• innovation, industrial policy and employment: a friendlier environment for small business
  • trade policy as geo-strategy: TPP as bitter but beneficial medicine
  • Beijing flies the flag of ecological civilisation: tiered natural gas pricing and more emission fees
  • revised Food Safety Law enacted: trust and detail lagging
  • a tale of two city sizes: battling to move growth away from megacities
  • burqas banned in Xinjiang: targeted as symbols of extremism

Silicon Valley imagery dominates state-driven attempts to inculcate a culture of innovation

economy position

spurring innovation: September witnessed many policy initiatives that went unnoticed in the wake of the disappointing SOE reform plan. A central directive on science and technology gives inventors more autonomy without ceding state control; a regional innovation policy allows for greater interprovincial coordination, rather than deleterious competition on national tasks; and another mass innovation policy promises further subsidies and support to would-be entrepreneurs.

The contours of innovation policy are becoming clearer. ‘Innovation’ has two nodes:

  • the next generation of industrial policy, in which the state strengthens its grip on core science and technology and high-tech manufacturing
  • mass entrepreneurship, or facilitating small business via reduced administrative barriers and expanded access to finance and markets via the internet

These two strains both serve to partially disaggregate the state’s dual and often contradictory functions as majority shareholder in and maintainer of social stability through SOEs. Small business is to reduce the burden on SOEs for ensuring employment. This move is supported by strengthening e-commerce, upgrading logistics, an unprecedented effort to reduce red tape, and tolerance of alternative financing platforms catering to small business and consumers.

The state redoubling its grip on core industry is not a throwback to Soviet Era planning. Rather, new innovation plans accommodate greater personnel mobility, increased linkages with academia and the private sector, and stronger independent IPR enforcement. Private entrepreneurs in the innovation space are exercising policy influence. MofCOM collaborated with Alibaba and Jindong to push rural entrepreneurship, and Tencent CEO ‘Pony’ Ma 马化腾 proposed the Internet+ strategy. There is also more room for firms to exercise civil society functions, albeit through state-sanctioned industrial organisations.

Industrial policy is no longer about catch-up. China’s industrial and trade policy has been shifting from establishing basic manufacturing capacity to securing global market share in a handful of high value-added industries. But only recently have internal dynamics changed to accommodate this: industrial planning is being ceded from NDRC to MIIT; simultaneously, decisions on industrial specialisation are being devolved from central level, a process reinforced with the rise of coordinated regional planning (see Beijing Cluster and Yangtze River midstream cluster) that discourages inter-provincial competition.

local government debt: After capping local government debt issuance at the end of August, Ministry of Finance redoubled efforts to push public-private partnerships (PPP), launching a 180 bn fund with ten financial institutions and unveiling a 658.9 bn wishlist of 206 model PPP projects at the end of September. Since Spring 2014 Finance Minister Lou Jiwei 楼继伟 has talked up PPP as a means to continue infrastructure construction while containing the local government debt burden. Yet private sector takeup has been slow due to concerns over profitability and contract enforcement. The fund will likely be used to get projects off the ground, while the model projects list serves to assure potential investors of included projects’ viability.

Continuing a trend from August, other measures aim to shore up fixed-asset investment. Concurrent with a push to diversify insurance company portfolios, both NDRC and CIRC have issued policies to encourage insurance fund investment in infrastructure.

financial reform: diversifying the portfolio of insurance companies, but pushing them to invest in favoured industries, is indicative of the flavour of recent financial reform: tweaks that on the surface have the effect of liberalising, but also selectively channel liquidity. This ranges from continued efforts to firm up RMB values by easing controls on doing business in RMB, to PBoC expanding pilots that allow banks to pledge credit assets as collateral for new loans from the central bank.

watching for

  • SOE classification details
  • improvements in PPP take-up rate by geographic distribution (projects in T1 cities much easier sell)
  • MofCOM’s new foreign trade model

China is pondering its options following the Trans-Pacific Partnership, agreed 5 October between 12 Asia-Pacific nations

geopolitics position

Ma Jun 马骏 PBoC chief economist predicts that failure to join the recently negotiated TPP could cost China 2.2 percent of GDP growth over four years. But most Chinese analysts downplay the economic and strategic costs. Ye Xingping 叶兴平 Shenzhen University Law School dismisses TPP as just another US instrument to direct the global economy and consolidate global leadership. Global Times declares TPP is incomplete without Chinese membership, and, in any case, is really just a glorified US-Japanese free trade agreement.

Pang Zhongying 庞中英 Zhongshan University says talk of ‘TPP containment of China is alarmist’ given China’s free trade agreements with many of the TPP countries. The Regional Comprehensive Economic Partnership (RCEP), an ASEAN-centred trade pact that excludes the United States, the Free Trade Area of the Asia Pacific (FTAAP) that would include all APEC nations and further economic integration with Belt and Road countries, offer viable alternatives for China.

With TPP now settling into separate jurisdictional ratification, China’s neighbours can conclude these agreements.

watching for

  • rethinking going global following Colombo visit of special envoy, Liu Zhenmin 刘振敏
  • compromise over US ‘freedom of navigation’ exercises: US will notionally assure freedom of navigation; China will neither challenge nor yield sovereignty
  • revised draft of maritime liaison mechanism to manage Sino-Japanese tensions in the East China Sea

plenty of challenges for ecological civilisation, as Beijing greets world top tennis players with heavy pollution

energy and environment position

The Party underlined its commitment to sustainable development with its 17 September ecological civilisation plan. The document demonstrates the government’s awareness that a first step toward managing natural resources is to clarify who owns them. Next is to coordinate planning between all levels of government, and establish effective financial incentives and deterrents to encourage appropriate use. Tuning cadre performance evaluation to ecological criteria remains a priority.

State Council pressured NDRC to complete the gas and oil reform plan—to dismantle the monopoly of the three big state-owned oil companies—by end 2015. Fiscal and financial priorities, and the tangle of interests surrounding SOE reform, qualifies this as a shot across SOEs’ bow, rather than a sign of real movement.

Beijing is moving on policy measures. Two schemes for tiered natural gas pricing are under consideration; the favoured one is to be chosen at the end of October. Beijing will impose fees on volatile organic compound (VOC) emissions from key industries from 1 October. Emissions are mooted to be reduced by 90 percent.

watching for

  • professional contractor standards for environment impact assessment
  • China Three Gorges Corporation bid for 29 dam concessions in Brazil
  • abolishing coal export tax, end 2015

China Food and Drug Administration has been placed in charge of implementing the new Food Safety Law

agriculture position

With revisions to the Food Safety Law effective 1 October, China Food and Drug Administration is given a broader remit and may widen its network of local agencies. In the last week of September, Hebei FDA, already assuming greater responsibility, sent out a warning that Liaoning Huishan Dairy, one of the D20 enterprises expected to set a food safety example, had sold contaminated milk. The enterprise immediately contested the warning with the support of Liaoning FDA. The incident, ending in withdrawal of the warning, evidenced an unsteady start to the new regime. Summing up lessons, food safety expert Chen Junshi 陈君石 called for a larger role for experts as the revised law stipulates.

Withdrawal of state price support presses domestic soy producers to seek market advantage by promoting their costly—but GMO-free—produce. Media revelations of illegal GMO soy crops in Heilongjiang in early September wound down after MoA investigations failed to detect GMOs in the said crops. The new law includes tougher sanctions on GMO use, supporting producers who depend on consumer trust in local products.

Food imports, clearly set to rise, are nonetheless a fertile source of policy conflict. AQSIQ remains the lead agency for both import and export under the revised legal framework. In late September, it released a new import inspection policy for public comment. CFDA now regulates imported food behind the border. A new license system was recently issued by CFDA to simplify procedures.

A larger Ministry is mooted to emerge in 2017/18, integrating the food safety portfolios of CFDA, NHFPC and AQSIQ, which are already often integrated into one department at the local level. But the Ministry of Agriculture, with food safety authority up to the farm gate under the related 2006 Agricultural Products Quality Safety Law, will fight to maintain its turf. Further developments may become clearer with release of the implementation guidelines for the revised Food Safety Law.

watching for

  • feedback on AQSIQ’s new import policy
  • revised Food Safety Law implementation policy
  • new food traceability systems

Tongzhou, Beijing house prices continue to climb despite restrictions

social policy position

Facing opposing problems, large and small cities both try to fight urbanisation trends wreaking havoc on the property market.

Small- and medium-size cities are taking steps to attract more homebuyers. The PBoC and CBRC lowered the minimum home deposit threshold by 5 percentage points to encourage first-time homebuyers; critics are skeptical of its impact. Many provinces have set plans to relocate more rural residents to periurban areas and integrate rural and urban hukou residence permits; this would provide out-of-the-way cities with more potential buyers.

Large metropolises are, on the other hand, unable to contain rapidly rising home prices. Beijing’s new restrictions lowered housing sales in Tongzhou by more than 50 percent, but it still could not stem soaring prices. Five years in, Shanghai and Chongqing’s residential property tax pilots have done little to raise public revenues or curb rising home prices. The next attempt is to push city services outside urban boundaries. Plans to develop the Beijing-Tianjin-Hebei cluster took another step forward with the release of a development plan for Hebei’s Caofeidian district. Beijing will relocate hospitals, universities, and primary and secondary schools to ease congestion and boost social services outside of the capital.

Rural collective property reform is a 13th 5-year plan priority; MoA is leading a group to draft proposals. As pilots to quantify and divide collective assets into shares continue, ministries have selected 29 pilots to evaluate by the end of the year. Increasing peasants’ financial power over assets could make it easier for them to leave the land, contributing to urbanisation efforts.

watching for

a July 2015 seminar in Urumqi on how to identify extremists

governance position

As Xi continues to reshuffle the beleaguered Ministry of State Security, State Council released a white paper on Xinjiang that reflects a shift in security policy concern from Uyghur separatism to extremist infiltration. A joint decree from 5 judicial and security ministry-level agencies aims to reassure lawyers of their right to practice, and ease the tension between lawyers and the judiciary. The commentariat are more than usually unimpressed. A reaffirmation of oft-stated goals offers no reassurance that those who disregard lawyers’ rights will be punished.

The liberal Unirule Institute released a grim report on private entrepreneur business confidence, charging the government with squeezing credit supply, violating impartiality and making arbitrary determinations that only encourage further capital flight.

watching for

  • tightening security criteria in Xinjiang
  • NDRC anti-monopoly policy against IPR infringement
  • conflict between Shanghai and the MoT over ride-hailing apps

in the spotlight

Jin Yongxiang 金永祥 | BJ Dayue Consulting founder and president

Launched in 1996, Jin’s PPP consulting firm is among the first and most solid, consulting on hundreds of projects annually. It was one of three formulating plans for Beijing subway line 4, often cited as the textbook example of how to undertake build-operate-transfer schemes. Regularly speaking to MoHURD, Jin advises both NDRC and AIIB on franchising legislation.

Forever rosy about PPP potential, he finds the model to be held back by unclear relations between state and enterprise, and unclear definitions of infrastructure and public good versus infrastructure and basic industry. The 2008 stimulus stunted its development: easy access to credit gave local governments excessive bargaining power, and as a result they have failed to work with private investors. He also expects resistance from state monopolies potentially undermined by an influx of private investment.

Liu Zhenmin 刘振民 | Vice Minister of Foreign Affairs

In charge of treaty and law, and boundary and ocean affairs, Liu regularly defends China’s claims to disputed territory in the East and South China seas and on the Indian sub-continent, in public. With four postings to the UN in New York and Geneva and long stints in MFA’s Department of Treaty and Law, Liu is one of the ministry’s most experienced international law hands. Now appointed China’s special envoy to Sri Lanka, he led a successful visit to Colombo earlier this month, to restore Sino-Sri Lankan diplomatic and commercial relations after the electoral defeat of the pro-China Mahinda Rajapaksa. A career diplomat, Liu graduated in English and law from Peking University, where he was a classmate of Li Keqiang 李克强 and Meng Hongwei 孟宏伟.

Zhang Yuanhang 张远航 | Peking University Environmental Sciences and Engineering College

An expert in atmospheric chemistry, Zhang’s findings on regional air pollution in the Pearl River Delta led to building the nation’s first 17 PM2.5 monitoring stations. There are now 612 such regional stations nationwide. Air pollution management systems are improving, but he warns that meeting the 2017 60 μg/m3 PM2.5 concentration target is a challenge without further research on causes. Strategies to address ozone (O3) pollution must also be developed. He sits on the MEP Science and Technology Committee, and leads the Ministry of Science and Technology’s ‘Blue sky science and technology engineering project’.

Chen Junshi 陈君石 | Food Safety Commission expert committee

Founder of Chinese toxicology research and an authority on food safety and nutrition, Chen is among China’s top food safety experts. A key architect of the first Food Safety Law (2009) as well as the new revisions, he has a leading standard-setting and crisis control role in the Food Safety Commission and its related expert groups. An optimist, Chen acknowledges consumer trust and social stability risks, but judges China’s foods to be safe compared to developed country peers. Food safety risks cannot be eliminated, but must be reduced to an acceptable level. Fundamental food safety problems in China, he says, includes too many small farms and producers, lack of standardised production, poor credibility and a fragmented national food control system. His attempts to clarify misconceptions on GMOs and food additives in the summer of 2015 met with protests from anti-GMO activists.

Li Tie 李铁 | NDRC China Centre for Urban Development

Urbanisation still has room to grow, Li Tie 李铁 argues, despite real estate overcapacity in many regions. Director of the NDRC’s China Centre for Urban Development, which guides urbanisation policy planning and pilot implementation, Li has co-drafted seven No. 1 documents on the ‘three rurals’ since 2004. In 2015, he has emerged as a key advocate of the role of innovation, technology, and open data in improving urbanisation. His optimistic view of urbanisation’s future reinforces the importance of Internet+ and smart cities as national policy priorities amid the pivot toward technology.

Unirule Institute 天则经济研究所

A private think tank founded in Beijing in 1993 by five liberal economists including Mao Yushi 茅于轼 and Zhang Shuguang 张曙光 to advance a steady but incremental reform agenda. As a flagship centre of China’s market liberalism, Unirule also attracts the support of prominent private entrepreneurs such as Wang Gongquan 王功权 and Sun Dawu 孙大午 Hebei Dawu Agriculture and Love Stock Group. Together they argue that the current economic hardship is the result of the failure to reform the Party-state system, entrenched state monopoly, absence of rule of law, and the 2011 Labour Contract Law that seeks to appease the masses by burdening businesses with skyrocketing salary and welfare costs. Since Xi came to power, Unirule’s outlook has shifted from hope to disillusion then to tacit opposition.

in case you missed it…

cp.signals—domestic policy movement
fair weather state support for internet finance
NPC is more than a rubber stamp

cp.positions—audit of shifts across policy sectors
end september: SOE reform, command economy lives on
mid september: lining up behind the chief

cp.focus—exploratory analysis
SOE reform: more plans, more pilots
rhetoric makeover heading for Washington?

cp.observer—monthly roundup
september roundup: gearing up for trade policy
august roundup: reform agenda edges forward

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