roundup from our portfolios

‘Window guidance’ from China Banking Regulatory Commission (CBRC) in early June asked commercial banks to examine credit extended to a list of companies with large overseas investments, including Anbang and HNA. Worries over the effective credit rating prompted asset managers to pre-emptively reduce their holdings. A flash crash of these companies’ stocks and bonds ensued. Wang Shi 王石 stepped down as CEO of Vanke, sparking speculation about CBRC’s next move to clamp down on illicit shadow banking activities that enabled the unresolved hostile takeover battle between Baoneng and Vanke.

Amid warnings about the challenges of integrating new members India and Pakistan into the Shanghai Cooperation Organisation, China remains enthusiastic about Iran’s future accession. China and Brazil set up a new US$20 bn China–Brazil Production Capacity Cooperation Fund. While Japan has made overtures of support for the Belt and Road (B&R), Chinese commentators are not convinced of its commitment. The outbreak of the Qatar diplomatic crisis and the killing of two Chinese language teachers in Balochistan brought home political and security risks facing B&R. The latter led to a new propaganda focus on the ChinaPakistan Economic Corridor and its Gwadar port project.

Low pork prices and market turmoil due to wholesale relocation of pig farms dominated headlines in early June. This spurred Ministry of Agriculture (MoA) to reprimand localities for ‘blind’ implementation of livestock banned areas and issue measures to guide better utilisation (and hopefully, monetisation) of livestock waste. A notice from MoA and Ministry of Finance provided management guidance for agriculture funds and subsidies, devolving authority to provinces starting this year. Progress was made on the US–China 100-day plan on trade, with steps taken towards market access for US beef in China and Chinese cooked poultry in the US, and more US GMO crop varieties added to China’s import approval list.

A new wage policy for public hospital doctors is in the offing, according to the National Health and Family Planning Commission. The Commission will also raise fees for medical services to allow hospitals to make up for revenue loss due to the elimination of pharmaceutical markups. Ministry of Housing and Rural–Urban Development announced that housing funds will become transferrable across provinces by end June 2017, to help satisfy demand from first-time homebuyers.

Ministry of Public Security (MPS) released a new Detention Centre Law, disappointing hopes that detention authority would be transferred to judicial organs. The new law, indeed, boosts MPS’ exclusive control over detention centres. This has renewed outcry over concerns of brutal maltreatment in detention centres under unlimited MPS authority. State media, on the other hand, says the law has made significant progress in terms of due process and protection of human rights, including referring to the detained as ‘suspect or defendant’ instead of ‘prisoner’, and placing detention centres under Procuratorate supervision.

Sci-tech funding reform, to be completed in 2017, is directing central funding to megaprojects and national key projects (NKPs). Megaprojects in earth observation, quantum communication and large aircraft have reported breakthroughs, as have NKPs in combustible ice and high-speed rail carriages. Forty major and 1,078 small NKPs were granted a total of 43 bn in H1 2017. The new economy is thriving, even independently of these funding schemes. Catching up with recent innovations, the government announced regulations that affect the bike-sharing, credit rating, big data and drone industries. Recently released management rules for new energy vehicles show how the state plans to arrange financial incentives to curb bubbles and fraud.


june policy movers

policy professionals in and out of the establishment

Cai Jiming 蔡继明 | Tsinghua University Institute of Economics

Cai specialises in income distribution, rural land reform and urbanisation. Progressive on land reform, he urges freer conversion of rural to urban construction land, and freer sale of rural property by urban residents. Urbanisation should be driven by megacities, urges Cai, rather than the government-sanctioned small- and medium-sized city model. Migrant workers in megacities should receive full urban social welfare benefits, he advises, and be able to buy commercial housing. Homestead plots should, he says, be allowed onto the market.

Yuan Peng 袁鹏 | China Institutes of Contemporary International Relations (CICIR) vice president

Yuan rose as a US specialist while directing the CICIR Institute of American Studies. Affiliated with the Ministry of State Security, CICIR enjoys close links to the intelligence services. In a controversial 2012 essay, Yuan defined five ‘US-backed groups’ as threats to social stability and reform: rights lawyers, underground religious movements, internet leaders, dissidents and ‘vulnerable groups’. China should, he argued recently, shoulder more international responsibility as Trump retreats with ‘America First’, but he also argues for cooperation with the US under B&R. He suggests cooperation could start in Afghanistan, where both sides share a common interest in counter-terrorism.

Lü Wei 吕薇 | State Council Development Research Centre Innovation Development Research Institute director

With over 30 years’ experience at the State Council Development Research Centre, Lü focuses on industrial development, innovation, IPR and the technology economy. The state, she argues, should be open to new business models and innovation, encouraging pioneers, allowing failure and reducing barriers to market access. This does not, however, mean governance is not needed. The state must instead ensure a fair and favourable environment for new industries’ growth. Traditional management measures should, advises Lü, be geared towards the new economy.


policy ticker highlights

gems from our feed of policy releases and domestic debate

geopolitics

Iran in SCO: cramping NATO’s eastward expansion
Grassroots | 11 June

China’s high-profile support for Iran’s membership of the Shanghai Cooperation Organisation (SCO) shows a commitment to the future, argues Zhou Xiaoping 周小平, a popular nationalist online commentator. SCO’s security network will ultimately cover the Gulf and even reach the Mediterranean and Black Sea areas, he says, effectively restricting NATO’s eastward expansion.

The Middle East and Central Asia are destined to be somewhat unstable, argues Zhou, given their role as a bridge between Europe and Asia and major energy sources. As competition over these areas increases, he warns, chances of conflict in North- and Southeast Asia will decrease. China will rely on East Asia for basic security, while its economic future lies in the west. If these areas descend into chaos, Belt and Road (B&R) land routes into the Gulf and Mediterranean areas will be severely affected, Zhou warns.

Iran, Zhou points out, is crucially important, and the focus of several recent crises. The terrorist incident whereby two Chinese teachers were kidnapped and later killed by ISIS took place in Baluchistan, a Pakistani province bordered by Iran. The Qatar diplomatic crisis is, he argues, rooted in Qatar’s advocacy of Gulf countries peacefully coexisting with Iran. The ultimate aim of both events is blocking China’s access to land routes to the Gulf and Mediterranean.

High-profile support for Iran’s membership of the SCO is, Zhou says, China’s commitment to the future. Tajikistan’s opposition to this shows the complicated nature of the Middle East, but B&R will help to overcome it. SCO is mainly a counter-terrorism organisation, he notes, but it also forms a security network. With India and Pakistan having joined, SCO has extended its reach from mainland Asia towards the Middle East and Central Asia. Iran’s membership would imply, Zhou predicts, other Gulf states joining in due course. SCO would then cover the Gulf, even reaching the Mediterranean and Black Sea regions, effectively restricting eastward expansion of NATO. China and Russia were, he notes, furious when Montenegro recently joined NATO.

Note: Dismissed as a ’50 cent-er’ by critics, (paid pro-Party internet commentator) Zhou Xiaoping was singled out by Xi Jinping 习近平 in 2014 and has risen in the Youth League.

trade and industry

shadow banking fears
Weixin | 21 June

As Wang Shi 王石 steps down as CEO of Vanke, China’s biggest real estate developer, it is unclear what will happen to the holdings of Baoneng, a third-tier firm in the same industry, writes Wang Shuo 王烁 Caixin editor-in-chief. The bigger question is what will happen to the shadow banking system that enabled Yao Zhenhua 姚振华 Baoneng founder’s hostile leveraged takeover of Vanke in mid-2015.

An official estimate puts the size of China’s shadow banking industry at 91 tn. In China, a big part of shadow banking lies in the banking sector itself, where banks issue wealth management products to savers-turned investors and use the funds raised to purchase trust products and unsecured bonds. All of these are kept off balance sheet as probable liabilities and assets, with the help of trusts, securities, insurance, and funds as conduits, notes Wang.

Any firm’s financing needs can be packaged into a product through the shadow banking system and sold to individual investors, says Wang. Apart from leveraging Foresea Life’s funds raised through the sale of universal life insurance, Baoneng issued structured products against the takeover of Vanke. As structured products were then packaged into structured products over and again, when they were finally sold to savers-turned investors by the banks, investors were unable to see the underlying risks. If Vanke’s stock prices fall, losses will be passed on from Baoneng to individual investors, who count on banks to guarantee the value of their investments.

agriculture

experts: new agribusiness operators need more policy support
Guangming Daily | 2 June

Government should support the development of new agribusiness operators and avoid focusing solely on scaling up farms, says Han Changfu 韩长赋 Ministry of Agriculture (MoA) minister, in response to ‘Opinions on policymaking to support new agribusiness operators’ issued by State Council on 31 May 2017. According to Guangming Daily, the document calls for new policies on taxation, finance, insurance, infrastructure, and human resources to improve the policy environment for family farms, farmers’ cooperatives, and other agribusinesses larger than traditional household-scale farms.

The number of ‘new agribusiness operators’ is rising: according to MoA statistics cited in the piece, China has 870,000 family farms, 1.888 million registered farmers’ cooperatives, 386,000 industrial agribusinesses and 1.15 million agriculture service providers. Zhang Shaoshan 张晓山 Chinese Academy of Social Sciences fellow and Rural Development Research Institute researcher notes that an estimated 40 percent of China’s arable land is now farmed by new agribusiness operators (the remainder is still held by farming households).

According to Han, new policies should

  • deliver targeted subsidies and financial support to new agribusiness operators
  • prioritise rural collective economic organisations and farmers’ cooperatives for appropriate scale projects with government financial support
  • expand access to credit and loans for new agribusiness operators, encourage improved financial service and more innovative products
  • support new agribusiness operators to survive and grow despite falling agricultural product prices and rising production costs
  • ensure new agribusiness operators are included within existing support policies and regulatory regimes

Kong Xiangzhi 孔祥智 Renmin University professor believes that these new entities should lead efforts to scale up and modernise the rural sector, noting that family farms and other new agribusiness operators are increasingly professional and incomes are rising rapidly. He recommends

  • giving new agribusiness operators access to more professional services, such as production trusteeship models
  • increasing farmer incomes through advance order contracts, shareholder arrangements and profit-sharing schemes
  • encouraging highly specialised ‘micro’ family farms to join larger farmers’ cooperatives or a ‘company + farmer’ scaled production system so they will be better positioned to withstand risks
  • encouraging new agribusiness operators to trial new crop varieties, livestock breeds, technologies, and market approaches

society

government should allow more types of rural land to enter urban markets
Caixin | 15 June

All rural land that satisfies spatial planning purposes and fits into urban land use categories, not just collective management construction land, should be allowed to enter urban markets, argues Cai Jiming 蔡继明 Tsinghua University Centre for Political Economy director.

The total size of rural collective construction land is double that of urban construction land, with 70 percent being homestead land and a mere ten percent being collective management construction land, according to Ministry of Land and Resources. With rapid urbanisation, more homestead land is left empty in the countryside, resulting in the rise of numerous ‘hollowed-out villages’, says Cai.

Meanwhile, the short supply of urban construction land pushes up the price of urban land, which in turn inflates housing prices, explains Cai, putting homeownership out of reach for most migrant workers. Allowing all idle homestead land and collective construction land cleared out from the process of merging village communities to be traded in urban markets, bypassing state acquisition, would both solve the urban construction land shortage and enrich peasants, argues Cai.

The law should also grant legal status to grey-market housing, 80 percent of which stands on rural collective construction land, says Cai. In addition, peasants should be allowed to work directly with developers in undertaking real estate projects in the future, he says.

governance

due process highlighted in draft Detention Centre Law
The Paper (1), The Paper (2), Ministry of Public Security | 19 June

Ministry of Public Security (MPS) has issued its draft version of the Detention Centre Law, which will, once enacted, replace the current administrative decree issued in 1990. Though the text has yet to be published, state media says it has made significant progress in terms of compliance with human rights and due process including

  • referring to the detained as ‘suspect or defendant’ instead of ‘prisoner’
  • subjecting detention centres to supervision by the Procuratorate and other external actors
  • separate confinement for suspects of sexual crimes or other crimes with special circumstances
  • no solitary confinement for minors
  • prosecutors authorised to terminate detentions deemed unnecessary or wrongful, as well as extended detentions
  • audio and video recording of interrogations mandatory for ‘major criminal cases’
  • no surveillance allowed during conversations between suspects and their counsels

finance

Shenhua and Guodian suspend shares again for potential merger
Jiemian | 19 June

China’s largest coal enterprise, Shenhua Group Corporation, and one of the five major power companies, China Guodian Corporation, issued identical announcements again on 18 June 2017, following the first announcement on 4 June. Insiders told Jiemian that the two corporations are discussing a merger.

If the merger happens, assets involved will exceed 1700 bn and the new company’s installed power generation capacity will reach around 226 million kW, making it the biggest power generation enterprise.

In a briefing on 2 June 2017, State-Owned Assets Supervision and Administration Commission stressed again that central SOE M&As will continue. Future central SOEs will be divided into industrial groups, investment groups and operational groups.


lexicon

short, graphic explanations of trending technical terms and jargon

new agribusiness operators
新型农业经营主体 xīnxíng nóngyè jīngyíng zhǔtǐ

First cited in the 18th Party Congress’ work report (2012), new agribusiness operators are intended to replace households as managers of collectively-owned farmland. Family farms will form the base of the pyramid below farmers’ cooperatives and key industrial agriculture enterprises. Together they will form large-scale, professional, and intensive farming operations, keeping farmland firmly on the ‘collective’ rung of the hierarchy of state, collective and private ownership.


china policy in the media

mentions of our work elsewhere

Efecto MSCI impulsa plaza bursátil china a máximo de más de un año
Pulso | 28 June

For all the enthusiasm that was generated in yesterday’s stock market session, China Policy Research Manager Wang Xinling has her doubts. The impact of PRC shares’ inclusion in the MSCI index, she said in Beijing, was ‘more emotional than real’. The inclusion of the titles, for the specialist, is mainly a moral victory. ‘Given the government has lobbied so much for incorporation into the indicator’, she said, ‘MSCI’s recognition is significant for domestic morale’.

China approves imports of new US-developed GM crops
Financial Times | 22 June

China only approved a single new variety of GM crop for import last year. ‘Already this year we have had more progress than last year. Clearly it’s linked to the 100-day plan with the US,’ said Even Pay, an agriculture analyst at Beijing-based consultancy China Policy. China’s demand for soyabeans has skyrocketed in the past decade because of rising meat consumption, which has fuelled the animal feed industry.


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