roundup from our portfolios

British PM Theresa May has avoided endorsing the Belt and Road Initiative (B&R): yet returned from a three-day visit end January with economic and trade agreements worth GBP 9 bn. Presidents Xi and Trump agreed on 16 January to keep up high-level economic dialogue. That day the Ministry of Commerce reported a record trade surplus with the US. Responding to Trump’s call for fair two-way trade, the State Council further opened up free trade zones to foreign investment in 16 industries. Visiting Xi’an and Beijing 7-10 January, France’s Emmanuel Macron pledged to take part in B&R. He signed new bilateral trade initiatives, and US$20 bn in business deals in priority sectors for Beijing: nuclear energy, aviation, environmental protection, finance and energy.

Beijing released its first white paper on Arctic policy, foreshadowing governance moves that may sideline the Arctic Council. On North Korea, analysts remain deeply divided, with some insisting inter-Korean talks are welcome, but denuclearisation remains essential. Others call for again treating North Korea as a security buffer zone to block any further development of a more direct danger: North Korean anti-China hostility.

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December saw deepening Party power and Xi Jinping’s political supremacy on show again. He proposed a constitutional amendment at a top political and legal meeting following the CCP Central Committee’s second plenary session. To be tabled at the March Two Sessions, the revision will confirm a new National Supervision Commission with sweeping oversight over the public sector.

Agent of increased central supervision, banking regulator CBRC is hanging tough as 2018 begins. Focus remains on bank-driven shadow banking and unproductive and/or high-risk investment, e.g. overcapacity industries and real estate. The watchdog also promises to speed up clarification of legal ambiguities.

The National Bureau of Statistics reports total GDP of 82.7 tn in 2017. This 6.9 percent y-o-y growth far exceeds the 6.5 percent target set in 2017. Annual industrial capacity utilisation reached 77 percent, a new five-year peak. Meanwhile Baotou, Inner Mongolia and Tianjin admitted that local governments had falsified data. The mandate to keep up fiscal stimulus in 2018 may clash with greater scrutiny of local government debt. But the state struggles to wean local cadres off grey channels in favour of legitimate debt financing via local government bonds.

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First mooted in Xi Jinping’s report to the 19th Party Congress, a new rural revitalisation strategy is part of a broader push to dismantle barriers between rural and urban areas and integrate supply chains. The Ministry of Land and Resources is expanding land supply for housing by allowing rental housing to be built on rural collective land, as well as exploring market conversion with the newly proposed ‘three rights’ system and ‘three rights’ separation for homestead land.

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Minister of Science and Technology Wan Gang 万钢 estimates R&D spending at 1.76 tn in 2017. At 2.15 percent of GDP, this exceeds Europe’s 2.1 percent. The NDRC is calling for comment on a plan under which half of newly produced cars will be connected and autonomous vehicles (CAV) by 2020: in just two year’s time.

In healthcare, the State Council issued plans to incentivise and train general practitioners, a step to control surging medical costs. In line with ongoing drug evaluation reforms starting in 2015, the top Party policy committee approved new measures to ensure quality consistency between generics and their branded variants.

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january policy movers

policy professionals in and out of the establishment

Zhang Liangui 张琏瑰 | Central Party School Institute for International Strategic Studies professor

Zhang has long decried North Korea’s nuclear ambitions; in 2006 he termed China the ‘biggest loser’ from a nuclearised North Korea, warning it would lead to a nuclear Japan and South Korea, a high-profile US presence and North Korea itself as a potential threat. Pyongyang seeks to prevent military strikes and drive a wedge between the South and the US, but its threshold for use of force may not be as high as generally imagined, Zhang warns. Pyongyang can, however, de-escalate tensions by abandoning its nuclear program, even on the brink of war.

Lou Jiwei 楼继伟 | National Council for the Social Security Fund chair and former Minister of Finance

Two issues keep local governments joined at the hip with their financing vehicles, says Lou: first, they often depend on LGFVs to service outstanding debts or contingent liabilities. Second, many LGFVs cannot be marketised because they lack sustainable, stable operating cash flows. The complexity associated with disposing of LGFVs is a major obstacle to central government efforts to discipline local government borrowing.

Gao Yanmin 高延敏 | Ministry of Industry and Information Technology Consumer Products Department director

Gao is a fixture at press conferences and in the media, explaining the regulatory agenda as well as designing it. A senior figure in his department for ten years, Gao served as vice director 2008-15 before promotion to his current position. His department manages industrial quality and safety with a broad purview spanning light industry, textiles, food and drugs, and the salt monopoly; he calls for investment in product diversity, quality and branding (三品战略) across all of them. Some functions of his department may be absorbed by a new superministry widely rumoured to be planned for the 2018 Two Sessions and expected to unite China Food and Drug Administration, General Administration of Quality Supervision, Inspection and Quarantine, and State Administration for Industry and Commerce.

policy ticker highlights

gems from our feed of policy releases and domestic debate


do not become a target of North Korea
Financial Times Chinese | 18 January

context: While China agreed to unprecedentedly harsh sanctions in 2017, some warn the limit has now been reached. Wang Peng 王鹏 advises against any further steps which could further deteriorate ties with Pyongyang.

China should ensure it does not become a target of North Korea, argues Wang Peng 王鹏 Charhar Institute research fellow and University of Bristol adjunct research fellow.

Stakeholders should learn to deal with a de facto nuclearised North Korea before denuclearisation, suggests Wang. China cannot afford to further sanction or appease North Korea, he says. Future deterioration of China-North Korea relations goes against China’s interests, Wang highlights: China is vulnerable, should a war occur.

China can ensure its relative security by continuing its current North Korea policy, and facilitating the worsening of North Korea’s relations with the US and Japan, argues Wang. China, facing a de facto nuclear North Korea, can minimise its security challenge by ensuring its ties with Pyongyang are better than those of the West, contends Wang.

China’s decision to not attend the Vancouver meeting was rational, argues Wang, given

  • China’s opposition to unilateral sanctions on North Korea
  • China cannot join the enemy bloc it fought against during the Korean War

Wang outlined possible unfavourable outcomes if China attended the meeting alone

  • China blocks the US-led unilateral sanction
    • China will be blamed for only implementing UN Resolutions at a modest level
    • North Korea would disapprove
  • China tries but fails to block the US-led unilateral sanctions and loses face
  • China participates in the sanction and China-North Korea relations further deteriorates

However, Wang argues that the Vancouver meeting was favourable to China, as it further restrains North Korea’s nuclear program in line with China’s interests and policy given the security threat.



disentangling localities and LGFVs proves difficult
Caixin Finance, Weixin | 14 January

context: An important part of curbing relentless local government borrowing is to disassociate local governments and their financing vehicles (LGFVs)—incorporated entities (mostly) wholly owned by local State-owned Asset Supervision and Administration Committees (SASAC). This has proven difficult, not least because of parasitical dynamics linking the two: LGFVs, having inherited highly-leveraged state-owned assets with poor prospects, are struggling to stand on their own two feet.

Yunnan Capital, an equity investment company wholly owned by Yunnan Provincial Government, delayed repayment of some trust loans for a month. According to the release by Zhongrong International Trust Company (underwriter and manager of these loans), the repayments were delayed because ‘relief capital’ from the Yunnan Government has not passed through the necessary government procedures.

This delay is the first instance of a (former) LGFV default in 2018, notes Caixin. Yunnan Capital, while still owned by the government, officially stopped financing for local government projects in mid-2016, according to the paper; it is now a state-owned investment and asset management company.

Through debt and equity investments, Yunnan Capital has very heavy exposure to underperforming state-owned assets based in Yunnan. According to Everbright Securities research, a significant proportion of its debt holdings rescued deeply indebted local overcapacity SOEs, particularly in coal-related industries. Low quality assets mean that Yunnan Capital has not been able to generate enough operating cash flow, and is forced to rely on new financing to fulfill liquidity requirements, notes Caixin.


CFDA may be merged with SAIC and AQSIQ at Two Sessions
Southern Weekly | 18 January

context: Food and drug regulation reform has been a top priority for the past two decades. In 1998, State Drug Administration (SDA) was formed, and in 2003 it was given responsibility over food regulation. In 2008, SDA was merged with the former Ministry of Health, and in 2013, CFDA was created. At the Two Sessions in March 2018, new food and drug reform is expected.

The food and drug system could face a new round of reforms in 2018, with two main possibilities, reports Southern Weekly. To form a professional and unified market supervision mechanism, State Council may create a new General Administration of Market Supervision (GAMS), merging China Food and Drug Administration (CFDA) with State Administration for Industry and Commerce (SAIC) and General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ). Alternatively, National Health and Family Planning Commission could take responsibility for regulations on drug and medical devices, with food regulation being incorporated into GAMS. The Central Leading Small Group for Comprehensive Deepening Reform is researching this classified plan without involving the above government agencies in the decision, according to sources close to CFDA. The plan will be more clear after the second plenary session of the 19th Party Central Committee, reveals an anonymous CFDA official.

Earlier personnel changes signaled the possible reform. Two vice-ministers responsible for food regulation, Guo Wenqi 郭文奇 and Teng Jiacai 滕佳才 left for other departments in March and May 2017. Shang Yong 尚勇 joined CFDA in September 2017 as vice-minister but with minister ranking, implying the high profile of CFDA, according to the paper. Surprisingly, CFDA was not included in the inter-departmental coordination meeting on market supervision formed in November 2017, leading to speculation of its imminent dissolution.


state no longer to be sole supplier of housing land
Weixin | 16 January

context: Commentators argue that interdependence of the real estate market and local governments’ land finance revenue is leading to high housing prices. They assert causality based on the fact that the state is the only land supplier. Breaking the land monopoly may impact the real estate market.

Ministry of Land and Resources (MLR) is expanding land supply for housing by allowing rental housing to be built on rural collective land and exploring marketisation with the newly proposed ‘three rights’ system. Until now, the only land supply in the housing market has been urban land, which is owned by the state; rural land, owned by rural collectives—including both the ‘construction’ and ‘homestead’ classifications—has been restricted to rural use.

Under the current system, rural collectives own rural land and residents under those collectives are granted contractual rights to use it. The ‘three rights’ system aims to expand this: ‘three’ refers to rural collective ownership, contract rights and use rights. Jiang Daming 姜大民 MLR minister says MLR is researching land legislation and proposing policies for the ‘three rights’. Rural land will supply more non-state owned land to the real estate market, which will decrease housing prices, said Zhao Xiuchi 赵秀池 Capital University of Economics and Business professor.

Since the 19th Party Congress, government has made a point of encouraging long-term rentals and the professional rental market, but rental land supply—state-owned urban land—is extremely tight. MLR released ‘Pilot plan on using rural collective lands to build rental housing’ in 2017 and set 13 pilot cities including Beijing, Shanghai, Nanjing, Hangzhou, Guangzhou etc. Beijing supplied 203.9 hectares in 2017, with a promise to set aside 1000 hectares from 2017-2021.


state constitutional amendment proposal released
Xinhua Net | 19 January

context: The amendment will give legal power to the National Supervision Commission, the new anti-corruption superagency. There is also speculation that Article 79’s two-term limit on the Presidency may be removed to allow Xi to stay on as President after his term would otherwise expire in March 2023.

The CCP Central Committee second plenum in late January 2018 adopted a proposal to revise the state constitution, reports Xinhua. It is expected to be passed at the March 2018 NPC meeting. According to the communique issued after the plenum, highlights of the amendment include

  • Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era is a guideline that the Party and state will uphold in the long run
  • leadership of the Party must be strengthened and upheld in all areas
  • the five-sphere integrated plan, which promotes coordinated economic, political, cultural, social and ecological advancement, and a new vision of innovative, coordinated, green and open development for everyone, are vital for national rejuvenation
  • the goals of finishing the building of a moderately prosperous society in all respects by 2020, basically realizing socialist modernization by 2035, and building China into a great modern socialist country by the middle of the 21st century, are also emphasized
  • following the path of peaceful development, pursuing a mutually beneficial strategy of opening up, and promoting the building of a community with a shared future for mankind are of great significance to the cause of peaceful development for humanity
  • reform to establish a national supervisory system, under the Party’s leadership and covering all who exercise public power, is a significant political system reform and a major decision to strengthen the self-supervision of the Party and state


US tax reform is larger than itself
Caijing Securities | 19 January

context: Domestic policy advisors are concerned about the effects of Trump’s tax plan. This commentator argues that the aim of the plan is not only short-term stimulus to the economy, but more importantly a structural reform that addresses loopholes that incentivise multinationals to flee to tax havens.

The real issue in the United States plan to reduce corporate tax from 35 to 21 percent and tax overseas profits is its effect on multinationals, argues Zhang Monan 张茉楠 China International Economic Exchanges Centre researcher. Her research shows that MNCs account for 60 to 70 percent of value created in global trade. To this end, Trump seems to have made a smart move, notes Zhang; by forcing capital and manufacturing to relocate back to the US, Trump is propping up the global competitiveness of American MNCs and the rest of its businesses. The tax reform is designed to fill loopholes in the US tax system and bring investment back to the US, she notes.

That makes the tax reform larger than the tax reduction itself, and signals a fundamental shift in the global industrial investment environment, says Zhang. In her analysis, the global trade cycle and global capital flows will be profoundly impacted.

China must pay strong attention to this, she urges, because it was a major beneficiary of the last round of globalisation initiated by Reagan. By becoming the preferred processing hub for multinationals, China connected to the upstream and downstream and has become a crucial link in global value chains.

Zhang suggests China accelerate its transformation away from manufacturing and towards market and innovation-oriented investment to further promote its global influence and attractiveness for industrial and financial capital.

industry and environment

CNNC and CNECC soon to merge
Jiemian | 25 January

context: The consolidation of CNNC and CNEC—still awaiting official confirmation—follows the Shenhua–Guodian mega-merger and the Huaneng–SPIC merger rumour. More M&As are expected as the central government seeks to trim state-owned firms and create internationally competitive giants.

China National Nuclear Corporation (CNNC) and China Nuclear Engineering and Construction Corporation (CNEC) are set for a merger. State Power Investment Corporation (SPIC) and China General Nuclear Power Group (CGNPC) will face stiffer competition as a result, predicts Jiemian.

CNNC is the second largest nuclear power plant developer and dominates most nuclear sectors including exports, investment, technology design and uranium supply. CNEC’s core business is construction of nuclear power projects. Both companies were spun off from China Nuclear Industry Corporation in 1999 in the previous restructuring of defense enterprises. The merger of the two has been highly expected, says an industry insider, as their businesses complement each other and the consolidation will enhance the competitiveness of CNNC on the international stage.

SPIC, CNNC and CGNPC have become the only three enterprises licensed to operate and control nuclear power plants, after SPIC was created through the merger of China Power Investment Corporation and State Nuclear Power Technology Corporation in the first round of nuclear sector restructuring in 2015.

science and innovation

BeiDou’s commercial industry to grow 100 bn by 2020
Shanghai Securities News, Xinhua Net, National Business Daily | 19 January

context: China is using its market to set up BeiDou as an alternative to GPS. Precise and real time positioning will be crucial to future warfare, autonomous driving, smart manufacturing and the sharing economy, to name a few areas in which China is trying to gain a global advantage.

Ten BeiDou-3 satellites will be launched in 2018 to extend coverage to Belt and Road countries, says Xu Ying 徐颖 China Academy of Sciences Opto-Electronics Academy. 35 more satellites are scheduled by 2020 to realise global coverage, reports Shanghai Securities News. BeiDou Navigation Satellite System (BDS) is key to a space-time grid that China will build before 2035, says Ran Chengqi 冉承其 BDS Management Office director. The grid will cover air, land and water with precise and stable positioning needed for a ‘smart internet of everything’, says Ran.

Ministry of Transport and CCP Central Military Committee’s ‘Special plan on applying BDS to transportation (public version)’ calls for BDS in all areas of transportation by 2020, and a positioning, navigation and timing (PNT) system by 2025. The plan mentions building a network of signal amplification bases along coastal areas and the Yangzi. BDS will be used

  • on ships
  • in 80 percent of ground-level public transport
  • in 100 percent of civil aviation at low altitude airspace surveillance
  • in 100 percent of railway carriage dispatching and planning

This kicks off BeiDou popularisation, experts told Shanghai Securities News. NDRC mentioned BeiDou in its plan for smart and automated vehicles. State Council’s 2013 ‘National satellite navigation industry mid- to long-term development plan’ aims for BeiDou to take up 60 to 80 percent of 400 bn industry by 2020. Consumer use, the largest growth market, may reach 200 bn, doubling its size, predicts the report.

Techtotop produced 14 million of the 18 million BeiDou chips sold in 2017, says a company representative, adding that its BeiDou/GPS chips are cheaper than overseas GPS-only chips. In 2015, the chip fund invested 1.5 bn in BDStar Navigation.

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