view from Beijing

analysis from our portfolio managers

Trump sought to reassure Beijing at Mar-a-Lago that it can work with his administration. But the missile strikes on Syria raised the spectre of unilateral US action towards North Korea, resulting in a mixed message. With the threat of a new nuclear test looming, Beijing is preparing for new sanctions, foreshadowing a possible halt of crude oil exports.

In the run-up to the mid-May Belt and Road Forum, Beijing’s major promotion of its Going Global trade and investment policy, official publicity hails the initiative as an overwhelming success. Others doubt the viability of projects such as the China–Pakistan Economic Corridor and its port at Gwadar.

Central Commission for Discipline Inspection unleashed a storm on the financial sector, pledging to hunt down the ‘crocodiles’. Having brought down insurance regulator Xiang Junbo 项俊波 and several senior bank officials, the three financial regulators are publicly targeting insider deals between officials and their families, confirming at last the prevalence of nepotism and corruption.

Supreme People’s Procuratorate is reactivating dormant oversight powers, cranking up supervision of police handling of criminal cases to align them with due process. It is also lobbying for a formal legislative mandate to allow prosecutors to file public interest lawsuits against businesses and officials, confident the new powers can help the public.

In H1 2017, basic data on citizens, businesses, service agencies and social organisations will be shared between all government agencies—an initial step toward a national platform. But without central steering, warn experts, incompatibilities and bubbles will surface in local government efforts.

The lightning launch of Xiongan New Area, a zone south of the Beijing-Tianjin complex to which non-capital functions will be transferred, raised debate. Some argue it will balance regional development; others fear the top-down approach will be ecologically negative and drain resources from a still larger periphery around Beijing. With housing purchasing restrictions ratcheting up to now cover more than 70 overheated cities (including in areas around Xiongan as people flocked to buy up apartments following the announcement), more than a dozen have now also brought in selling restrictions.

The economy finished the first quarter with a stronger-than-expected performance. This robust start buys policymakers some time to push forward measures aimed at curbing financial risk. The clock is ticking, however, as economic indicators suggest an impending downturn.

An expected oil and gas reform plan may liberalise upstream activities, part of a broader push to support private investment in energy, telecoms and defence. A series of China National Petroleum Corporation joint projects were announced or completed, serving both energy security and Belt and Road goals with partners in Kazakhstan, Russia, and Myanmar.

Over a billion mu (66.5m hectares) of China’s arable land will be brought under a new system of ‘staple crop areas’ and ‘key agricultural product areas’ within three years, while a plan for designating ‘specialty product areas’ was also announced, asking provinces to propose local specialty crops by the end of the month. Together with agriculture parks (modern agriculture industry parks, science and technology parks and entrepreneurial parks), which will operate under a new system, these areas will be used to direct policy and funding.

april policy movers

policy professionals in and out of the establishment

Mei Xinyu 梅新育 | Chinese Academy of International Trade and Economic Cooperation (CAITEC)

Mei articulates the views of CAITEC. Touching on trade, investment and development, these display an often deeper sense of global trends than domestically-focused agencies like NDRC. Sceptical of official hype and media feel-good stories, Mei warns against reading too much into Trump’s anti-globalisation electoral rhetoric, and is alive to the risks of Belt and Road. His harsh views of Gwadar Port as a bridge to nowhere, coinciding with ballyhooing of the China–Pakistan Economic Corridor in December 2016, drew much social media criticism. He responded by republishing the article in April 2017.

Wu Hequan 邬贺铨 I Jingjinji Coordinated Development Advisory Committee deputy director

An information technology engineer by trade, Wu currently serves in multiple government-sponsored technology R&D projects and industry associations. XNA’s core role, says Wu, is to explore a development model centred on innovation and conservation. It will be a key cluster for innovation and entrepreneurship, and a green and liveable city, adds Wu. XNA will be backed by Jingjinji resources, but also attract nationwide support, expecting to influence national development by 2030. On the Jingjinji Coordinated Development Advisory Committee, Wu and 15 other scientists and urban planning experts advise central government on coordinating development in Jingjinji.

Ma Jun 马骏 I People’s Bank of China (PBoC) Research Bureau chief economist

World Bank, IMF and Deutsche Bank veteran Ma joined PBoC as Research Bureau chief economist in 2014. Ever the optimist, he views Q1’s more robust performance as part of a cyclical recovery, laying a strong foundation to deepen supply-side structural reform. An economic moderate, Ma argues the state should fill in for market failures. SOEs should, in his view, be allowed to default so that the market can rationally price credit channelled to them; entry barriers for firms should be lowered. The state should, he says, guide funding and talent into sectors where the invisible hand falters—in green development, for instance.

policy ticker highlights

gems from our feed of policy releases and domestic debate


risk warnings for Chinese firms investing overseas
China Business News | 11 April

China recorded a net investment outflow under its capital account for the first time, reports China Business News. Yet geopolitical shifts, and the weakness and imbalance of global economic growth, as stated in an Annual Report on China’s Outbound Direct Investment and Host Country Risks have brought great challenges to China’s ODI. It predicts that

  • Western nations will continue tightening inflows of foreign investment
  • they will specially protect core infrastructure and key technology companies to prevent foreign acquisition
  • developing nations will press for greater localisation

A major risk facing overseas M&As by Chinese firms is host countries reviewing market access. Chinese investors may come up against new restrictive policies of

  • tightening investment access to industries of strategic importance, including
    • agriculture
    • electronics
    • chemical
    • communications
  • upgrading national security screening of foreign investment

The Annual Report also lists countermeasures for Chinese firms Going Global, namely

  • on a governmental level: balancing capital outflow and inflow needs, and protecting the interests of Chinese investors through international agreements
  • on a business level: experimenting with different ownership systems for Going Global (including partnerships with western MNCs), to reduce visibility and political risk of investments

The Annual Report was jointly produced by China Bond Rating Co Ltd and Chinese Academy of Social Sciences Institute of World Economics and Politics.

trade and industry

National New Areas to focus on technology innovation and strategic emerging industries
21st Century Business Herald | 12 April

NDRC’s new National New Areas (NNAs) institutional innovation working points prioritise technological innovation and strategic emerging industries, according to 21st Century Business Herald. The paper notes the working points call for

  • developing innovation capabilities
  • nurturing new growth drivers
  • developing the new economy
  • enhancing quality and efficiency
  • accumulating experience that can be reproduced and promoted

NDRC also encourages NNAs to differentiate, says 21st Century Business Herald, to counter overlap and fragmentation between Economic and Technological Development Zones, High-Tech Zones and National Innovation Demonstration Zones. NNAs in the same industry should specialise in different stages of the industrial chain, says Chen Yao 陈耀 China Regional Economic Association secretary general. The success of China’s 19 NNAs also lies in their integration of industry into the urban development, capitalising on education, transportation, and medical and related public services, notes 21st Century Business Herald.


Zhu Junsheng: innovative agricultural insurance approach needed
State Council Development Research Centre | 10 April

The current system of agricultural insurance is unsustainable, according to Zhu Junsheng 朱俊生 State Council Development Research Centre (DRC) Institute of Financial Research professor, due to high administrative costs and high levels of insurance fraud. In an editorial published on DRC’s website, Zhu proposes adjustments to ensure profitable and sustainable operation of the agricultural insurance industry.

Zhu identifies the following problems

  • high costs to set up policies and assess claims due to
    • multiple risk insurance structure
    • policies extended to individual farming households
  • high rates of insurance fraud due to
    • poor internal control and high levels of local authority result in extending inappropriate coverage
    • false or exaggerated claims prevalent in some areas
    • overcharging by local staff prevalent in other areas
  • arising due to
    • mismatch between China’s small scale, decentralised farming structure, and traditional agricultural insurance products designed with large-scale farming operations in mind

In order to build a sustainable agriculture insurance industry, Zhu recommends

  • establishing a public-benefit agricultural insurance system in which
    • government supports a basic policy for all farming households
    • individual farmers can pay to expand scope of coverage
  • replacing traditional insurance products with index insurance
    • bases coverage on regional yield or weather indicators rather than individual claims
    • greatly reduces investigative burden

Zhu says the development of agricultural insurance needs more policy support, including

  • financial support for piloting innovations in agricultural insurance
    • include index insurance in the scope of central financial subsidies so companies can actively explore the approach
    • provide subsidies to establish a public-benefit agricultural insurance system
  • build the infrastructure needed for an index insurance system, including meteorological data collection sites
    • National Bureau of Statistics, Ministry of Agriculture, and China Meteorological Administration should strengthen coordination and improve data availability and quality through data-sharing and verification
  • revise ‘Agricultural insurance regulations’ to reduce institutional risk for companies that want to innovate by
    • better defining and constraining the government’s rights and role in agricultural insurance
    • incentivising farmers to participate in agricultural insurance while disincentivising fraud


annual demolition report shows problems worsening
Suiling Net | 16 April

Local governments are using more forceful and brutal tactics in demolitions and relocations, finds 2016 Annual China House Demolition and Relocation Report released by Peking University Law School and Beijing Cailiang Law Firm. The situation has deteriorated as local governments use legal ambiguities to evade responsibilities, says the report, making restrictions on administrative intervention meaningless.

Amplified by ten violent demolition cases in 2016, the report points to worsening problems including

  • ineffective de-stocking policies in hot spot cities, causing a rebound in the number of demolitions and relocations
  • a tendency of local governments making subordinate units, such as street offices and autonomous grassroots organisations, scapegoats for forceful implementation of demolitions, as a countermeasure against legal sanctions
  • lack of sufficient authority of local courts and inability to swiftly order compensation for citizens filing suits against local governments, resulting in a higher tendency of victims resorting to violence

The report hopes that legislation on protecting property rights would take concrete effect in the coming year, and suggests further institutional improvements and tightening of restrictions.


watchdog goes after bank hiring of officials’ wives
The Paper | 16 April

Seven guiding documents were issued in the past few weeks by China Banking Regulatory Commission (CBRC) targeting areas where supervision has fallen short, says Xiakedao 侠客岛 People’s Daily Wechat column, predicting strong determination from newly appointed CBRC head Guo Shuqing 郭树清 to deal with long-standing disorder and install ‘fences’ in the banking industry.

This comes with a recent focus on family members of officials hired in banks, such as the ‘the wives club’, and illegal trading practices featuring embezzlement and poorly designed financial products, according to the piece. If fully implemented, reform gains will be mostly seen in small and medium-sized banks, financial advisories and non-bank institutions, adds Xiakedao. China Minsheng Bank and Huaxia bank have already been fined over 40 million for dozens of violations following the new guidance, it says.


economy hitting peak of current cycle
Sina Finance | 17 April

The pattern of economic indicators suggests that the economy has hit the peak of the current business cycle and shows signs of a possible slump into contraction, says Zhang Bin 张斌 China Finance 40 senior researcher. In particular, Zhang shows that

  • sales growth in cyclical industries reached the current business cycle peak roughly two quarters ago and is currently trending down; for example, growth in commercial real estate sales peaked in April 2016 at 35 percent
  • growth of price indicators peaked in the current cycle around the beginning of Q1 2017
    • PPI growth peaked in January 2017 and is now sliding downwards
    • CPI growth is also sliding downwards from its peak in Q4 2017
  • production activities growth is currently at its peak
    • manufacturing PMI, business activities PMI and services PMI reached 51.6, 54.6 and 53.6, respectively, all at three-year peaks
    • the Keqiang index, a weighted average of industry power consumption growth rates, mid-to-long term loan balances, and rail freight, is at a six-year high

As the changes in growth rates in price indicators and production activities generally lag behind growth changes in sales and demand, the above pattern suggests a peak of economic activity and the likely beginning of contraction, argues Zhang.

According to Zhang, there is limited room to sustain economic growth at the peak level, as

  • large-scale expansion in infrastructure investment is unlikely
    • since 2013 infrastructure investment growth has trended down, echoing the government’s reservations on overusing fiscal stimulus
    • as local government revenue contracts and monetary tightening continue, infrastructure investment growth is unlikely to stay in the 17 to 20 percent range
  • room for improvements in exports is still limited

Hope, says Zhang, lies in the speed at which the manufacturing sector upgrades and substitutes imports for self-manufactured products. A sign of accelerating industrial upgrading is that R&D expenditure and the number of patented inventions have increased substantially, and that the value-added in China’s exports has increased, adds Zhang.


short, graphic explanations of trending technical terms and jargon

National New Areas 国家级新区 guó jiā jí xīn qū

First launched in 1992, National New Areas enjoy preferential policy support to solve urbanitis and integrate industry and urban development, covering housing, transportation, resources and the environment. Reporting directly to State Council, they have specific geographic coverage, such as a district in a city, and explore institutional reform and innovation to spur regional development. As of April 2017, there are 19 National New Areas, including the Xiongan New Area, approved 3 April 2017.

china policy in the media

mentions of our work elsewhere

will the Chairman turn? China contemplates its North Korea policy
the interpreter | 27 April

With North Korea recently threatening a nuclear strike on Australia, the Communist Party of China’s ability to shift gears on the Korean issue comes into stark focus. When US President Donald Trump told his Chinese counterpart Xi Jinping over chocolate cake that he was launching airstrikes on a Syrian airfield, Chinese observers immediately read it as a message to Xi with implications for North Korea.

Chinese economy grows 6.9% in first quarter
Financial Times | 17 April

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.

China aims to sow a revolution with GM seed takeover
Science | 7 April

The agriculture ministry also created a “green channel” to streamline the registration process for new seed lines, and China began rewriting its seed law with an eye toward encouraging smoother collaborations between university researchers and the private sector, says Even Pay, an agricultural analyst with the firm China Policy in Beijing.

联合早报 | 3 April


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