roundup from our portfolios

In the wake of Trump’s visit to Beijing early November, specialists here found much to worry about longer-term ties with the US, highlighting tensions on North Korea and trade. In the region, Beijing pushed to speed up agreements on a legally binding South China Sea Code of Conduct, confident that it can ‘build a regional order’.

The state is moving to keep foreign investment flowing, updating Foreign Investment Law and amending Anti-Unfair Competition Law. State Council vowed to lower the cost of IP protection in international trade and e-commerce. Shortly after Trump was making nice in Beijing, the US initiated anti-dumping and anti-subsidy investigations against Chinese sheet aluminium, the third in a series of moves to impose tariff duties, following earlier action on tool chests, cabinets and plywood flooring.

Financial markets suffered post-Congress jitters in November, as tougher financial regulation follows an increasingly coherent narrative. The central bank issued a long-awaited call for comment on new asset management regulations, aimed at unifying regulatory standards. This is the first strike after the Financial Stability and Development Committee was launched earlier this month. Responding to these developments, the domestic bond market was on edge: rising rapidly mid October, the yield on ten-year treasury bonds hit record highs in November.

Top agriculture policymakers recommitted to imports as the basis of China’s food security strategy at a high-level food security forum in late November. While the benefits of agricultural trade to the environment, supply stability and prices took front and centre, concerns were raised about dependence on the Americas, Australia and the EU for food. Boosting ag trade and related infrastructure investments with Belt and Road countries is a rising priority.

Implementation measures to the 2014 Counter-espionage Law expanded state security power to include barring the entry and exit of Chinese and foreign nationals. It also clamped down on religious practices, ethnic unrest and behaviour that ‘challenges the socialist system’. In response to a series of child abuse scandals, Ministry of Education ordered a one month nationwide inspection of all kindergartens and began drafting a Preschool Education Law.

The long-awaited carbon trading scheme, among climate pledges Xi made on his 2015 US visit, is due soon: expectations are running high. Subject to final approval a nationwide carbon market was ready to launch, Xie Zhenhua 谢振华 global climate spokesperson told the Bonn climate change conference (6–17 November). The scheme, to be the world’s largest, is projected to trade some 3–5 bn tonnes of carbon allowances. Starting small, it will only operate in power generation, one of eight proposed sectors.

State support for Made in China 2025 and Internet+ has been renewed. Such top-down manufacturing upgrade plans will not, claim new guidelines jointly released by sixteen agencies, disrupt market mechanisms. Nor will they discriminate against private investors or FDI. Most IT industries will receive a boost, above all AI, robots, semiconductors, integrated circuits and the internet of things.

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november policy movers

policy professionals in and out of the establishment

Wu Shicun 吴士存 | National Institute for South China Sea Studies president

A prolific commentator on South China Sea issues in both English and Chinese publications, Wu toes the line, routinely defending official positions. After China lost the South China Sea ruling in 2016, he led ‘informal talks’ with Philippine envoy Ramos that prepared the rapprochement. Requiring China to give up its Nine-Dash Line, he claimed in 2014, was an ‘obvious violation of the will of the Chinese people’. The US, he warned in August 2017, will further disturb the area by increasing naval patrols. To forestall unilateral action by other claimants, he urges boosting deterrence capabilities and advancing joint exploration projects. China should build a regional order and rules suited to China’s strategic goals through the Code of Conduct, Wu argues, which should be legally binding.

Xie Zhenhua 谢振华 | special representative for China’s climate change affairs

Longtime face of China’s climate change interests, Xie led negotiations in Copenhagen, Cancun and Durban. Steering major breakthroughs at the Paris climate change conference, he helped reach consensus on the final agreement. Xie is renowned in such negotiations for scathing criticism of developed nations’ climate delinquencies. He has worked in environmental protection since his 1990 appointment as State Environmental Protection Administration deputy director. Xie was China’s chief negotiator at the Bonn conference this November.

Zhao Yaohui 赵耀辉 | Peking University National School of Development professor

Her focus on labour economics, mature economics and health economics led Zhao to take charge of the China Health and Retirement Longitudinal Survey (CHARLS). Lack of a top-level policy framework is to blame, she contends, for current scarcity and inequality in childcare. It has worsened due to insufficient private players, which in turn in due to the state making it too difficult for them to enter the market, Zhao says. Insufficient access to childcare severely impairs women’s access to employment, she adds. The state should, she urges, give play to market forces in childcare so that quality can be improved via competition.


policy ticker highlights

gems from our feed of policy releases and domestic debate

geopolitics

South China Sea: punitive Code of Conduct needed
Global Times | 20 November

More effort is needed on a legally-binding Code of Conduct (CoC) to resolve disputes in the South China Sea, contends Wu Shicun 吴士存 National Institute for South China Sea Studies president. Zhang Feng 张锋 Australian National University (also affiliated with the National Institute for South China Sea Studies) also contributed to the article.

The 13 November China-ASEAN Summit (10+1) in Manila produced an agreement to begin official talks on a CoC to resolve disputes in the SCS, notes Wu. China wants

  • a more legally binding code of conduct, with supervisory and punitive mechanisms
  • to fill a gap in crisis management mechanisms
  • to boost political trust and security cooperation between China and ASEAN

Given disputes cannot be solved overnight, a rules-based institutional order based in the South China Sea can

  • ease regional tensions and help maintain peace and stability
  • ease suspicions of outside countries such US, Japan and Australia, and avoid their intervention
  • help create a regional order in the interest of all involved states, not least China

China is wary of a ‘rules-based order’ as proclaimed by the US, Japan, Australia and other outsiders, argues Wu, but can build a regional order and rules according to its own strategic goals and the interests of all parties. This way China can seize the initiative, and increase its institutional voice and leadership role, he says.

Note: Wu is closely associated with the government, and led ‘informal talks’ with the Philippines after the Permanent Court of Arbitration ruling on the South China Sea in 2016.

finance

central bank governor: heavier regulation required
People’s Bank of China | 4 November

In an article published in ’19th Party Congress Complimentary Report’, Zhou Xiaochuan 周小川 People’s Bank of China governor provided his take on China’s financial system and urged that problems be addressed at their roots.

At the macro level, high financial leverage and liquidity risk are building up. By end 2016, the country’s financial leverage—the ratio of total debt to GDP—reached 247 percent, in the business sector reaching 165 percent, exceeding the international average. SOEs and local governments are piling up debt, adds Zhou. In addition, the 2015 stock market turmoil and housing bubbles in some cities were significant contributors to excessive leverage being channeled into those markets.

At the micro level, financial institutions are facing mounting credit risk, as nonperforming loans pile up and eat into the banking sector capital buffer and defaults occur more often in the bond market. Finally, rampant expansion of shadow banking, plagued by multi-layered structuring of wealth management products, maturity mismatches between assets and liabilities, and implicit return guarantees is exacerbating cross-market and cross-region risk. Financial conglomerates and non-financial firms keen on investing in the financial industry are trying to make quick money through insider trading and affiliated-party trading.

Ineffective monetary intervention, coupled with financial regulatory fragmentation, has facilitated the buildup of risk, says Zhou. Monetary policy has been hijacked—greater money supply is called for both in good times, when money is sought to accommodate booming economic activity, and in bad times, when it’s needed to pay off debts and spur growth. Regulatory fragmentation also results in redundant financial products of similar nature issued by different financial institutions in different regulatory standards.

agriculture

ongoing rural reform and trade key to delivering food security
Weixin | 19 November

Ensuring safe and high quality food is a top priority for the new era, says Li Wei 李伟 State Council Development Research Centre (DRC) director. National goals on achieving a ‘moderately prosperous society’ are nearing completion and food demand will continue to rise until a projected peak in 2030. Though substantial progress has been made, Li notes ongoing contradictions in the agricultural economy including

  • rapidly rising yields but slow progress on quality
  • rapid industrialisation of food production but slow progress on sustainability
  • insufficient capacity to guarantee both food security and safety

Still, Li is confident that lessons learned on rural poverty alleviation and food security in China provide valuable experience as the rest of the world pushes to reach the UN 2030 Sustainable Development Goals. He pledges that State Council DRC will actively share its experience and research.

Basic self sufficiency in grain is still a national goal, says Han Jun 韩俊 Central Rural Work Leading Group Office director, despite commitments to supply-side structural reform and regulations blocking grain production in unsuitable regions. Instead, food security will come from ‘storing grain in the land and in technology’—a strategy focused on production capacity rather than yield. Rural property rights reform and increasing marketisation of agricultural factors of production is critical, argues Han, who further calls for

  • reforms to the wheat and rice purchase and storage system
  • addressing mismanagement of agricultural resources through centralisation of management
  • opening up to agricultural trade and improving coordination of imports with domestic interests

The fifth annual Food Security and Safety Strategy Summit was held in Beijing 18–19 Nov 2017, convened by State Council Development Research Centre and China Economic Almanac.

society

new childcare abuse case prompts fiery People’s Daily commentary
Economic Observer | 24 November

Following the recent case of toddler abuse at a Ctrip childcare centre, another kindergarten in Beijing is now under investigation. Alleged crimes include poking children with needles and giving them suspicious tablets and injections, according to Economic Observer. RYB Kindergarten is one of China’s most famous early education groups and was listed on the New York Stock Exchange in September, it adds.

People’s Daily advocates for

  • law armed with ‘teeth’ to enforce severe criminal punishment
  • upgraded education regulations urging more staff and a higher level of enforcement
  • capacity building for early childhood education professionals
  • more investment in video surveillance systems

governance

criminal procedural standards should not apply to Supervision Law
Caixin | 20 November

The Constitution should be amended before the approval of Supervision Law, says Ma Huaide 马怀德 China University of Political Science and Law vice president, explaining that otherwise the Supervision Law would not be valid.

The supervision commissions should be categorised as supervision agencies distinct from administrative and judicial agencies, Ma says. Given that supervision commissions will be working together with commissions for discipline inspection, they will be placed under CCDI leadership, he says. Their decisions should also be supervised by judicial organs, he adds.

To address the issue of the relationship between supervision commissions and people’s congresses, Ma says that the commissions will supervise congress members, not the institution itself. He argues, however, that the law should specify the levels of service agency employees that fall within its jurisdiction, and clarify whether managers in partially state-owned enterprises count as public sector employees.

Ma believes that individuals under detention should not have access to lawyers, since detention is not a criminal procedure under which individuals are entitled to legal counsel. The distinction between supervision commissions and the procuratorate should be equally clear, he argues, and the latter should be able to make independent legal decisions without having to consult the former. Like other branches of government, supervision commissions should also be required to submit annual reports to people’s congresses, says Ma.

trade

Belt and Road in ‘New Era’ champions new wave of balanced globalisation
Shanghai Observer | 18 November

As China enters the ‘New Era’, its Belt and Road (B&R) initiative champions a new wave of balanced globalisation that Shanghai can lead, argues Huang Renwei 黄仁伟 Fudan University Belt and Road and Global Governance Research Institute professor and executive vice president and Shanghai Academy of Social Sciences researcher.

‘New Era’ and the new wave of globalisation are two sides of the same coin, says Huang. Both emphasise regional development cooperation, the need to close the gap between rural and urban areas and people’s living standards.

For China’s domestic economic reforms and transformation to be successful, asserts Huang, they need to be matched by similar trends globally. B&R’s significance therefore transcends the construction of roads to an initiative that covers domestic and global markets, shapes overall development arrangements of China and the world and promotes integration of resources at home and abroad.

At the same time, says Huang, B&R addresses the flaws of the current wave of globalisation and counteracts populism and protectionism by fighting

  • imbalance between the virtual and real economies
  • bloated status of hot money in the face of shrinking real investments
  • polarisation of global wealth

Boasting a pilot free trade zone, combining the ‘four essentials’—economy, finance, trade and shipping—and as a centre for scientific innovation, Shanghai is in an ideal position to lead the ‘New Era’ B&R initiative. Geographically, too, it is in a uniquely favourable situation, Huang points out. After all, it is merging point for

  • three Yangtze river economic zones
  • B&R’s land route
  • B&R’s maritime route

In that context, Fudan University’s new Belt and Road and Global Governance Institute will be a crucial source of B&R expertise for the state, enterprises and society, says Huang. By covering issues comprehensively rather than just concentrating on security, economy or science, the institute is in the spirit of Shanghai’s services to B&R, says Huang.

science and innovation

burgeoning overcapacity in smart manufacturing and batteries
National Business Daily, China Economic Daily, CCStock | 16 November

Made in China 2025 sped up industrial transformation and structural adjustment as a solution to overcapacity in traditional industries, but the policy may have overshot its mark, reports China Economic Net, noting overgenerous policy support and poorly designed industrial layout. Ministry of Industry and IT (MIIT) promotes rational planning, specialised production, quality improvement and differentiated provincial layout among Made in China 2025 policies and projects, explains Li Beiguang 李北光 MIIT Planning Department deputy director. But this may not be enough, according to the report. While traditional industries are at pains to meet de-capacity quotas, emerging industries and smart manufacturing are already starting to show signs of overcapacity, according to separate reports in China Business Daily and Neng App.These signs include

  • new energy vehicle (NEV) subsidies creating lithium-ion battery overproduction, argues Liu Yanlong 刘彦龙 China Chemical and Physical Battery Industrial Association president at 2017 Global Fuel Cell Summit
    • from Q1-3 2017 the industry produced 31,500 MWh in batteries, whereas the NEV industry only installed around 14,700 MWh, meaning many batteries remain unused, says Liu
    • production capacity is expected to grow 125 percent y-o-y in 2017, reaching 228,000 MWh by year end
    • subsidies were adjusted in early 2017 to mitigate low-end NEV oversupply, and a similar adjustment for low-end batteries is to be expected next year, reports CCStock
    • Liu argues against adjusting subsidies so often, advocating market self-regulation and consumer choices over direct administrative measures
  • the smart air conditioner industry is at risk of oversupply, said Liang Zhenpeng 梁振鹏 household appliance market analyst to China Business Daily
    • inappropriate production planning is likely due to manufacturers’ and markets’ lack of preparedness for the recent smart manufacturing stimulus, agreed Zheng Jianjiang 郑坚江 Aux Group president at the 2017 Artificial Intelligence Industry Development Summit

industry and environment

carbon market is ready, but challenges remain
Caixin (1), Caixin (2), 21st Century Business Herald | 13 November

Preparations for the national carbon trading market have been completed and the scheme is awaiting a green light from State Council, according to Xie Zhenhua 谢振华 special representative for climate change affairs. The nationwide development follows seven pilot markets launched since 2013, which include nearly 3,000 major polluting enterprises and accumulated a trading volume of 197 million tonnes or 4.5 bn by September 2017. Thanks to the replicable experiences from the pilot markets, China is well-positioned to peak its carbon emissions around 2030, adds Xie.

However, it is still unclear when the carbon market will be launched. The initial 2017 target proposed in ‘13th 5-year work plan on controlling greenhouse gas emissions’ was recently reported to be postponed to beginning 2018, due to data unreliability and regulatory issues, says Wang Zhongying 王仲颖 Energy Research Institute vice director. In the early stages, the carbon trading scheme is expected to be conservative, comment industry insiders, referring to the possibility of incorporating only power generation into trading. This falls short of the eight sectors (petrochemcals, chemicals, power generation, building materials, ferrous metals, paper making, aviation and steel) laid out in ‘Working on key areas in the launch of nationwide carbon market’, notes Caixin.

Xie also mentions that no carbon futures or carbon tax will be introduced in the initial phase of policy implementation, emphasising concerns over excessive financial derivatives destabilising the market and the fledgling carbon market not focusing on developing financial products. Central government will stick to the core objective of using a carbon trading market to reduce carbon emissions, adds Li Gao 李高, Climate Change Department of National Development and Reform Commission vice director.

The trading platform will be located in Shanghai, while Hebei province will be in charge of registration, according to 21st Century Business Herald. Carbon allowance prices will largely be determined by the overall quantity of emissions set by NDRC, as the market is mainly influenced by supply and demand, says Liu Shuang 刘爽 Energy Foundation China program officer.


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