China's Party Congress Poses Threat to Assets as Reforms Loom

  • Economic calm in runup to meeting can give way to volatility
  • Once-every-five-years gathering is slated for autumn

Markets have calmed as last week’s tension with North Korea ebbed, but Goldman Sachs Group Inc. says there’s a bigger threat looming, especially for risk assets in China.

The 19th Communist Party Congress, where China’s ruling party shuffles leadership and addresses economic reform, is set to trigger an uptick in volatility for offshore Chinese stocks, if previous gatherings are anything to go by, the firm said.

The Hang Seng China Enterprises Index has eked out stable returns in the run-up to the past four meetings, buoyed by loose fiscal and monetary policies. Tighter policies and structural reform thereafter typically spur higher volatility of returns as the shifting political economy separates the wheat from the chaff.

Goldman Sachs Group Inc.

As such, the ’China policy put’ may be a bigger driver for offshore stocks than North Korea tensions, and the Federal Reserve, in the months ahead.

Offshore Chinese stocks have notched a 14 percent gain this year, bolstered by stable policies and renewed foreign risk appetite. But headwinds loom, with Monday’s data showing signs of a second-half slowdown, as curbs on property, excess borrowing and industrial overcapacity kick in.

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