resonate] for the next five years,” Xie said. “It sets the goal of realising China’s great rejuvenation, and to do so by charting our own path and not following the Western model of political party rotation,” he explained.

On Monday, the committee will vote to confirm the line-up of a new 25-member Politburo and seven-member Politburo Standing Committee – the highest decision-making body in Chinese politics. While Xi is set to get a convention-breaking third term as party leader, he will reshuffle many key positions and put together a new supporting cast for the next five years and beyond.

* * *

Below we excerpt from a note by Goldman strategist Andrew Tilron summarizing his main takeaways from Xi’s opening remarks:

• The 20th National Congress of the Communist Party of China (NCCPC) convened today in Beijing and will conclude on 22 October. Through the opening remarks, President Xi summarized the achievements over the past five years and set out the blueprint for the Party and the country for the future.
• In summary,
  • 1) President Xi’s “Thoughts on Socialism with Chinese Characteristics for a New Era” have been further highlighted;
  • 2) national security and social stability appear to have become more important, especially for the security of key supply chains;
  • 3) President Xi reiterated the “One Country, Two Systems” principle, and strengthened the stance to secure national sovereignty; and
  • 4) economic development remains important, with continued focus on high-quality growth. 
• Our textual analysis suggests the adjusted frequency of “security”, “people”, “socialism”, “modernization” and “military” this time increased versus five years ago, that of “growth” and “law-based governance” remained largely stable, while that of “economy”, “market” and “reform” declined somewhat. 

• We believe the ongoing Party congress may not be an inflection point for major policy changes. We maintain our view that a reopening will probably be delayed until at least Q2 2023, and implemented gradually to the extent possible. Policymakers’ reaction function such as “no flooding of easing measures” and the top leadership’s long-term goals are unlikely to change after the Party Congress. 
• In terms of equity market implications, we are not changing our views in the absence of any fresh and material policy and political inputs so far from the Congress—We prefer China A over Offshore equities, and would continue to focus on thematic ideas such as “Common Prosperity” and “Little Giants” to trade for sustainable alpha in the stock market. That said, we’d argue that a high level of risk premium is embedded in prevailing equity valuations, and investors should consider option strategies to tactically position in the market.

(Full note available to pro subscribers.)

Finally, courtesy of Bloomberg, here is how global China experts are reacting to Xi’s speech:

Neil Thomas, a China analyst at Eurasia Group:

• “Xi changed the structure of the report fairly significantly compared to previous years. There are new sections on science and education, on national security and on the legal system areas that have previously been addressed in other parts of report. Having these new sections means they’re going to be even higher priorities.
• “The new focus on science and education is a reflection on just how much Xi is betting on innovation as a solution to China’s economic problems and its reliance on Western technology. I think that’s super significant.
• “What’s new there is the addition that this would be done by using or done through Chinese-style modernization. That’s a strong sign Xi is sticking to his guns in going his own way toward wealth, power and very much not following the ways of the West.
• “The message for the United States is that China’s going to do its own thing. The message to the rest of the world is that China is going to remain powerful and is going to remain a potential partner, especially for developing countries.”

Scott Kennedy, senior adviser and trustee chair in Chinese business and economics at the Center for Strategic & International Studies:

• “The language of this speech is all about trying to establish a different kind of international system from what we’ve seen since World War II — one led by the US emphasizing free markets and through the UN system, multilateralism and democracy.
• “And you can see the whole emphasis of this speech an emphasis of a Chinese style everything — China’s foreign policy, domestic policy, and, in some ways, an acceptance of the fact that the US and China are strategic competitors in the type of world order they’re trying to create. And he was not backing down from that at all.
• “So I think we’re seeing a real effort for the Chinese to say, ‘You know what, we still want to participate in this global society but we want to be rule makers not just rule takers.’”

Peiqian Liu, chief China economist of Natwest Markets:

• “There were two parts that are important to the medium term. First, there was a balanced emphasis on both development and security. This means growth rates will no longer be the only and top priority in coming years, security of development also matters.
• “Second, there was a lot of emphasis on technology and innovation, which means the focus will likely shift away from just lowering financial risks and reducing debt growth to pouring more resources to development of high tech and innovation.
• “Common prosperity is still highlighted. That means the policy goal of redistribution of income and wealth is still a medium term goal.”

Wu Xianfeng, fund manager at Shenzhen Longteng Assets Management Co:

• “The standout of the speech was that Xi emphasized economic development still remaining the priority, contrary to the jitters and misconceptions prior to the meeting that common prosperity would come first.
• “It’s reassuring the leaders say growth still comes first and foremost in the current stage of development, especially as we are faced with economic difficulties from virus curbs and as we are in for challenges from the US over the long term.”

Ding Shuang, chief economist for Greater China and North Asia at Standard Charted Plc:

• “It’s important that he reiterated that development is the first priority, and that modernization can’t be achieved without the material foundation. That means the economy’s size still needs to expand and the quality needs to improve.
• “The speech is mostly an extension of Xi’s previous thoughts on the economy, and there aren’t much new ideas. That’s understandable because he has helmed development in the past decade.
• “The speech itself may not have much impact on the market, because most of the points have already been raised in the past.”

Frank Tsai, lecturer at the Emlyon Business School’s Shanghai campus:

• “Xi’s speech sends a signal that China is serious about its socialist roots. To paraphrase, Xi stated that China offers a ‘new choice for humanity,’ China’s ‘scientific socialism,’ and that ‘Chinese wisdom and capacity’ will make this model work for the benefit of all. This sounds like boilerplate propaganda, but it is serious. China is the last major country standing with Cold War roots in Soviet communism.”

Alfred Wu, associate professor at the National University of Singapore’s Lee Kuan Yew School of Public Policy:

• “From his speech, it’s clear he’s the leader of the world’s number two country; he wants to change the world order. So China’s clash with the US will be intensified. I don’t see any possibility of tensions being lowered.
• “China has always argued that the US made the current world order, but now they are doubling down on how they present a true alternative world.
• “Xi emphasized and boosted the narrative of national security because it is serving as a justification for him to remain in office for as long as possible. He won’t tolerate sensitive issues that could jeopardize his regime.”

Chen Shi, fund manager at Shanghai Jade Stone Investment Management Co.:

• “The report settled my nervousness over the past weeks, and should assuage concerns of those investing in China. The fact that the report is shorter this time says to me that the party is confident and policies are consistent — it doesn’t feel the need to waste words explaining itself, and that the overall direction in policies remains the same, and iterated in various policy blueprints in the past.
• “The way that development and technology came so high up in the report also is reassuring to me — this party is not just about ideology, as some were beginning to fear, but development and economic stability stays high on the list. Those words coming out the mouth of the man himself means that China will still be full of investment opportunities.”
• Xi Jinping tells the Communist Party that China’s “power to shape the world” has increased, although “dangerous storms” are ahead.

Drew Thompson, visiting senior research fellow at the Lee Kuan Yew School of Public Policy at the National University of Singapore:

• “It’s interesting how Xi characterizes China’s response to the dynamic international situation as a ‘struggle’ in the Marxist sense for its own national and political security. He is calling on the nation to struggle against international forces that threaten China’s interests.
• “It reflects an adversarial world view that is zero-sum, and likely foretells of continuing tensions between China and developed nations, featuring wolf warriors and coercion in multiple domains — diplomatic, economic, informational, and military.
• “Xi emphasized the importance of the country gaining in strength, and the need to struggle against challenges and threats to the party and country, which requires not only a modern military, but a ubiquitous domestic security apparatus as well.”

Baohui Zhang, a professor of political science at Lingnan University in Hong Kong:

• “Xi’s speech re-emphasized China’s commitment to ‘openness,’ which was started by Deng Xiaoping. Many have wondered if the strategic rivalry between China and the United States could push them apart and motivate China to pursue autarky. Xi’s message is to assure the world the China remains committed to economic integration with the world.
• “However, this may not impact the Sino-US rivalry in significant ways. Washington is pursuing at least limited decoupling to redefine its relations with China. Recent technology denial measures are the latest evidence. As such, China’s commitment to ‘openness’ does not mean that decoupling will not continue ,as Washington’s choices and strategies also impact their relations.”

Wen-Ti Sung, a political scientist at Australia National University’s Taiwan Studies Program:

• “By giving Taiwan the spotlight early in his speech, Xi is committing the performance of his Taiwan policy to be put under the microscope over the next five years.
• “Xi declared the Chinese military has both the capability and resolve to deter external influence over Taiwan. What he still hasn’t said is if Chinese ‘intent’ to do so.
• “In that sense, China is still preferring peaceful unification to using force, but the focus on military capability will only accelerate an arms race in the Taiwan Strait, and the need to demonstrate resolve through military exercises will both raise tensions and increase risks of accidental escalation.”