drum beats for China Solution as new administration enters White House

view from Beijing

analysis from our portfolio managers

Xi burnished his global leadership credentials at Davos; back home the administration remains nervous on the eve of Trump-era America. Official media claim Xi’s ‘China Solution’ is the antidote to de-globalisation, whether or not that was what US voters really had in mind. Trump’s pledge to slash corporate taxes, weakening the RMB and investment into China, is more threatening than a tit-for-tat war over tariffs and exchange rates, but no one is ruling it out. Beijing’s reassurance on FDI and ODI remaining as before spoke to doubts rather than confidence.

Thresholds for reporting cross-border cash transactions were lowered; information disclosure requirements imposed for exchanging foreign currencies—but the individual US$50,000 foreign exchange quota was maintained. The insurance regulator moved to limit financial risk with a series of measures covering insurers’ operations, management, shareholding and products. Supervision over regional equity markets was shifted from local to provincial financial offices, reducing conflicts of interest and improving enforcement.

Launching an ‘agricultural product wholesale price 200 index’, Ministry of Agriculture has become a forecaster, hoping to make prices respond to market information and prompt structural adjustment. The data will appear daily, weekly and monthly.

Shareholding for rural collective economic organisations mooted in a new central document aims to gradually scrap the ambiguous status quo, and rationalise land transfer and requisitioning within five years. Less noticed is a reform of civil service staffing, aiming to clean up the messy professional rank system to address mismatch between rank and office.

Cyberspace Administration (CAC) has set a new micromanagement record with a campaign against click-bait, and new regulation on how to properly style news titles, as well as a new registry for app stores. On the anti-corruption front, CCDI has made good on Wang Qishan’s 王岐山 promise to toughen supervision over the watchdog itself, while the judiciary changed rules to speed up seizure of assets of corrupt officials who flee abroad.

NDRC released a plan to boost central regions through advanced manufacturing and new industry development, while SASAC moved to update supervision measures for central SOEs’ domestic and international investment. The ‘National informatisation 5-year plan’, underpinning the IT industry and Made in China 2025, will assist cybersecurity, big data, smart manufacturing, cloud computing, e-commerce and 5G development, potentially increasing public data access for tech start-ups. Several agencies issued a new NEV subsidy policy, matching a range of measures issued H2 2016 aimed at consolidating manufacturing, closing down subsidy abuse and spurring innovation.


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january policy movers

policy professionals in and out of the establishment

All-China Lawyers Association (ACLA) 中华全国律师协会

Affiliated with the Ministry of Justice (MoJ), and with a national network reaching down to the cities, ACLA is the ‘quasi-governmental regulator’ of a profession the Party can find troublesome. Membership is mandatory for lawyers. Those who accept sensitive clients against Party orders are disbarred. The association’s latest priority is to expand Party units among law firms for closer supervision. ACLA staff significantly overlap with those of the MoJ, and are on the ministry payroll. This will make it difficult, in the next two years, to sever financial and personnel ties while ensuring ACLA can still perform its regulatory role. The current president is Wang Junfeng 王俊峰 (pictured).

Wang Yizhou 王逸舟 | Peking University School of International Studies International Politics and Chinese Foreign Affairs

Long a deputy director of the Institute of World Economics and Politics, CASS, Wang moved to Peking University in 2009. He finds three main foreign policy challenges: ensuring economic growth, territorial sovereignty, and the protection of China’s overseas interests including personnel and energy infrastructure. Wang argues foreign policy should be framed to offer ‘creative involvement’ with the international community: China needs to develop its ‘high frontiers’, including space, the polar regions and the ocean depths. In so doing it will produce international public goods, he says, living up to the formerly unfamiliar and contentious ideal of a ‘responsible stakeholder’.

Chen Qingtai 陈清泰 | China EV100

State Council Development Research Centre former deputy director, Chen now heads up the leading NEV industry policy research platform. A pro-market advocate, Chen is an active commentator on SOE reform and strategic emerging industries. Transforming SASAC from managing enterprises’ daily operations to state investment capital, required in the Corporation Law, argues Chen, protects state assets and allocates resources through market forces. Markets, rather than government incentives, should drive the NEV industry forward, says Chen. Responding to international competition in the period to 2020 is key, he says, calling on firms to focus on improving core technological competitiveness and branding.


policy ticker highlights

gems from our feed of policy releases and domestic debate

geopolitics

geopolitical challenges in 2017: experts weigh in
Xinhua | 30 december

In view of likely challenges in 2017, Xinhua interviewed international relations experts from universities and think tanks. Three principles should be observed, proposes Wang Yizhou 王逸舟 Peking University School of International Studies deputy dean

  • strategic prudence
  • crisis management and control
  • timely correction of mistaken practices

China has become relatively powerful in the past 25 years, says Wang, while the USA has grown weaker. At this moment of transitioning, he concludes, China should concentrate on avoiding major strategic mistakes.

Sino-US confrontation may escalate on two fronts, forecasts Teng Jianquan 滕建群 CIIS USA Research Centre director

  • trade, especially finance
  • security, especially in the South China Sea, Taiwan Strait and Korean Peninsula

US power comes to some extent from Wall Street banks, says Teng. China, however, has also started to operate banks to amend the old financial institutions, he says, and Sino-US competition in the financial sphere is increasing.

For Japan, argues Zhang Huanli 张焕利 Xinhua World Affairs Research Centre research fellow, confronting China has become a national policy and strategic pivot. Aware of the Abe administration’s hostile attitude, China should make sound judgements, advises Zhang, and corresponding plans to avoid harm to its rights and interests.

agriculture

salt monopoly abolished
Southcn | 1 january

1 January 2017

The State Council’s ‘Salt industry reform program’, originally published 5 May 2015, South China reports, is due to come into effect 1 January 2017. Measures include

  • releasing all salt product price controls
  • abolishing salt transport permits
  • allowing existing fixed-point salt producing enterprises to enter salt distribution
  • allowing wholesale salt enterprises to carry on cross-regional business

The reform, argues a Municipal Salt Bureau official, will likely bring about

  • lower salt prices in food processing
  • momentary price rises for packaged salt
  • more varieties of salt products
  • eventual stabilisation

Salt quality and safety is the main challenge, finds the article. To better supervise food safety

  • all units buying salt will be required to sign salt safety responsibility documents with supervisory departments
  • salt users and retailers and food processing enterprises must buy directly from salt wholesale enterprises
  • market supervision departments will strictly investigate and punish behaviour disrupting the markets, as well as illegal salt production and wholesale

Setting up government and corporate social responsibility reserves will ensure secure supplies, advises the article. Reserves (days of supply) will number

  • provincial government: 20
  • prefecture-level government: 50
  • enterprise stock protection: 30
  • supply guarantee: 80

trade and industry

encouraging private capital to enter commercial space projects
China Business News | 27 december

Government encourages and will guide advantageous private capital and resources to participate in aerospace development, aiming to make China an aerospace leader by 2030, says Wu Yanhua 吴艳华 China National Space Administration deputy director. Over the next five years, the aerospace industry will use modern systems to boost progress, she adds.

On 27 December 2016, State Council released and held a press conference on the ‘2016 China aerospace’ white paper, encouraging and highlighting support policies for private and foreign capital to participate in commercial rocket development, satellite R&D and commercial projects, noting

  • State Council released ‘Guiding opinions’ on private capital investment in 2014, encouraging participation in commercial satellite development
  • recent negative list for foreign investment includes very few restrictions on aerospace projects
  • government is researching investment policies for commercial launchpads and monitoring

finance

centralised custodian for customer provisions
Peoples Bank of China (1) Peoples Bank of China (2) | 13 january

People’s Bank of China (PBoC) issued ‘Notice on centralised custodian of non-banking payment institutions’ customer provisions’. The notice stipulates that from 17 April 2017 non-banking payment institutions must deposit a portion of total customer provisions to designated bank accounts, and will no longer earn interest on those provisions. Customer provisions are payments made by customers temporarily, then held by a third-party payment platform until the transaction is settled.

The proportion required to be deposited is based on type of services provided and company grading, further scaled against PBoC’s ‘Management measures on grading non-banking payment institutions’, where Grade A firms are least risky and Grade E firms most risky. According to the new policy, for

  • online payment service firms, Grade A institutions must deposit 12 percent of their provisions and Grade E institutions must deposit 20 percent
  • card acceptance merchant service firms: Grade A institutions must deposit 10 percent of their provisions and Grade E institutions 18 percent
  • prepaid card issuance and acceptance service firms: Grade A institutions must deposit 16 percent of their provisions and Grade E institutions 24 percent

Over the next few years, PBoC will work towards centralising custodianship for all payment institutions’ customer provisions, though it did not provide a timetable for the transition.

The new policy on customer provisions

  • reduces income from interest for third-party payment service providers; reliance on interest for income creates the wrong incentives, says PBoC, leading companies to seek expansion and look for ways to keep clients’ money in their accounts for as long as possible
  • moves towards central custody of funds, which would bring more transparency to the industry and help prevent crime; currently, every third-party payment companies have on average 13 bank accounts where they can store customer provisions, according to PBoC

governance

centralised custodian for customer provisions
Cyber Administration of China | 13 january

Cyberspace Administration (CAC) launched a one-month special campaign against online click-bait, targeting major news websites.

Having penalised Sina, Netease, Sohu and Ifeng for ‘severe misconduct’, CAC issued an interim guideline on online news titles, to ensure they are editorialised in the correct way and free from objectionable sensationalism. To maintain pressure on click-bait, CAC opened a new section on its website where people can report non-compliant news titles to the authorities at any time.

society

rural shareholding reform strengthens peasants’ land and property rights
p5w | 10 january

The move to deepen rural land shareholding reform will grant peasants more bargaining power against the state in land acquisition deals, argues He Xuefeng 贺雪峰 Huazhong University of Science and Technology rural governance research centre director.

The newly released ‘Opinions on rural collective property rights reform’ stresses the need to proceed with management assets corporatisation, and to verify and quantify rural collective organisation members’ rights-holding status by granting them stock shares, explains He. The policy is targeted primarily at wealthy countryside areas and villages in urban suburbs, where peasants enjoy comparatively high income and where rural construction land has been appropriated for urban purposes, says He. The increase in land value, coupled with ambiguous land rights ownership status, has triggered numerous local disputes and unrest during state land acquisition projects, he says, so has the vague ownership of profits from collective rural enterprises. Without well-defined legal ownership of collective property, individual peasants fell victim to the arbitrary will of the state, he says.

Corportising rural construction land and enterprises will allow peasants to provide supervision over local land management, argues He, as well as collectively bargain for more compensation during state land acquisition. But the organised peasants might also require compensation that governments can ill-afford, worries He, risking derailing the country’s larger urbanisation plans.


lexicon

short, graphic explanations of trending technical terms and jargon

first island chain 第一岛链 dì yī dǎo liàn

The first chain of major archipelagos out from the East Asian continental mainland coast from the Kamchatka Peninsula to the Malay Peninsula, it includes the Kuril Islands, Japanese Archipelago, Ryukyu Islands, Taiwan, the northern Philippines, and Borneo. Proposed by US strategists in the Cold War, the concept now forms part of China’s military doctrine. As an area that must be secured; its defence may entail pre-emptive attack against an enemy. Several naval initiatives have been hailed as ‘breaking the lock’ of the first island chain.


china policy in the media

mentions of our work elsewhere

prospect of warming US-Russia ties worries China
VOA News | 17 december

‘In the West, people have been extremely concerned about Russian involvement in the U.S. elections, and Trump’s commitments, but very few people take seriously the idea that he could lure Russia away from the partnership with China,’ says David Kelly, research director at China Policy, a research group in Beijing. ‘In China, it’s taken much more seriously and is a subject of daily speculation.’


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