On Wednesday Nov 2nd, the Fed raised rates by .75% for a historic 4th consecutive time. There were rumors that they would only raise by .5%, which would signal a pivot (positive for the markets), but those hopes were quickly erased. Inflation has continued to ease although moderately, partially due to retailers having massive inventories. Don't be surprised to see early Black Friday sales, and discounts extended through the rest of the year, as retailers try to move the products that are clogging their supply chains. In the US, polls show that Republicans are likely to control the house and the senate, which has historically been considered a positive for the markets. The logic behind this is that a divided congress and president means gridlock, which tells businesses that no major tax or regulatory issues are likely to change in the next two years, giving them more certainty to invest in growth. Geopolitical tensions have ratcheted up in Ukraine, Pakistan, Iran, the Korean peninsula, and more political theater from China.
China held its National Party Congress a few weeks ago, in which President Xi Jinping made a clear demonstration of his power over the Communist Party. During the highly choreographed event, former President Hu Jintao (and political rival of Xi) expressed dissatisfaction with a document to his protege, seated next to him. Shortly before a vote, which included an amendment to their constitution, two officials escorted the hesitant Hu Jintao out of the building. While the official story is that Hu Jintao had health concerns, the message of the event is clear.
Xi Jinping has also broken with tradition in his cabinet selections and consecutive terms in office. In general, past Chinese presidents have had a younger cabinet member (in their late 40’s or early 50’s) under their wing, an heir apparent. Former presidents have also limited themselves to two, consecutive five year terms. The youngest of Xi’s cabinet members is 60, meaning he has no plans of stepping down. Furthermore, he was just unanimously elected to a third, five year term.
Why does this matter?
China is the second largest economy in the world. It is growing rapidly, and is widely expected to surpass US economic output by 2030. Because we have the ability to invest in international markets, including China’s, consideration must be given to its potential growth, as well as risks involved with Chinese equities. Xi Jinping’s recent display of power makes a very strong case to avoid investments in this region. He has publicly displayed a break with rules and traditions, and his power has so far gone unchecked. A free market is a fair market, and we as investors have no interest in being treated unfairly.
What is the CCP?
The Chinese political system is not like those of developed countries. The CCP, or Chinese Communist Party, is the overwhelmingly dominant party of the government. Additionally, the military does not belong to the country, but to the party. There is literally one organized “party line”, distributed via a smartphone app called Xi Thoughts. Xi Jinping is the leader of the CCP, and by default, the country. Upon pondering China’s party system, I have a fresh perspective watching America’s political back-and-forth. While it may get excessive at times, I have come to hear it as the sweet sound of democracy.
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