roundup from our portfolios

Beijing’s geopolitical outlook shifted abruptly in April. A series of breakthroughs on the Korean peninsula reconfigured relations with North Korea; escalating trade tensions with the United States persuaded many domestic observers that a long-feared struggle for dominance has begun. Taiwan-directed naval exercises and a pledge of military support for Russia suggest greater interest in competitive power politics, while Xi vowed at the Boao Forum to overcome the ‘Cold War mentality’ and pursue greater openness to foreign trade and investment. Meanwhile, Japan signaled interest in the Belt and Road Initiative. Tensions rose in the Australia–China relationship.

Technology export controls are the most feared weapon in the US trade arsenal. A ban on exporting key chips to ZTE threatens to hamstring the company, as its larger peer Huawei is again rebuffed from the US market. Reports suggest that Huawei is also at risk of a US export ban. Xi Jinping warned the 2018 National Cybersecurity and Informatisation Work Conference that technological dependence is an Achilles’ heel. National rejuvenation, he said, entails building China into a cyber superpower. He pledged a multi-front push for cyber application in governance, national defense, economic production and public information control. Cyberspace Administration of China and China Securities Regulatory Commission issued a joint plan to bring overseas-listed online giants home via Chinese depositary receipts (CDR), an instrument which allows mainland investors to purchase rights to overseas-listed stock in RMB. MIIT rolled out long-waited national regulations on connected and automated vehicles (CAV) real-time road tests. China Mobile, China Telecom and China Unicom launched 5G small-scale technical tests and pre-commercial applications in over 100 pilot cities.

A strategic decision to step up imports in order to serve the Chinese market has paved the way for opening up measures that address some international concerns about market access. In his Boao speech, new PBoC governor Yi Gang易纲 promised to further liberalise foreign investment in the financial sector, laying out 12 measures to relax market access and expand business opportunities for international investors; half of these will be implemented within the next few months and the rest by end 2018. State Council dropped tariffs for 28 categories of pharmaceuticals covering most imported drugs, including anticarcinogens, and China Food and Drug Administration adopted customs procedures accommodating streamlined regulations on imported active pharmaceutical ingredients (API) and excipients.

State efforts to increase internet access in villages are reaping dividends as more rural residents shop online, use electronic payment platforms like Alipay and Wechat Wallet, and sell farm products directly to urban consumers. New data suggests over 35 percent of rural residents, around 209 million people, have internet access as of end 2017. Of these, 47.1 percent have used electronic payment platforms to purchase goods both online and offline. Urban consumers are also buying online, and e-commerce sales of agricultural products have grown nearly 40 percent, y-o-y, in Q1 2018, generating retail sales revenue of 45.27 bn. This means better data on agricultural production and the food system.

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april policy movers

policy professionals in and out of the establishment

Shi Yinhong 时殷弘 | Renmin University Centre for American Studies director

Widely cited internationally, Renmin University’s Shi Yinhong often warns against overreach. On North Korea, he urges Beijing to cut its losses and prevent a turn against China. A sceptic on the effect of sanctions, Shi warns a long-term oil cutoff is unlikely to work, let alone justify its strategic and political costs. Beijing’s long-term strategic interests in Northeast Asia should be prioritised over a temporary relief in Sino–US ties, he argues, and under no circumstances should the US and South Korea be allowed to militarily control North Korea’s territory.

Wang Jianjun 王建军 | Shenzhen Stock Exchange (SZSE) general manager

Before being appointed head of SZSE, Wang chaired CSRC’s marketing department, analysis team and general office. He seeks to attract internet giants like BATJ to list in Shenzhen, where over 70 percent of companies are in high-tech and innovation. The stock exchange, he told Netease, hosts very few homegrown unicorns. Wang argues that current law of ‘one share, one vote’ does not suit innovation preferences of tech firms. As a 13th NPC delegate, he proposed allowing companies multiple share classes, reports The Paper, so that key stakeholders of innovation firms are better motivated and incentivised. Wang also confirmed to PE Daily that SZSE is to announce detailed implementation rules for overseas-listed IT firms to be relisted in the A-shares stock market via CDR.

Qin Haiyan 秦海岩 | China Wind Energy Association secretary general

Wind and solar technology policy expert Qin Haiyan was involved in drafting the 2005 Renewable Energy Law and 2012 ‘Implementing opinions on accelerating wind power sector development’. Failure to address curtailment will make it impossible to increase the share of non-fossil fuel in primary energy mix to 15 percent, he says. Qin stresses that guaranteed purchase of renewable energy is key to reducing wasted renewable energy.

policy ticker highlights

gems from our feed of policy releases and domestic debate


do not concede to escalating US pressure
Global Times, Sina | 21 April

context: US media reports that the Trump administration is planning to release details on an additional US$100 bn of tariffs, and is weighing whether to use the 1977 International Emergency Economic Powers Act to curb Chinese investment in America’s tech sector. In the worst-case scenario, the US could freeze China’s assets in the US, including US treasuries.

By spreading rumors like US$100 bn in additional tariffs and the potential use of International Emergency Economic Powers Act, the US is trying to add pressure and force China to give in, says a 21 April Global Times editorial. From the very beginning, China has stood firm and won’t take the initiative to start or escalate the war, but it will adopt retaliatory measures of the same strength and scale, it states.

If the US freezes China’s assets, the editorial says that scenario would lead to retaliations against US assets in China. No country would dare to buy US treasuries if Trump uses the Emergency Economic Powers Act, says Zhou Shijian 周世俭 Tsinghua Center for US-China Relations senior fellow. Japan and Russia sold US$6.7 bn and US$13.5 bn worth of US treasuries respectively in February 2018.


financial opening up unlikely to increase probability of defaults
Nanfang Daily, The Paper | 10 April

context: As of end 2017, foreign banks accounted for only 1.28% of the total assets of China’s banking financial institutions. Xi heralded a new round of economic opening up in his speech at Boao, and central bank governor Yi Gang 易纲 followed up with concrete initiatives for the financial sector. It remains to be seen, however, just how top-level advocacy will translate to concrete policies.

Countering the view that excessive cross-border financial services would increase the chance of defaults, Lian Ping 连平 Communications Bank chief economist believes that stable bank asset management and sound financial supervision make defaults unlikely in the process of opening up the financial sector. Instead, more cross-border services will bring China the benefits of optimized resource allocation and healthy sectoral development. Therefore, the current opening up is well timed, adds Lian.

Since 2007, China’s financial regulators have made several big changes, according to The Paper, including

When there are large changes in short term international capital flows, crises like the Mexican peso crisis and Asian financial crisis of the 1990s may follow. However, China is unlikely to experience a financial crisis because its central bank, People’s Bank of China, can dynamically adjust banks’ foreign exchange management measures and employ countercyclical macroprudential policies, says Lian. Since China joined the WTO, Lian argues, sectors more open to the outside world and active in the allocation of global resources have generally developed better and become more competitive.


rapid development in rural and ag e-commerce, mobile payment
Securities Times, Xinhua Net | 23 April

context: State efforts to increase internet penetration in villages are reaping dividends as more rural residents shop online, use electronic payment platforms like Alipay and Wechat Wallet, and sell farm products directly to urban consumers. This rapidly developing market may be constrained somewhat in coming months, however, with a push to introduce more standards for ag product e-commerce.

Rapid gains in rural internet access are driving development of the agriculture sector, according to officials from Ministry of Agriculture and Rural Affairs (MARA). State statistics show that 35.4 percent of rural residents, or a total of 209 million people have internet access as of end 2017. Of these, 47.1 percent have used electronic payment platforms to purchase goods both online and offline.

Tang Ke 唐珂 MARA Market and Economic Information Department director says expanded internet access has the potential to improve management of the agriculture supply chain, boost efficient use of land, labour and other resources, and help raise farm incomes. MARA has helped establish 169,000 rural information cooperatives via pilots and demonstration projects, he says, driving e-commerce transactions valued at 16.7bn. The program will be expanded to cover half of all provinces by end 2018, he says.

Wei Baigang 魏百刚 MARA Development and Planning Department director says e-commerce sales of agricultural products have grown 38.8 percent y-o-y in Q1 2018, with retail sales revenue totalling 45.27bn. Marketing activities around the Lunar New Year holiday drove high revenues, he suggests.


develop generic medicine to replace imported brands
Yicai | 8 April

context: Policies to develop the generic medicine industry exist but are fragmented. State Council issued ‘Guiding opinions on quality consistency evaluation of generic medicine’ in 2016 to encourage manufacturers to pay third-party review agencies to conduct evaluations. By end 2017, 55 percent of the 423 medicine reviews that Centre for Drug Evaluation (CDE)’s had prioritised were for generic medicines.

State Council published ‘Opinions on reforming and developing generic medicine supply and usage policies’ 3 April 2018, providing supportive policies on purchasing, insurance, and taxation for high-quality generic medicines. The Opinions call for

  • providing manufacturers with supportive policies for consistency evaluations
  • improving the quality of raw materials and packaging
  • upgrading manufacturing
  • speeding up marketing approval processes for generic medicine
  • setting up life cycle quality control and management systems
  • including high-quality generic medicine in health insurance lists

China’s market is flooded with cheap inferior medicines that lack the potency of their brand-name equivalents. Health insurers are paying for these expensive imported medicines even though their patents are expired and domestic manufacturers could produce generic alternatives, says Yicai, arguing that high-quality generic medicine will eventually replace imported brand-name medicine.

Government is trying to transform generic medicine from a big industry to a strong one, reports Yicai, explaining that 95 percent of China’s total 17,000 approved medicines are generic and 60 percent of China’s total 4,376 pharmaceutical firms produce generic medicines.


Xi offers blueprint for cyber development
Sina | 21 April

context: The concept of a cyber superpower is integral to Xi’s vision of national rejuvenation. Recent rhetoric has taken on a nationalistic tone as major Chinese tech companies like ZTE and Huawei have encountered western government sanctions. The other crucial but so far less publicised aspect of the concept, state control of information flow and sharing, may gain more prominence in light of the scandals that have embroiled Facebook.

President Xi Jinping spoke at the National Cybersecurity and Informatisation Work Conference on 21 April 2018, stressing the key goals that underlie China’s ambition to become a cyber superpower

  • serving and shaping state–society relations
    • engaging government leaders, enterprises, social groups and the public to participate governance
    • guiding public opinion by promoting positive values online
  • guarding social security
    • cracking down on cyber crimes
    • building an operation code for major online service providers
  • building economic development engine and increasing international competitiveness
    • integrating hi-tech tools like AI and big data with economic production
    • streamlining bureaucracy and increasing administrative efficiency
  • boosting civil–military cooperation


new unified rules for anti-dumping and countervailing hearings take effect
The Paper | 11 April

context: China is institutionalising its trade remedy system. Last year it focussed on helping Chinese companies battle increasing global protectionism through a new cooperation mechanism. This year its focus has moved to getting better feedback from domestic companies affected by its own trade remedy actions.

On 4 April, Ministry of Commerce (MofCOM) published ‘Rules for anti-dumping and countervailing hearings’. Taking effect from 5 April, the rules are designed to be a more detailed, transparent, more practice-oriented amalgamation of three previous regulations, writes The Paper

  • ‘Provisional rules on anti-dumping investigation hearings’
  • ‘Provisional rules on countervailing investigation hearings’
  • ‘Rules for industrial damage investigation hearings’

The move goes hand in hand with a 2014 institutional restructuring which saw Import and Export Fair Trade Bureau and Bureau of Industry Injury Investigation merged into Trade Remedy and Investigation Bureau.

Drafted with input from experts, lawyers, relevant departments and foreign advisors, the rules aim to

  • unify hearing procedure regulations and address practical problems
    • abolish distinctions between anti-dumping, countervailing, and injury investigations
    • no longer require written minutes for hearings
    • specify when stakeholders can call for hearings (Article 5)
  • protect rights of all parties involved through standardisation and transparency
    • lay out in detail stakeholders’ and investigating bodies’ rights and duties
    • keep all parties’ information confidential where appropriate (Article 8)
    • avoid unnecessarily inconveniencing involved parties (Article 8)
    • make decisions for hearings public online (Article 11)
    • give reasons for hearings and allow stakeholders to take position orally (Article 10)
  • keep investigations efficient and fair
    • give investigating body greater role in hearings (Article 17 and 18)
    • notify all parties of specific times for hearings (Article 7 and 16)
    • specify format and deadline for stakeholders’ reports to authorities (Article 15 and 20)
  • stay in line with World Trade Organisaton (WTO) regulations
    • stakeholders are free to not attend hearings, and this will not negatively impact their right to communicate objections or defend themselves to the investigating body through other means (Article 13)

industry and environment

aluminium industry facing downturn despite Rusal sanctions
The Paper, Shanghai Securities News, China Securities Journal, 21st Century Business Herald, China Aluminium Net | 23 April

context: US sanctions on Russia and the world’s second largest aluminium producer, Rusal, triggered high market expectations for Chinese products to fill the gap in supply, driving up aluminium prices since 6 April 2018. However, the US has extended the time for Rusal to comply with sanctions as of 23 April, meaning the temporary price rise for domestic aluminium will likely evaporate, mainly as a result of persistent high stockpiles and industry overcapacity.

Overall aluminium output might see slower increase or even decline thanks to supply-side structural reform. However, the industry will be facing strong overcapacity pressure and price decline in H1 2018, argues Yao Xizhi 姚希之 Antaike research director. This is caused by

  • potential increase in capacity: over 3.5 million tonnes of capacity were eliminated in 2017, with 1.5 million tonnes of new capacity starting operation. Around 2.7 million tonnes of capacity may start operation in 2018
  • restart of after heating season production restrictions: around 0.9 million tonnes of capacity is operational again after restrictions expired
  • sluggish demand: slowdown in economic growth likely to continue

Aluminium has seen overall price decline since October 2017 and around 40 percent of capacity operates at a loss, which will slow down the release of new capacity. Aluminium price is likely to rebound in H2 2018 after H1 adjustment though, adds Yao. Leading aluminium SOE Chalco released its Q1 report on 23 April, announcing its net profit reached 309 million, a 19.4 percent y-o-y decline, says The Paper. The group attributed this to declining aluminium prices and loose implementation of winter heating season production controls.

science and innovation

trade war fuels overheating semiconductor industry
Jiemian, 21st Century Business Herald | 9 April

context: Integrated chips are becoming a focus in the potential US-China trade war.Reducing reliance on US firms like Qualcomm has been a top priority for Beijing.

Shares of domestic chipmakers have been soaring, reports Jiemian, pointing out

  • local and central government support
  • growing profits
  • trade friction with the US

Reducing reliance on imports needs to speed up, argues Li Xinyan 李新颜 Founder H Fund managing director, citing international trade friction. Integrated circuits (IC) became China’s largest import category in 2017, replacing crude oil, with a US$260 bn total value and a trade deficit of US$193 bn, according to China Semiconductor Industry Association.

Local governments are contributing with projects that diversify the industry, argues 21st Century Business Herald (note: some investors argue local enthusiasm is fuelling low-end overproduction). In March 2018 Huarong Semiconductor launched a US$10 bn project in Wuxi, and Tsinghua Group and Chongqing government set up a chip design firm with 100 bn. Major projects have also been announced in Shanghai, Chengdu and Nanjing in 2018.

Central government is supporting the industry through the big fund, but investments come with too many strings attached and tend to go to established firms, says Wei Shaojun 魏少军 Tsinghua University Microelectronics Institute director, noting the fund does not sufficiently support innovation.

40 percent of chips are to be domestically produced by 2020 and 70 percent by 2025, according to the Strategic Emerging Industries 5-year plan. Over the last decade Jiangyin RunMa’s products replaced 60 percent of imports for some input materials, reducing costs for the industry by 30 percent, says Ge Shiyong 戈士勇 Jiangyin RunMa CEO. But it will take years to dismantle US dominance, says 21st Century Business Herald. Semiconductors started in the US, then production moved to Japan, South-Korea, Taiwan and finally mainland China, says Zhao Cheng 赵成 Caitong Communications Electronics analyst. Our clients will only buy products that have a US patent because that signifies top quality, says Mao Chenglie 毛成烈 Wuxi ETEK Microelectronics vice director.

According to SEMI, 26 out of the 62 fabs that will be built worldwide from 2017–20 will be in China. With projects in manufacturing and successes in testing, China’s weakness is in design, says the report. The industry will lack 80,000 people by 2020, says professor Wei. Wuxi has no upper limit for support packages for top-level talent, says the report.

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