view from Beijing

analysis from our portfolio managers

In the wake of the Two Sessions and the Boao Forum for Asia, resolve to tighten monetary supply has hardened. Policymakers fret over asset bubbles, self-fulfilling inflation prophecies and systemic risk. Deleveraging the non-financial sector, another wish, is compromised by dread of SOEs failing. The GDP growth target was reduced to 6.5 percent in the Government work report, accompanied by a policy focus on supply-side reform, de-capacity, free trade zones, car emissions, zombie enterprises and consumption. Plans to eliminate substandard steel by end June 2017 will affect the industry’s entire supply structure and possibly push prices up. Premier Li Keqiang 李克强 called for more evidence to show that agriculture is the most polluting sector. Three M&As will bring the total number of central SOEs below 100, with further M&As expected to speed up in 2017.

China’s jurisprudence fulfilled a decades-old goal at the annual National People’s Congress with passage of the Civil Code preamble, hailed as a landmark protection of private citizens. Strengthened general provisions granting legal person status to rural collective economic organisations and village Party committees were similarly hailed as a milestone in protecting individual rights to collective land.

More disquieting was a new national anti-corruption entity, to be codified in March 2018. State media hail the new body as radically restructuring the Party-state, beefing up disciplinary watchdogs, and making anti-graft campaigns more effective and accountable.

Behind the scenes, however, internal messaging display Party angst over stalled reform and bureaucratic foot-dragging. Scholars mutter about incentivising the bureaucracy to explore its options more boldly. The anti-graft campaign has, they agree, dampened initiative. Xi Jinping’s 习近平 call since January for recalcitrant officials to ‘roll up their sleeves and get on with it’, seems unlikely to resonate with them.

With political crises sapping the Trump administration, Beijing’s fears of warming US-Russia ties have abated. The THAAD issue, however, seems headed for stalemate, with South Korea unfazed by economic sanctions. Rule of law issues cast a shadow over Premier Li’s warm reception in Australia, with Canberra shelving a planned extradition treaty with China due to human rights concerns. New Zealand, however, was hailed as the first Belt and Road buy-in by an advanced economy.


march policy movers

policy professionals in and out of the establishment

Jin Shuqin 金书秦 | Ministry of Agriculture Research Centre for Rural Economy, Division of Sustainable Development Research

Jin made waves this month, suggesting agriculture is likely the largest source of domestic pollutant emissions, masked by poor-quality environmental data. Jin joined the centre in 2010 with a PhD in Economics from Renmin University. He publishes extensively on agricultural pollution and related regulatory issues. A leading expert in his field, in 2014 he led the MoA research team drafting policies for the 13th 5-year plan on clean technology and pollution prevention in agriculture, and will continue to influence policy in the area.

Wang Sanshou 王叁寿 | Jusfoun Big Data CEO & Guiyang Big Data Exchange Centre president

Wang started working in the data industry in 2000, founding Jusfoun in 2010. In 2014, with support from Guiyang government and big data firms nationally, he became Guiyang Big Data Exchange Centre president, the largest big data trading centre in the country. China’s big data industry can outstrip the US’s, argues Wang, creating massive value and employment, but the state must be transparent in sharing its data. This would increase its utility and value, he argues, while enhancing governance and policy decisions. Data should not be isolated or static, he adds: integration, interaction and remodeling are key to its value.

China Association for Promoting Democracy (CAPD) 中国民主促进会

Founded in 1945 by intellectuals in literature and the humanities, CAPD is one of eight parties under the CPPCC, representing the interests and concerns of academia. CAPD has frequently raised the issue of internet censorship in recent years, arguing access for academics and professionals to global resources like Google Scholar is indispensable. During the 2017 CPPCC session, CAPD argued for more precision, with blocks targeting banned content on websites, rather than websites themselves. The association’s current chair is Yan Junqi 严隽琪 (pictured).


policy ticker highlights

gems from our feed of policy releases and domestic debate

geopolitics

Shen Zhihua: ‘Korea policy is counterproductive’
Aisixiang | 23 march

Korean peninsula policy is conflicted and counterproductive, argues Shen Zhihua 沈志华 East China Normal University: China needs to alter the ‘Three Nos’ policy (no unification, no war, no chaos) that preserves the status quo. A transcription of Shen’s 19 March 2017 lecture in Dalian, placing China-Korea relations in historical perspective, has topped the Aisixiang analytical website’s weekly ratings since it first appeared.

Shen argues that while China needs a stable neighbourhood for its development and the success of Belt and Road, serious issues persist with most of its neighbours, especially at the Korean peninsula, which harms regional stability and thus prospects for China’s development. The status quo is, given both Koreas seek unification, a fertile source of tension, he says. Based on irreconcilable interests, China’s alliance with North Korea is, in Shen’s view, inherently contradictory.

The decision to go nuclear was, notes Shen, rooted in North Korea’s strategic isolation following loss of the nuclear umbrella provided by the Soviet Union and China. China’s opening of relations with South Korea in 1992 dealt the North an irreconcilable sense of betrayal. It will, he warns, keep conducting nuclear tests, destabilising China’s neighbourhood.

The tests lead in turn to a cycle of rising US-led military pressure, says Shen, completely against China’s interests. North Korea is a lesser worry for the US, he argues, giving the latter a pretext for exercises, moving its fleet and THAAD into the region in order to contain China’s rise, with Japan in its wake. Both China and South Korea, Shen finds, are losers in this cycle, facing nuclear pollution and accident risks.

Beijing’s handling of the THAAD issue draws severe criticism from Shen: it pushes South Korea further into the orbit of Japan and the US. Yet South Korea is, he says, given its cultural and historical affinities and economic complementarity, a potentially valuable partner. The current rift in its relations with China, in Shen’s opinion, serves only the US and North Korea.

China should, urges Shen, support South Korea’s drive for peaceful reunification. While there would be some fallout, they constitute manageable risks. A unified Korea would not, in Shen’s view, destabilise the border, nor would refugee outflow be insurmountable (especially given China’s experience with refugees in the Northeast). The economic benefits for the Northeast, currently a rustbelt, would be huge, he adds. China should work towards restoring mutual trust with the US, Shen concludes, calling for a ‘return to Yalta’.

trade and industry

sharing economy flourishing
China Environment News | 17 march

The sharing economy, which includes, among other things, life services, transportation, knowledge sharing, accommodation, and medical services, realised market transactions worth 3.452 tn in 2016, up 103 percent year-on-year, says ‘China’s sharing economy development report 2017’. The report predicts

  • sharing economy to grow 40 percent yearly, reaching 10 percent of GDP by 2020 and 20 percent by 2025
  • five to ten giant platform enterprises to emerge over the next decade

China Environment News argues this growth is based on

China Environment News further argues the sharing economy’s 2016 growth was characterised by

  • market expansion
  • flexible employment, important due to slowing economic growth
  • entrepreneurship and innovation (E&I) enabling flexible and efficient use of resources; the most successful mass E&I areas ‘have sharing economy DNA’
  • paid-for knowledge sharing, live video streaming and bike sharing, all of which had a breakthrough year
  • large M&As in pioneering areas
  • online platforms’ exploration of credit systems

agriculture

agriculture may be China’s largest polluter
Caixin | 1 march

As complete monitoring data becomes available, the agriculture sector is likely to emerge as the largest source of pollution by industry, according to new research by Research Centre for Rural Economy (RCRE), a research centre affiliated with Ministry of Agriculture (MoA). Nonpoint source (NPS) agricultural runoff was the focus of the study, conducted by RCRE researcher Jin Shuqin 金书秦 and reported at a conference on 28 February 2017.

NPS agricultural pollution has been included in national pollution statistics since 2007, according to Caixin coverage, but has been repeatedly undercounted, argues Jin. 2015 statistics for ammonia pollution, for example, take into account agrochemical runoff, livestock waste, and emissions from aquaculture operations, but fail to account for decomposing crop residue or post-harvest waste. Jin believes that as data on rural pollution improves, agriculture will likely account for more pollution than urban residents or industrial sources.

Jin proposes the following pollution control measures, many of which are already underway

  • management of irrigation water to prevent runoff
  • management of livestock and crop waste for use as fertiliser
  • zero growth of chemical pesticide and fertiliser use
  • complete recovery of agricultural plastic film

He further notes that zero growth of chemical pesticide and fertiliser use should be evaluated by pollution as well as by market sales.

society

more city clusters taking shape
Jiemian | 22 march

The government will speed up development of city clusters by offering administrative upgrades to counties and townships within them that meet the requirements of city status, according to National Development and Reform Commission.

Major city clusters include Guangdong-Hong Kong-Macau Big Bay Area, Western Taiwan Straits Economic Zone, Guanzhong Plain, Hohhot-Baotou-Ordos-Yulin Area and Lanzhou-Xining Area, according to 21st Century Business Herald.

Meanwhile, six cities—Shenyang, Hangzhou, Changsha, Nanjing, Qingdao and Xi’an—are competing to become ‘national central cities’, says the paper. They will be evaluated based on a range of criteria including population size, economic strength, cultural environment, innovation capacity, and their status within city clusters. Existing national central cities include Beijing, Shanghai, Tianjin, Chongqing, Guangzhou, Chengdu, Wuhan and Zhengzhou.

governance

inadequate incentives for officials to be more proactive
People’s Forum Online | 27 march

In response to Xi Jinping’s 习近平 call on officials to ‘roll up sleeves and just do it’, People’s Tribune, a People’s Daily subsidiary magazine devoted to major policy issues, conducted two surveys on morale within the state, one among scholars and officials, the other among the public. The second survey finds a majority agreeing that the officialdom is not as energetic and bold in seizing initiatives as expected, contributing to loss of momentum of the reform agenda, while over half of people believe officials are working under tremendous pressure, and thus cannot do more.

To relieve officials of undue pressure and provide more incentives to deliver better performance, People’s Tribune argues the Party must

  • identify those who actively agree with the Chinese political system and bring them into the system
  • provide higher salary and better welfare benefits to maintain the ‘stability of the civil service staff’
  • put in place a mechanism to give immunity to ‘tactical mistakes’ in the reform process, to send an encouraging signal to officials aspiring to lead reform causes

Note: the suggestions above were widely discussed after the Third Plenum; their reoccurrence implies the Party has made little progress in injecting reform enthusiasm into its apparatus.

finance

moderate financial regulatory reform due, says top advisor
NetEase | 12 march

Financial regulatory reform is due, says Cao Wenlian 曹文炼 National Development and Reform Commission international cooperation department director, advocating for ‘moderate reform’, as major reform is unrealistic while marginal reform is ineffective. Now is the time, argues Cao, as

  • financial product innovation and interest rate liberalisation conducted since the third National Financial Work Conference were bold steps forward, but have created problems
  • financial risk containment was emphasised at the 2016 Central Economic Work Conference
  • directing the financial sector to service the real sector has become key to monetary policy and financial regulation

Moderate reform should be underpinned by function-based regulation and administrative supervision, says Cao. In particular, he envisions

  • function-based regulation led by the central bank (PBoC)
    • function-based regulation refers to regulation over market and product innovation, including making professional and industrial standards
    • a feasible short term option is to merge the banking regulator (CBRC) and insurance regulator (CIRC) into the PBoC, while leaving the securities regulator (CSRC) separate
  • administrative supervision left to the Ministry of Finance (MoF)
    • administrative supervision includes market entry and approval of institutional qualifications
    • can be further divided between central MoF and its provincial counterparts

The central bank deserves more autonomy while under National People’s Congress supervision, argues Cao, adding this is likely to be a major part of regulatory reform in the 14th 5-year plan.


lexicon

short, graphic explanations of trending technical terms and jargon

sesame credit 芝麻信用 zhīma xìnyòng

Ant Financial Services Group’s third-party credit rating company. Originating from Alipay Pay to support Alibaba, China’s largest e-commerce platform, it assigns individual credit scores, ranging from 350 to 950, using an undisclosed algorithm.High-scoring (600+) users enjoy small loans, as well as no-deposit hotel check-in, car rental and bike-sharing, among other conveniences. Approved in 2015 by PBoC, Sesame Credit is one of eight agencies licenced to evaluate individual credit, and is also piloting ways for building a more comprehensive national social credit system.


china policy in the media

mentions of our work elsewhere

is China challenging the United States for global leadership?
The Economist | 31 march

And so on. Unlike the China model, which its boosters said was aimed at developing countries, the China solution, says David Kelly of China Policy, a consultancy, is for everyone—including Western countries. This marks a change. Chinese leaders never praised the China model; its fans were mainly Chinese academics and the country’s cheerleaders in the West.

debt piles add to risk for China’s property groups
Financial Times | 23 march

“China’s big developers stand out compared to their peers worldwide for being highly leveraged, thanks to their access to local banks and capital markets,” says Wang Xinling, lead analyst at China Policy, a think-tank in Beijing. On top of a slowing market, many funding sources favoured by property companies are coming under threat. Beijing began restricting funding last October, ordering regulators to limit equity and bond sales by developers as part of efforts to rein in the property market.

Rex Tillerson makes first official visit to China, looks for breakthrough on South China Sea
Australian Broadcasting Corporation (ABC) News | 18 march

A scaling back of U.S. involvement overseas is likely to be seen as an opportunity for the world’s second largest economy, says David Kelly, director of research at China Policy, a Beijing-based research group. “Once again Trump has left large spaces open for China to, in a sense, exploit in diplomatic terms,” he said.

world leaders welcome Trump’s measured tone, await details of ‘America First’ policies
VOA | 1 march

A scaling back of U.S. involvement overseas is likely to be seen as an opportunity for the world’s second largest economy, says David Kelly, director of research at China Policy, a Beijing-based research group. “Once again Trump has left large spaces open for China to, in a sense, exploit in diplomatic terms,” he said.


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