roundup from our portfolios

The annual Central Economic Work Conference (CEWC) expressed a desire to ratchet up and professionalise Party regulation of the economy. Held mid-December, its main initiative, an ‘effective long-term policy intervention package’, stays close to themes laid out at the October 19th Party Congress: quality-over-quantity growth, prudent monetary policy and lowering barriers to foreign investment.

Debt, both local government and real estate, remains the biggest structural roadblock. Regulators moved this month to clamp down on overheated ‘feature town’ schemes, targeting localities that conceal debt expansion under public-private partnerships and local government financing vehicles. Rental housing, core to the CEWC ‘intervention package’, offers both to mitigate risk and meet backed-up demand for affordable housing.

On trade, CEWC rhetoric prioritised expanding imports, boosting export quality and easing market access for foreign investment via the long-mooted negative list system. In the face of stepped-up trade investigations and friction with the US, these efforts aim to rebalance the trade surplus and encourage more (and better) domestic consumption.

With analysts warning of increasing likelihood of a US military strike on North Korea, Beijing used President Moon’s 13 December visit to minimise THAAD tensions with Seoul and express shared opposition to any military options.

Environmental concerns have been the primary driver of change in rural and industrial sectors this year. December was no exception, with northern provinces in the midst of a severe natural gas shortage rooted in poorly actioned central measures to swap coal for cleaner energy sources. Rising gas prices also reflect stalled oil and gas reform, with the CNPC, Sinopec and CNOOC pipeline triopoly continuing to suppress competition, hindering gas supply rationalisation.

Plans to ban all ‘highly toxic’ pesticides by 2022 were announced by Ministry of Agriculture. The world’s largest producer and consumer of pesticides, China’s impact on global practice in the sector is equally great. The signal to chemical companies is clear: to ensure a position in the emerging highly regulated new market, focus R&D on safer, greener alternatives.

At the World Internet Conference in Wuzhen, officials predictably called for building ‘a community of shared future in cyberspace’, hailing achievements in IPv6, space exploration and 5G. AI got a boost with MIIT’s ‘Next generation AI 3-year development plan (2018-20)’ amid debate over AI integration into the legal system and other unconventional applications.

Alarm bells rang when unauthorised publication of scholarship students’ personal data prompted high-profile state media to call for legally safeguarding online privacy. Industry is now set to play a larger role in the design of research and education, according to State Council ‘Opinions on deepening industry–education integration’. Vocational education is particularly wanting, as MIIT calculates the manufacturing sector will be 30 million shy of the 62 million skilled workers it needs by 2025.

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december policy movers

policy professionals in and out of the establishment

Xu Bo 徐博 | China National Petroleum Corporation Economics and Technology Research Institute senior economist

Natural gas shortages will continue for five years, predicts Xu Bo, noting that 23 bn m3 of natural gas storage capacity must be added to meet residential heating demand. Laws and regulations to clarify stakeholders’ responsibilities are needed to resolve capacity shortages, and supply–demand imbalance. An early advocate of natural gas as a cleaner alternative, Xu has long studied natural gas supply and demand, price setting and policy. He has led numerous related research projects.

Wu Hequan 邬贺铨 | Internet Society of China (ISC) president

Already one of the most cited commentators in the IT and telecom sectors, Wu hit the headlines again during the Conference with talking points circulating on all mainstream media. On IPv6, he wants China to own one or more of the root servers, set IP address assignment rules and build the largest commercial IPv6 network in the world by 2025. On 5G, he confirms that the standard-setting process is winding up, with large-scale commercialisation to debut early 2019. On digital economy, he opines that no business model can be repeated: innovation alone is eternal. Expert in fibre optic and broadband internet, member of the preeminent China Academy of Engineering (CAE) since 1999, ex-chief of the State Informatisation Advisory Committee and the China Institute of Communications executive council, Wu may have the credibility to be appointed Cyber Administration of China’s (CAC) tech spokesman, lending legitimacy to Beijing’s cyber governance and internet policies.

Wang Junsheng 王俊生 | CASS National Institute of International Strategy Department of Regional Strategy director

Moon’s visit will, enthuses Wang, boost security and economic cooperation. South Korean exports are under pressure, he argues: Trump wants to renegotiate their FTA. Beijing and Seoul should instead cooperate on opening third markets through B&R, he proposes, expanding their own FTA by inviting Japan and later other countries. Wang has long warned against a US–Japan–South Korea trilateral military alliance and holds conservative views on North Korea, having advised improving ties by increasing assistance and welcoming it into the AIIB.


policy ticker highlights

gems from our feed of policy releases and domestic debate

geopolitics

high expectations on Moon Jae-in’s visit to China
Weixin | 12 December

context: Many analysts recognise Moon’s constraints in addressing China’s concerns over THAAD, although some have criticised the deal as insufficient. There is optimism both sides can move on nevertheless.

Senior analysts Wang Chong 王冲 Charhar Institute and Liang Yabin 梁亚滨 Pangoal Institute expect China-South Korea relations to get back on track after Moon Jae-in’s first visit to China, reports Wen Jing 文晶 from Sina International.

Liang acknowledges the fact that Moon is facing both domestic and US pressure on THAAD. Therefore, China should not expect Moon to completely remove THAAD. Since it now involves national dignity, he argues no South Korean government could easily concede on the issue. Liang argues that it is worth following whether and how South Korea’s government follows up on the ‘three no’s’ deal.

Wang argues that the suspension or demolition of THAAD is fundamentally a ‘face’ problem. In the east such issues are resolved through ‘shelving disputes’, he says, recommending further dialogues between both sides to evaluate THAAD’s security issues for China. Wang and Liang argue that Moon’s visit to Chongqing has both symbolic and practical meanings

  • symbolically, argues Liang
    • to show South Korea’s long-term ties with the Chinese Communist Party as Chongqing was South Korea’s interim capital during WWII, and Chairman Mao 毛泽东 visited members of South Korea’s interim government in 1946
  • practically, argues Wang
    • to indicate South Korea’s focus on China’s growing central and western markets

Wang says China and South Korea should strengthen the bilateral relationship given their shared interests in cultural relations and the North Korea nuclear issue.

finance

industry insider: more deleveraging despite softer rhetoric
21st Century Business Herald | 22 December

context: In this year’s Central Economic Work Conference (CEWC), deleveraging—domestic economists’ latest favourite buzzword—received no specific mention. This was due, analysts suspect, to fears for unintended consequences of hardline deleveraging measures. However, if high-quality growth is to supplant fast growth in Xi’s new era, moving away from a debt-fuelled investment-heavy model is the biggest challenge.

Despite lack of mention in the Central Economic Work Conference (CEWC), deleveraging will remain atop policymakers’ economic agenda in 2018, argues Deng Haiqing 邓海清 JZ Securities global chief economist, as controlling the risk of debt crisis is still key to containing and defusing risks.

While regulators have reined in the problem within the financial sector since Q4 2016, warns Deng, macro leverage (measured by the economy’s total debt over nominal GDP) remains alarmingly high. The most acute problems are, he states, implicit local government debts, soft budget constraint problems of ‘zombie firms’, and quick build-up of household debts.

Despite a series of regulatory measures, including crack-downs on local government financing vehicles (LGFVs), debt swaps, and the use of PPP, local governments have continued to increase their borrowings, but in more disguised ways. 2018 may be a watershed year for this issue, speculates Deng, as scrapping the ‘GDP first’ doctrine strikes at the root of local government borrowing. One potential side effect may be a growth crunch in infrastructure investments, which are traditionally heavily debt-financed.

agriculture

drone industry to grow to 60 bn by 2020
Jiemian, Xinhua Net, China Economic Times | 23 December

context: after issuing restrictions in May 2017, the central government released the first document supporting UAVs, putting them on par with NEVs in the nation’s innovation agenda. This also means they will be equally prone to subsidy-abuse and overcapacity. Applications in agriculture will see the most growth, followed by security. Inclusion of technical standards for drones will help support purchase subsidies for the products, particularly in farming.

Ministry of Industry and IT issued ‘Guiding opinions on promoting and regulating the civilian UAV industry’, aiming to

  • by 2020: generate 60 bn total output with over 40 percent annual growth rate
  • by 2025: generate 180 bn total output with over 25 percent annual growth rate

Previously, iResearch estimated the domestic market would reach 75 bn by 2025, including

  • 30 bn in aerial photography and entertainment
  • 20 bn in agriculture and forestry
  • 15 bn in security
  • 5 bn in inspecting electricity cables and other infrastructure

The drone industry has grown from 450 million in 2012 to 9 bn in 2015, reports China Economic Times, noting that is one of the few high-tech products in which China leads globally. But firms have focused on production and sales, foregoing R&D investments, says the report, noting the Guiding opinions move to address this by calling for military-to-civil tech transfers. The policy further sets 200 technical standards for civilian drones, filling a key regulatory gap, says China Economic Times.

Market leader DJI is courting the agricultural market, reports Jiemian, with R&D efforts, attention to affordability, and a 1,000 person strong post-sales team that will help the firm become service rather than hardware-centred. 11,000 agricultural drones are active in China according to November 2017 Ministry of Agriculture data, of which DJI sold 7,500 (70 percent), says the report (Note: competitors).Jiemian notes room for growth as drones are only used on two percent of domestic farmland area, against 50 percent in the US and 38 percent in Japan. National subsidies were announced in September 2017. The market is far from saturated, especially for professional-grade drones, agrees Zhao Ziming 赵子明 Analysis International analyst.

society

cooling down feature towns
The Paper | 5 December

context: Not long ago, the state encouraged the ‘feature town’ model for urbanisation. The state is now starting to pump the brakes, concerned with growing risks from rising government debt and unhealthy real estate development.

National Development and Reform Commission (NDRC) issued ‘Opinions on promoting and regulating feature towns’ together with Ministry of Land and Resources, Ministry of Environmental Protection and Ministry of Housing and Urban-Rural Development.

Key tasks include

  • highlight individual features
    • each feature town should have distinctive characteristics and specific functions
  • comply with rules of development
    • feature towns should be aligned with their region’s urbanisation process
  • avoid repetitiveness
    • the construction of feature towns should follow local conditions and set the direction based on resource strength and development potential
  • respect ecosystem
    • the setup of feature towns should reconcile economic production, convenience of urban living and environmental protection
  • enhance market mechanisms
    • enterprises and private organisations should take the lead in running and investing in feature towns instead of local governments
  • set up periodic performance review and evaluation regimes
  • mitigate local government debt risks
  • prevent speculative real estate investing in feature towns
  • optimise the utilisation of land resources
  • maintain ecological protection red line

governance

supervision reform aimed at strengthening Party leadership
Legal Daily | 10 December

context: Early speculation about the National Supervision Commission’s role as an independent supervisory force over the party and the state has been dashed by the inadequacy of Supervision Lawand repeated stress on Party leadership in anti-corruption work.

The ultimate goal of supervision system reform is to strengthen Party leadership, says Central Commission for Discipline Inspection (CCDI).

Despite the success that anti-corruption work has achieved since its launch, it continues to face serious challenges, such as detachment from the public, foot-dragging, and uneven enforcement, says CCDI. The National Supervision Commission has consolidated responsibilities including administrative supervision, corruption prevention, and professional crime prevention, it explains. It will follow the same routine as CCDI but function under its own name to carry out the dual function of discipline inspection and supervision, says CCDI.

trade

China-US relations evolve amidst conflict
China Daily | 18 December

context: Despite China-US trade volume increasing 16.5 percent since 2016, tensions continue to grow. This roundtable contextualises increasingly interdependent economic relations, downplaying media hype of a looming trade war.

China-US trade relations have generated momentum this year, agree trade experts in International Business News. Nonetheless, a sense of reserve are felt towards its near future as pundits speculate that the current trade tension will likely intensify.

Compared to short-term sways and frictions, economic interdependence strengthened through comprehensive economic dialogue, deals signed on the Trump visit and China’s relaxed financial market access all play a much larger role in future trade relations, asserts Cheng Shi 程实 ICBC International chief economist and managing director.

Recent US investigations only affect products accounting for 0.26 percent of total bilateral trade volume, hardly threatening relations overall, says Liang Ming 梁明 Chinese Academy of International Trade and Economic Cooperation Foreign Trade Institute deputy director. Liang quotes data from China and the US maintaining that both sides remain each other’s largest trading partner.

Being heavily interdependent, neither side can afford to trifle with the relationship, asserts Su Qingyi 苏庆义 Chinese Academy of Social Sciences Institute of World Economics and Politics associate researcher. Despite that, endogenous factors generating trade tension will continue to exist as trade protectionism aims to replace imports with domestic products, subsequently stimulating de-capacity in China and re-employment in the US.

If the US reinvigorates its economy, demand for Chinese imports will surge, hopes Huo Jianguo 霍建国 China Society for World Trade Organisation Studies vice president.

Experts agree on the following solutions to ease trade tension

  • strengthen comprehensive economic dialogue
  • restart Bilateral Investment Treaty (BIT) negotiations
  • work towards trade balance through domestic industrial upgrading

industry and environment

winter gas shortages an opportunity to break up pipeline oligopoly
Economic Observer | 8 December

context: media attention has focused on the clean energy campaign pushing up demand for gas, causing severe shortages this winter; but insufficient supply is also a problem, says Dong Xiu 董秀 China University of Petroleum. Supply shortages may provide an opportunity to break up SOE monopolies, says Dong.

Natural gas shortages this year have exposed core problems in the industry, says Dong Xiu 董秀 China University of Petroleum professor. Shortages are not just due to the switch from coal to gas, argues Dong; supply has also been severely constrained by

  • difficulties in increasing pipeline gas imports; Central Asian countries, China’s major suppliers, also need gas for winter heating
  • insufficient liquefied natural gas (LNG) terminals, restricting imports
  • challenges in increasing domestic output at a large scale in the short term

CNPC, Sinopec and CNOOC have long dominated natural gas pipelines and gas imports. CNPC controls most imported pipeline gas and is also the largest pipeline operator, owning 50,600 km of pipeline, notes Economic Observer. But these state-run companies rarely coordinate, says Dong, and pipeline infrastructure also insufficient, this prevents gas from being delivered to demand centres. Dong calls for using this opportunity to break up SOE monopolies, improve base infrastructure, and increase natural gas storage capacity, which currently cannot meet emergency demand.

science and innovation

next generation AI development plan released
People’s Daily, Xinhua, Yicai | 18 December

context: MIIT released plans that flesh out July 2017 State Council calls for a globally competitive AI industry. Experts believe the benefits of AI will outweigh risks of unemployment and other disruptive effects.

Ministry of Industry and Information Technology’s (MIIT) ‘Next generation AI 3-year development plan (2018-20)’ finishes a top year for artificial intelligence (AI) and raises expectations for 2018, reports Xinhua. The plan promotes cooperation between government, enterprises, industry associations and think tanks, and supports AI innovation, entrepreneurship and talent cultivation with fiscal, financial and other preferential policies. AI laws, institutions and regulations are forthcoming, says the plan, emphasising these will not disrupt market mechanisms.

AI will lead to sustained growth of productivity in the services industry, argues Tan Hongbo 谭洪波, an economist from University of Yangzhou. Tan notes that this upsets a dogma of economic theory called Baumol’s cost disease, which dictates that labour cost in the service industry tends to rise faster than productivity growth warrants due to competition over human resources with faster growing industries.

AI needs to go beyond new products to transform daily life, add Shen Xiaowei 沈晓卫 IBM China Research Laboratory (CRL) director. Next to improving computing power and AI-IT interaction, China should use AI for problems thought to be out of reach, including environmental protection, universal education, affordable healthcare, finance and manufacturing upgrading, adds Shen. MIIT’s plan echoes this ambition, prioritising

  • smart products
    • connected vehicles
    • service robots
    • unmanned aircraft and drones
    • medical imaging devices
    • biometric facial identification
    • voice interaction system
    • home appliances
  • software
    • sensors
    • neural networks and chips
    • open source and open platforms
  • manufacturing areas
    • technologies, devices and machine tools
    • smart workshops, assembly lines and integrated production systems
  • associated sectors in the industrial chain
    • integrated information databases for talent and professional training
    • intellectual property service platforms and standard testing and certification centres
    • internet infrastructure, 5G and broadband service
    • information security and cybersecurity platforms


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