roundup from our portfolios

Four provincial public security chiefs and seven provincial political and legal affairs secretaries have been replaced, emphasising social stability leading up to the 19th Party Congress. Political and legal affairs secretaries, powerful social controllers, can no longer hold simultaneous positions as public security chief, deputy party secretary or deputy governor. Several more central government officials fell to corruption charges, including Yang Jiacai 杨家才 former banking regulator (CBRC) assistant chairman, Wang Min 王珉 former Liaoning Party secretary and Yao Zhongmin 姚中民 former China Development Bank deputy Party secretary.

Ministry of Commerce expressed concern over a Trump executive memorandum authorising a probe into alleged theft of US IP by Chinese firms. With inbound investment slowing, State Council renewed calls to attract foreign direct investment (FDI), liberalising access and inviting investment in SOE mixed ownership reform. On overseas direct investment (ODI), State Council outlined measures to channel and improve ODI. A BRICS trade meeting in early August produced eight major agreements, underpinning the ninth BRICS summit this September in Xiamen.

Belt and Road term reports warn of external economic and security challenges, suggesting growing risk of overreach. Domestic observers rated adoption of a South China Sea Code of Conduct framework as a diplomatic win, token of Beijing’s ability to set the regional agenda. The border standoff with India remained unresolved, threatening to overshadow the upcoming BRICS summit in Xiamen. China supported UN sanctions that banned North Korean coal, iron ore, and seafood exports, but stopped short of restricting oil supply.

The 33 ‘three rural land reform’ pilots, originally set to wind up end 2017, will run for another year. Reforms in pilot areas—key to monetising peasants’ land rights, upscaling agriculture, and easing unrest over land requisition—have been haphazardly conducted. The health ministry floated major changes to healthcare governance and investment, with new measures cancelling certification requirements for setting up clinics within aged care institutes, and eliminating the 70 percent cap on stock shares for foreign entities in healthcare joint ventures.

Debt-for-equity swaps entered a new phase. CBRC greenlighted swap-focused asset management subsidiaries of the big four state-owned banks. While insisting ‘zombie firms’ go to the wall, CBRC is encouraging these entities to rescue over-leveraged industry leaders in over-capacity industries. Official statistics illustrated the real estate industry’s waning contribution to economic growth, and willingness to let the market cool. The sector faces growing difficulties, as policymakers try to rebalance the sales-heavy housing market to encourage more rental housing, challenging the current quick development-and-sale model.

The first two batches of infant formula product licenses were approved by China Food and Drug Administration under a new system slated to come into effect 1 January 2018. Industry analysts expect two out of three infant formula products to be forced out by the new licensing system. The agrochemical industry is also in the cross-hairs of regulators. Revised pesticide management regulations are now in effect, with a sweeping national inspection underway in the run-up to the 19th Party Congress.

If you are seeking to work at the leading edge of policy analysis on China, please join our team! We have two openings.

august policy movers

policy professionals in and out of the establishment

Zhu Feng 朱锋 | Nanjing University Collaborative Innovation Centre of South China Sea Disputes director

A widely published foreign policy expert and former Peking University professor, Zhu now heads a major South China Sea (SCS) think tank. Like virtually all domestic analysts, he dismissed the arbitration finding of July 2016 against Chinese sovereignty claims in the SCS. Sceptical of ties with North Korea, Zhu found Beijing’s handling of the THAAD issue counterproductive. Its position on DPRK, has been shifting, he argues, due to the threat of a nuclear North Korea, the likelihood of accidents, and worsening public opinion. Continued support is mainly due, argues Zhu, to North Korea’s value as a security buffer and fear of a unified Korea hosting US bases.

Zhou Shijian 周世俭 | Tsinghua University Centre for US-China Relations research fellow

Zhou is a champion of the US–China Bilateral Investment Treaty (BIT) talks; China needs US advanced technology, leading R&D, and its large consumer market; the US needs China’s abundant cash and forex reserves. Admitting talks have stagnated under Trump, Zhou reiterates Trump’s primary goal: to revive the US economy via capital and a market, both of which China can provide. Formerly seeing BIT talks as a quick fix, Zhou now sees a negative list approach as a token of progress. A trade official at China’s Washington Embassy in the 1980s. He has been an executive director of China Association of International Trade (CAIT), he remains a director.

Xu Lin 徐林 | NDRC Development and Planning Department director general

Director general of NDRC Development and Planning Department since 2012, Xu is a key player in economic and social planning, not least in drafting the 13th 5-year plan (2016–20). Barriers to gaining urban hukou and bans on urban capital buying up rural land hinder urbanisation, argues Xu. Many migrants, unable to afford housing in megacities, move to smaller ones, he says, abandoning homestead plots. Hence restrictions on trading these plots should be lifted. Zhejiang, Chengdu and Jiangsu have piloted blending capital and rural construction land, he says, e.g. by developing rural tourism or merging agriculture, manufacturing and service industries.

policy ticker highlights

gems from our feed of policy releases and domestic debate


no outside interference in South China Sea
Observer | 14 August

Outside powers should be prevented from manipulating China–ASEAN ties, argues Zhu Feng 朱锋 Nanjing University Collaborative Innovation Centre of South China Sea Disputes director in Observer. Adopting the framework code of conduct (CoC) for the South China Sea is, he says, a small step forward for CoC negotiations but a big one in terms of China–ASEAN ties.

Following the 2002 Declaration on the Conduct of Parties (DoC) in the South China Sea, it took another 15 years to conclude negotiations. Discussions were prolonged by divisions (also within ASEAN) over what role a CoC can realistically play in disputes, and what factors should be avoided as disturbances during negotiations. The difficulty is that if CoC negotiations interfere with sovereignty and maritime rights disputes themselves, contends Zhu, the latter in fact become sovereignty negotiations, which is inappropriate.

If a CoC is to become legally binding, notes Zhu, it cannot be become a tool of external power interference; it must be the result of voluntary and independent dialogue and work to advance regional stability and cooperation, he says.

After 2002, the situation became much more tense, not least due to China’s island building, notes Zhu, but outside interference worsened the situation. The arbitration case launched by the Philippines contravened the 2002 DoC, he claims, becoming a source of tension.

The US, Japan and Australia (outside powers) were unhappy with the framework agreement because, according to Zhu, they thereby lose a tool to interfere and disrupt. In a trilateral statement they insisted on the arbitration award from July 2016, which Zhu dismisses. These powers are simply unwilling, finds Zhu (noting recent US Freedom of Navigation operations), to appreciate China–ASEAN cooperation, still seeing the South China Sea as a battlefield in the great power game where China can be pinned down.

China and ASEAN will continue to maintain restraint and control over disputes, says, Zhu says, approvingly citing Wang Yi 王毅 Foreign Minister: history will prove who is the visitor and who is the real host (in the South China Sea).


developers face a cooling housing market and other challenges
China Securities Journal | 11 August

Participants at the Bo’ao Real Estate Forum, held on 8 August 2017, agreed that measures taken in H1 2017 to curb overly rapid growth of house prices and stabilise the market have yielded initial fruits, reports Economic Information Daily.

In H1 2017, the number of housing transactions in first- and second-tier cities fell, bringing down house prices, says Gu Yunchang 顾云昌 Ministry of Housing and Urban-Rural Development (MoHURD) policy expert committee member; transactions and prices are growing at a slower rate in the third- and fourth-tier cities.

China’s housing market is subject to a three-year cycle, notes Gu. Since the market peaked in terms of transactions last year, it is likely to adjust downwards this year, he adds. The forum attributed the cooling housing market to the state’s firm stance that housing should be for living, not for speculating, and to differentiated policy interventions between overheated markets and others.

The housing market shows further segmentation. Housing transactions in first- and second-tier cities have declined by 20 percent. Third- and fourth-tier cities around hot-spot cities are cooling down, while those further away have been picking up since last May, says Ouyang Jie 欧阳捷 Future Land vice president, a developer of high-end commercial real estate. This is due to the resettling of migrant workers back in their hometowns, he says.

Real estate developers are facing more intense competition, thinner profits, and industrial reshuffling under the current policy movement. Zhu Zhongyi 朱中一 China Real Estate Association former chair argues they are also up against

  • tight control over credit entering the housing market, and greater difficulty in securing land for development
    • both undermine two crucial factors in developers’ traditional profit model: cheap credit and land
  • growing rental housing market as a percentage of the total market, which will negatively impact their sales
  • further segmentation of the housing market, which requires them to stay agile
  • green development and construction industrialisation, which will require them to deal in interior decoration, instead of leaving this to home buyers

These challenges will push developers to change their business models and strategies.

The average total liabilities to total assets for listed real estate developers stood at 0.78, notes Lin Caiyi 林采宜 Guotai Junan Securities chief economist, suggesting that the real estate industry has essentially hijacked the financial sector. This creates a policy tradeoff between curbing housing bubbles and reining in banks’ nonperforming assets.


seed industry besieged by foreign competition
Economic Information Daily | 16 August

Domestic companies have successfully developed commercial jets and military aircraft carriers but are still lagging far behind international suppliers of vegetable seeds, reports Economic Information Daily. Control of agricultural production has, therefore, fallen into the hands of foreign companies.

Despite delivering high quality varieties, international dominance of the seed market puts seed supply, and therefore food security, beyond state control, say a number of stakeholders cited in the piece. Ministry of Agriculture (MoA) estimates China’s seed market size at 60 bn annually.

The article highlights a number of factors constraining domestic seed industry, namely

  • lack of independent innovation capacity
    • less than three percent of sales revenue is invested into seed R&D
    • less than 30 percent of seed companies have staff or facilities for R&D
    • seed companies in China do not compete on the basis of R&D and are underdeveloped
  • gap between state seed research institutes and commercial production companies
    • domestic breeding research is out of touch with the market and not focused on practical applications
    • weak system to commercialise newly developed varieties
  • outdated equipment and infrastructure
    • field testing areas, crop demonstration sites, seed breeding basis, and other infrastructure is poor
    • seed quality and new variety testing is held back
  • seed management agencies are weak
    • lack staff and funds to carry out good quality control on domestic seed

According to local sources, at a project in Ningxia, vegetable seed varieties from Japan and South Korea had obvious advantages over domestic ones in yield, quality, pest resistance, germination rate and hardiness during storage and transportation. Li Chunqin 李春琴 Ningxia agriculture and livestock bureau director told reporters that due to these advantages, prices of foreign seeds are significantly higher than domestic ones. Local villagers were vocal in speculating about what the vast number of local and national agricultural research personnel are doing with government funds.

Imported crop varieties are a double edged sword, offering high quality varieties but at a high cost, says Jiang Xuele 蒋学勒 Ningxia agriculture bureau horticulture office director. It also puts China’s food production under foreign control, Jiang adds.

Even in Shouguang city, Shandong province, a leading vegetable producing region, foreign seeds dominate the market. Before 2000, most local producers were not aware of foreign vegetable varieties, says Li Ping 李平 Lusheng Agriculture Science and Technology Development Co. general manager. Between 2000 and 2009, these varieties gained traction in Shouguang as Syngenta, Rjik Zwaan, Monsanto and other international seed giants set up demonstration bases in the region.

Fan Liguo 范立国 Shouguang city seed development service director insists domestic vegetable varieties are regaining market share, increasing from 54 percent in 2010 to 65 percent today. Still, he admits, foreign varieties enjoy a strong advantage and dominate 70 to 90 percent market share in certain crop categories including

  • spinach
  • broccoli
  • carrots
  • peppers
  • red cherry tomatoes
  • eggplant


declining working-age population contributes to higher employment
China Business News | 14 August

A declining working-age population is behind the growing employment index, says Zeng Xiangquan 曾湘泉 Renmin University professor. The working-age population has declined by 17.96 million cumulatively over the past five consecutive years, he adds.

The drop in labour force supply, says Zeng, is due to

  • near-depletion of rural labour force transfers
  • young workers undergoing more extended education
  • labourers demanding more time off as wages increase
  • fewer retirees returning to work, due to more generous pensions

Zeng says employment jumped during 2016 as the economy improved and enterprises undergoing de-capacity resettled laid-off workers.

The biggest risk for job-seekers is being poorly compensated rather than being unemployed, says Zeng. However, indicators such as wages, working hours, and social insurance levels, which reveal the actual quality of employment, are not shown in official statistics, he adds.

Zeng suggests the government should

  • reveal the surveyed unemployment rate on the basis of the current registered rate
  • improve the unemployment registration system
  • release statistics on the variation of unemployment figures


provincial personnel changes for positions related to public security and politics and law
The Paper | 2 August

Recently, four provincial public security chief positions and seven provincial political and legal affairs secretary positions have seen personnel changes. These changes are due to China’s attempt to strengthen its rule of law, build a professional judicial sector, and reduce Party interference with the judicial sector.

Recent personnel changes in the public security apparatus also signify an emphasis on social stability leading up to the 19th Party Congress. The changes include

  • five new appointees that are all below the age of 50 and have legal experience
  • the personnel changes follow certain trends
    • political and legal affairs secretaries do not simultaneously hold positions as public security chiefs
      • seen in Tianjin, Shaanxi, Hunan, and Henan
    • political and legal affairs secretaries no longer jointly hold positions as deputy party secretary or deputy governor
      • seen in Jilin, Guangdong, and Guangxi
  • frequent personnel changes in political and legal affairs and in public security are normal, and a crucial part of judicial reform

trade and industry

improve the quality and efficiency of China’s ODI
China Securities Journal | 11 August

Financial arrangements with a combination of SOEs and private enterprises, or a mix of ‘real enterprises’ and consortiums will enhance quality, further efficiency and reduce the risks of overseas investments, says Zhang Rui 张锐 Chinese Market Development Association director. Zhang argues that MoF’s ‘Financial management measures for foreign investment of state-owned enterprises’, which has been active since 1 Aug 2017, does not translate into a change of policy direction to curb overseas investments, but an effort to upgrade their structure, quality and efficiency. Thus, investments that are congruent to the national strategic plan of de-capacity and structural upgrading will be supported, including investments along Belt and Road and investments in high-tech industries such as biomedicine and high-end manufacturing. Policy support will also be given to leading enterprises Going Global with robust market advantage and healthy financial structure.

Faced with soaring numbers of overseas investments, the ‘Measures’ warned enterprises going global on an ‘irrational’ basis, stresses Zhang. These were characterised by

  • leveraged investments achieved through onshore guarantees for offshore loans, which include
    • lending from domestic financial institutions
    • private placement of additional shares
    • issuing bonds
    • trusts
    • private equity funds
    • internet financial products
  • investments disregarding financial profit and loss prospects
  • arbitrage through valuation adjustment between local and foreign currency capital
  • large-scale cross-border investments which deviate from main industries and the national strategic plan
  • money laundering and asset transferral in the name of overseas investment

These irrational overseas investments would inevitably increase the amount of outstanding foreign exchange funds. This will exacerbate capital outflow and negatively impact the balance and stability of the national foreign exchange reserve, says Zhang. He also adds that the biggest risk from these investments is the rise in corporate debt levels and the accumulation of non-performing bank debts.

china policy in the media

mentions of our work elsewhere

共享脚踏车停放管理 与“便利”理念相悖?
Lianhe Zaobao | 25 August

Furthermore, China Policy bike-sharing market analyst Cao Nanxin warns bike-sharing service providers should pay more attention to user penalties. She says if illegal parking penalties are too heavy, the public will choose not to use bicycles. If penalties are too light, such as only deducting credit within bike-sharing apps, they may not be a strong enough deterrent. Geo-fencing alone cannot resolve parking chaos, so in the end we must rely on more effective regular dispatching from bike-sharing companies.

Changing standards reflect increased focus on quality for Chinese grains industry
Farm Online | 16 August

Speaking at the Australian Grains Industry Conference (AGIC) last week in Melbourne Erlend Ek, agricultural researcher with analysis business China Policy, said there had been a significant shift in official Chinese policy regarding food security. ‘Since 2013 there has been a move away from attempting to be self-sufficient in food production to strengthening food stability, which has implications for grain imports.’

China deadline for dairy exporters of infant formula
The Australian | 14 August

The new requirements were issued last year, and Beijing-based research body China Policy said that at a recent meeting organised by the CFDA the authorities stressed that the grace period would not be extended. So far, the meeting heard, 665 applications had been received by the CFDA from 75 Chinese and 26 international companies. The organisation had requested further information from 168 of the applications from 42 of the companies, both domestic and foreign.

lessons of the Crown Resorts China affair
The Australian | 11 August

Nicholas advises businesses planning to enter the Chinese market to consider Australian Chamber membership, employing law firms, management consultancies or public affairs firms, and services such as Beijing-based but Australian-owned China Policy, and to establish a China advisory board.

Australian Grains Industry Conference: Be wary of China reforms
The Weekly Times | 3 August

Australian grain exporters will need to be wary of new disease and import standards in China as its Government starts to implement a range of revolutionary food safety and agriculture policy reforms. That’s according to Beijing-based Chinese policy specialist Erlend Ek who spoke at yesterday’s Australian Grains Industry Conference in Melbourne.

China Policy logo
China Policy is a Beijing-based research and advisory company. Supporting our clients at multiple levels, from in-house research teams to CEOs and boards, we help them anticipate, understand and respond to China’s changing domestic policy and geopolitical environment. Contact us for more information on our services.