roundup from our portfolios

The National Financial Work Conference, held every five years, convened in July. Speeches from Xi Jinping 习近平 and others amplified concerns of the past year: restoring real-economy priorities in the financial sector, enhancing central macro control, and targeting financial risk. A new Financial Stability and Development Committee within State Council will provide a top-down coordinating mechanism, intended to resolve competition and conflict between different regulators. Pundits interpret it as an interim measure anticipating full-blown regulatory consolidation, betokening reluctance to shake up the established power structure.

Central SOE profits are up by some 17 percent y-o-y in H1 2017, reaching 721.8 bn. Driven by rising commodity prices rather than efficiency, 99 of 102 central SOEs generated profit; 29 grew profits by over 20 percent. The Deepening Reform Leading Group approved a ‘Plan for national technology transfer systems’, further regulating a market that exceeded 1 tn in 2016. Rather than incubators and tech transfer centres, most transfers still emerge from enterprises networking with professors and research teams. National centres, labs and platforms are central to State Council’s plan for China to become a global centre for artificial intelligence development by 2030. China needs to attract more talent to overtake the US, which employs 850,000 people in AI (China employs 50,000).

In the ongoing Sino–India border standoff, China insists India withdraw its troops unconditionally as a precondition for talks. Global Times editorials reflect a rising rhetorical temperature, speculating on US-India collusion; others argue China should win India over through moderation. A CICIR report on Belt and Road warned against populist politics, the worsening international economic environment, and possible Indian and Japanese obstruction, called for more US engagement and US observer status at the Asian Infrastructure Investment Bank, and suggested outsourcing security for work on projects.

Agricultural Product Quality and Safety Law is now under revision to reduce conflict with Food Safety Law. Twenty major food firms set up an industry blockchain alliance, foreshadowing new traceability requirements. Late June-early July floods in 11 provinces inundated over half a million hectares of farmland, with damage so far in the tens of billions of RMB. Ministry of Agriculture issued emergency livestock disease response measures to prevent the disaster infecting the food system.

The plan to permanently settle 100 million rural residents in cities has fallen behind schedule. Local government concerns over settlement costs, poor implementation of the policy linking urban construction land quotas to the number of migrants settled, and migrants’ reluctance to give up their rural land despite land reform promises are all to blame. Central agencies called on cities with large migrant populations to speed up developing viable rental markets and increase rental housing. Key measures include bundling rental with commercial residential housing as part of construction land leases to real estate developers, and converting unsold into rental housing.

Judicial personnel reform has been claimed a success, after the deadline was postponed for six months. Under the initiative, a limited number of judges are selected from a staff pool to preside over cases, forcing courts and procuratorates to simplify procedures and rationalise judicial resources. The Third Circuit under Supreme People’s Court (SPC) has led the trend in launching a joint platform to allow cross-district case filing, paving the way for a nationwide roll-out. SPC also joined hands with the securities regulator (China Securities Regulatory Commission), issuing model securities cases to streamline finance-related court proceedings.


june policy movers

policy professionals in and out of the establishment

Zhao Kejin 赵可金 | Tsinghua University Centre for Sino–US Relations deputy director

Zhao made his mark as early as 2010 in an article warning that China’s rise had caused international anxiety, and the state should fine-tune its foreign policy to suit its new economic status: economic advantage had not yet been translated into strategic advantage. Much of his work stays on this theme, often moderating the zero-sum approach to US relations found in Global Times. Zhao’s recent work distinguishes between ‘leadership’ (as domination) and ‘taking the lead’ (leading by example) on the global stage.

Liu Shiyu 刘士余 | China Securities Regulatory Commission chair

Since his early 2016 appointment, Liu has been tough on those siphoning stock market funds, taking aim at financial crocodiles who exploit small investors. Since his famous off-script rebuke of insurance firms’ over-leveraged acquisitions of listed companies as ‘barbaric’ last December, Liu has become more outspoken against market shenanigans. In H1 2017, CSRC dished out 113 penalties totalling some 6.5 bn, half as much again as H1 2016.

Zheng Zhenyuan 郑振源 | China Association of Senior Scientists and Technicians Land and Resources Office Land and Environment Commission director

Former cadre at the National Land Management Bureau (now in the Ministry of Land and Resources), Zheng champions peasant rights and rural land market liberalisation. Insisting on bolder moves to integrate urban and rural land, Zheng dismisses fears that free rein of market forces would deplete farmland一which is above the state’s ‘red line’ for arable land. Large-scale loss of rural land to growing cities is natural in industrialising societies, advises Zheng. The government should acknowledge this, he argues, and make laws to protect interests of peasants who give up land. Adjusting central–local fiscal powers should also accompany land reform: local governments should not be bankrupted by loss of revenue as their powers to requisition land are curbed.


policy ticker highlights

gems from our feed of policy releases and domestic debate

geopolitics

taking the lead globally
Global Times | 5 July

China aspires to ‘take the lead’ on a variety of global issues and become a responsible great power, argues Zhao Kejin 赵可金 Tsinghua University Centre for Sino–US relations deputy director and Institute of International Studies associate professor. It will however, he contends, stick to its anti-hegemonic principles.

‘Taking the global lead’ differs from ‘global leadership’ in that it corresponds to the inner logic of the development of history and the times, says Zhao, and has a theoretical basis. China should dig into its own history, drawing from both Western and non-Western experience to offer a China Solution in response to global challenges. Zhao points out that China should be able to take the lead on a variety of global issues as the first step to lead the world.

By ‘taking the lead’, China aims to cooperate with its followers, contends Zhao, creating a win-win, co-existent partnership based on benevolent rule and morality. China has, he asserts, long adopted a diplomatic strategy combining morality and strategic interests but prioritises morality. The international community can, he hopes, also gradually replace anarchic rule with this more thoughtful strategy.

The mindset of relying on, fearing and idealising the US is, warns Zhao, something to avoid when evaluating China’s espousal of global leadership. While China has nothing like the overall capacity of the US, he argues, it can maintain and enhance its leadership in such fields as high-speed rail, nuclear energy, space technology and the internet. Subjective judgment aside, China’s global contribution is an objective reality.

finance

new committee to address financial regulatory shortfalls
People’s Daily Online | 18 July

The new financial stability and development committee within the State Council aims to

  • lead financial reform and regulation
  • coordinate between monetary, fiscal and industrial policies
  • enhance the authority and effectiveness of regulatory coordination

The committee’s responsibilities were outlined by Lu Lei 陆磊 People’s Bank of China (PBoC) financial stability bureau chief, in an interview with People’s Daily.

First announced at the National Financial Work Conference, the setup of the committee is a crucial step to enhance regulatory coordination and amend regulatory shortfalls so as to control financial risks systematically, says Lu. He goes on to acknowledge

  • multiple risks are growing in severity
    • these include risks associated with nonperforming assets, liquidity, shadown banking, real estate bubbles, governmental debts, internet finance and exogenous shocks
  • financial market integrity is jeopardised by misconduct
    • these include circumvention of regulations, interest tunnelling; and cases have been growing in magnitude
  • lack of regulatory coordination, insufficient regulation and weak law enforcement lags behind cross-industry financial innovation

The general office for the committee is set at PBoC, highlighting PBoC’s leadership in this latest effort to enhance financial regulatory coordination. This is in line with the current structure where PBoC is responsible for macro prudential management and systemic risk prevention.

In its new role, says Lu, the PBoC will emphasise

  • sound monetary policy that aims to balance stabilising growth and adjusting structure
  • better risk prevention and pre-emptive measures
  • fixing regulatory shortfalls
    • enhancing regulation over important financial institutions and financial holding groups
    • unifying standards for regulation over the business of the same nature
  • more comprehensive provisions for corporate governance, shareholder structure and internal risk control

agriculture

policy support needed to protect ‘worked to death’ farmland
Economic Daily | 18 July

Pollution and overuse of arable land has reached crisis levels, according to experts from Chinese Academy of Engineering (CAE) cited by Economic Weekly. Urgent work is needed to grade soil by quality, identify remediation technologies and techniques, and advance the regulatory framework around arable land, the report adds.

While domestic food production accounts for 16 percent of the world total, fertiliser use has reached 31 percent of world total, says Lin Weilun 林伟伦 CAE fellow and Beijing Forestry University professor. Estimates place fertiliser use at four times the appropriate level. Annual pesticide use is in excess of 1.8 million tonnes, but effective utilisation rate is under 30 percent, continues Lin. The rest is not utilised and instead runs off or accumulates in soil, contributing to pest resistance. While chemical agriculture can result in short term yield increases, in the long term, it has a severe impact on soil, environment, and food quality and safety, he adds.

Areas irrigated with wastewater are at high risk of being contaminated with heavy metals, according to data from a cited Ministry of Agriculture (MoA) soil survey. In survey data from 1.4 million hectares of wastewater irrigation area, 64.8 percent of land tested positive for heavy metal contamination. Wastewater irrigation has stopped in most areas, but these pollutants are difficult and costly to extract from soil. Soil remediation costs at a Beijing chemical plant redeveloped for real estate were in excess of 700 million, says the piece. A recent incident involving cadmium-tainted wheat is discussed.

Farmland is ‘worked to death’, says Meng Wei 孟伟 CAE fellow, and China’s soil suffers from overuse and overdraft of soil.

Soil pollution is not as severe as some developed countries due to the shorter history of industrial production, says Wei Fusheng 魏复盛 CAE fellow and China Environmental Monitoring Station researcher. While over 90 percent of farmland land remains suitable for cultivation, 2.6 percent of farmland is moderately or severely polluted, he says. An additional 11 percent is slightly polluted. Wei recommends

  • developing classification measures to clearly categorise type and degree of soil pollution
    • using classifications to regulate whether and how land is used
    • using classifications to carry out monitoring and remediation work
  • modernising agricultural production
    • moving towards sustainable agriculcture
    • promoting rational use of fertiliser and pesticide
    • achieving zero-growth or use reduction goals for agrochemicals
    • processing livestock waste into organic fertiliser
  • upgrading legal framework for arable land protection including upgrades to
    • land ownership and use rights
    • soil environmental protection and pollution
    • soil related legal frameworks lag far behind those for air, water
  • improving technical support for soil remediation
    • identifying and studying sources of pollution
    • developing restoration and pollution management technology
    • setting up a special science and technology plan for soil

society

institutional structure needed for aged care worker training
Caixin | 20 July

The government will not realise its goal of having six million professionally trained aged care workers by 2020, says Gao Huajun 高华俊 Beijing Normal University China Philanthropy Research Institute vice director.

Aged care professional training is primarily conducted by two systems: vocational and junior vacation education, and professional qualification certification, according to Ministry of Civil Affairs (MCA). Both are highly fragmented. The availability of aged care workers also varies considerably across regions, with Shanghai having one worker for every five institutionalised elderly persons and Sichuan having one for every 36, says MCA. Both fall below the international standard of one worker for six elderly persons, it says.

In training aged care professionals, China can learn from Japan’s experience, says Caixin. Japan granted aged care workers professional status as early as 1987, while setting up comprehensive training and certification systems. Its training curriculum is drafted by the government and carried out by certified education institutions, the report adds. A large number of high-quality private institutions emerged as a result of market competition, boosting the industry’s overall service level, it says.

China can also borrow from Germany’s multi-level aged care worker certification system, the report says, in addition to encouraging family members and social volunteers to take on the task.

governance

experimenting with class action lawsuits
Caixin, China Wealth Media | 23 July

Supreme People’s Court (SPC) and Securities Regulatory Commission are researching pilots on class action lawsuits in ruling civil cases related to financial securities. Shan Suhua 单素华 Shanghai Intermediate Court assistant judge commented on the background of these cases, noting

  • shareholder rights litigation is an important way to combat illegal activity in securities trading and protect investors’ rights
  • the rapid increase of lawsuits pertaining to investors’ rights over recent years have placed a heavy burden on the civil law system
  • starting in 2006, China Securities Investor Services Centre (ISC), an NGO under the supervision of the Securities Regulatory Commission, has spearheaded acting on behalf of investors to conduct class action lawsuits to protect investors’ rights
  • ISC acts on behalf of a large number of small investors dispersed throughout different regions in China, which eases the burden on SPC
    • ISC also contributes valuable expertise due to its in-depth knowledge of financial securities

This is a positive development, and strengthens the rule of law in China’s financial securities market.

trade and industry

resurgence of substandard steel
Wall Street News, China Times | 15 July

Substandard steel has started to re-emerge, only half a month after the 30 June 2017 deadline for cleaning it all up. This is mainly due to its huge profitability: the illegal use of a medium frequency furnace, used to make substandard steel, could generate 100,000 to 500,000 per day, notes the director of a steel factory in Tangshan. Though substandard steel was listed by the government as backward capacity as early as 1999, the 30 June 2017 deadline was the first time the clean up became a political task, notes Du Hui 笃慧 Zhongtai Securities analyst.

The production of substandard steel is usually hidden in remote and rural areas, sometimes under the disguise of legitimate large-scale steel factories. Without any dust removal equipment, manufacturing usually happens during smoggy days or at night, notes Wall Street News. The de-capacity campaign also caused a fall in steel supply, creating a need for replacement steel. The price of rebar futures soared 18 percent this year to 3,500 per tonne, adds Wall Street News.


china policy in the media

mentions of our work elsewhere

Is China’s Xi Jinping Removing Possible Successors?
RUSI | 26 July

President Xi Jinping has moved decisively and unexpectedly against one of the top 25 Communist Party officials in the Politburo, Sun Zhengcai, once seen as a possible successor. Sun Zhengcai was once seen as a high flyer in the Chinese Communist Party. He and one other were marked out in 2012 as likely successors to President Xi Jinping and Premier Li Keqiang in 2022, when a handover to a successor generation is supposed to take place.

Why China Is Snatching Land from U.S. Farmers
Money Morning | 7 July

And while the country may look huge on a map, only 11% of Chinese land can be farmed, according to a 2016 report from Mercola. When you combine that with China’s huge population of over 1.3 billion people, you’ve got a recipe for a food disaster. “There could be massive social unrest if they screw up the agriculture industry,” said Erlend Ek, an agriculture expert at the China Policy research firm, to Time.

Winding back the China Solution
the interpreter | 6 July
The cluster of foreign policy initiatives labelled the ‘China Solution’ has evolved over the past two years, from a strategy that spoke to the aspirations of a still dev­eloping China to those of a nascent major global power. Brexit and the election of US President Donald Trump precipitated a dramatic rise, at least in the rhetorical temperature.


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