roundup from our portfolios

When launched at last year’s 19th Party Conference, ‘Xi Jinping thought’ on foreign policy stressed self-confidence and Party authority. Repeated by Xi at the Central Foreign Affairs Work Conference 23-24 June, the space for debate seemed to narrow further. Yet doubt, debate and cautious stocktaking remained in the air. Much uncertainty was due to Trump, whose odd concessions, e.g. on ZTE and eagerness to deal with Kim Jong-un, collided with trade threats and strategic tensions, a chaotic mix not easily amenable to Xi’s ‘China solution’.

Tensions renewed in the South China Sea (SCS) following US freedom of navigation patrols near the Paracel Islands, and withdrawal of Washington’s invitation for China to participate in the 2018 Rim of the Pacific (RIMPAC) Exercise. SCS issues have become a barometer for China­–US relations, writes Hu Zhiyong 胡志勇 Shanghai Academy of Social Sciences. Despite its preference for cooperation with regional neighbours and the US, warns Hu, China should be prepared to resort to military action if US harassment persists. In contrast, Yang Li 杨力 National Institute for SCS Studies vice director, argues that the US has now accepted China’s role in upholding regional peace and security, creating ample room for US–China cooperation.

Admitting its own economy may suffer in the process, Beijing is confident it can successfully counter US tariffs and pressure Trump via his support base. Recognising the harm to local stability and to world trade, it remains adamant in its support the multilateral order. Ahead of the mid-July WTO biennial review, when its trading behaviour will be scrutinised by WTO partners, Beijing issued, 28 June, a white paper on China’s achievements in the WTO. The paper lays out the record as Beijing sees it, reiterating that ‘China’s open door will not be closed’. EU and China have already set up a working group to continue WTO reform.

Economic growth faces significant downward pressure in H2 2018, says Wang Yiming 王一鸣 State Council Development Research Centre vice director. Some stimulus is called for given the tough global environment and contraction due to domestic structural reform, but this, he warns, must not weaken financial deleveraging. Targeted monetary expansion is the state’s way out of this bind, throwing a lifeline to small and micro businesses and rural development. The Individual Income Tax Law will be amended, boosting domestic demand and improving services.

A central readjustment scheme for provincial pension schemes was set up by State Council 13 June. It will collect 3 percent of each provincial fund in a central fund, reallocating it to balance regional disparities. Commentators anticipate pressure on provincial governments, which will be forced to take responsibility for city- and county-level pension deficits under their jurisdictions. To encourage private capital investment in the healthcare industry, National Health Commission (NHC) announced 19 June it would simplify market entry and reduce regulations on medical institutions.

A Supreme People’s Court (SPC) interpretation broadly redefines terrorism, covering major forms of religious expression in Xinjiang and providing legal justification for heavy-handed security measures. Meanwhile, a judicial upgrading in the form of People’s Courts Organic Law second draft plans to make courts less vulnerable to the influence of local officials and more accountable to people’s congresses at all levels. The official plan to set up special courts to handle Belt and Road-related commercial disputes was released to the public five months after its approval by the Central Commission for Comprehensively Deepening Reform. Central environmental inspection teams are travelling around ten provinces with heaviest pollution to examine the results of cleanup measures and punishing officials who miss environmental targets.

The ‘most stringent solar power regulations yet’, announced 4 June, strike a blow to the industry. The new rules restrict 2018 solar power project construction and slash subsidies. While industry outrage prompted regulators to soften regulations, experts lowered their 2018 solar capacity forecasts and predict faster cuts to on-grid solar power tariffs (prices paid to power producers) toward parity with coal. Despite this setback, the state remains committed to a long-term objective of lowering prices for renewable power to the same levels as electricity produced from coal. The regulations may improve the health of the industry long-term by squeezing out small players and increasing consolidation.

State-led research programs in agricultural technology—from salt-tolerant rice, to automated farming technology, to the newly launched Gaofen-6 agricultural observation satellite—are taking off this month, with global implications. State interest in building internationally competitive agriculture companies in seed, equipment and beyond is strong. As agricultural imports rise, policymakers are also concerned about food security among trading partners, recognising that imports could suffer from shortages overseas. Chinese Academy of Agricultural Sciences (CAAS) established a new Centre for International Agricultural Research in late 2016 and has now kicked off dozens of joint research projects with BRI countries. Highly advanced ag technologies will, says Wang Jianyu 王建宇 MIIT deputy inspector, help address critical challenges including an aging farm labour force, low production efficiency and pollution.

The State Council issued a new academic code of conduct (COC) to crack down on plagiarism, intellectual property infringement, peer-review fraud and, above all, sci-tech funding abuse. Ministry of Sci-tech (MoST) rolled out measures to consolidate state key labs (SKL). Aiming for quality rather than quantity, SKLs need to meet criteria in positioning, layout, incentive mechanisms and research capabilities. To bridge labs with the market, sci-tech start-ups and small and medium-sized enterprises (SMEs) received tax cuts and credit incentives. Nonetheless, sci-tech unicorns struggled to enter domestic capital market despite the new China Depository Receipts (CDR), a new financial instrument crafted to allow overseas-listed companies to trade on Chinese exchanges.


may policy movers

policy professionals in and out of the establishment

Gong Xifeng 贡锡锋 | CAAS Department of International Cooperation (DIC) director

Gong’s profile has risen since 2014, when he became vice director of DIC, followed by two years running the local CAAS outpost in Xinjiang. In 2017, he returned to DIC in Beijing as director—his Xinjiang experience will serve him well as partnerships with Belt and Road countries in Central Asia become a top priority. His opinions on ag ‘Going Global’ stick to the Party line, and his growing presence at domestic and international events alike suggest his star is rising. An agricultural economist by training, Gong has built a career in international agricultural technology and trade cooperation, based at CAAS since the early 2000s. Previous contributions include work with the International Potato Centre’s China projects and leading a China–Norway project focused on reducing impact of agrochemicals on food security, food safety and the environment.

Dong Dengxin 董登新 | Wuhan University of Science and Technology Institute of Finance and Securities dean

Expert in modern finance and macroeconomics, Dong led Ministry of Education-sponsored research on the US private pension system. The established ‘provincial pension management system’ is, he argues, underdeveloped in six areas: contribution rate setting, standards for income declaration, fund management, service models, information systems and institutional management. These shortcomings mean there is a long way to go before provinces can truly meet Vice Premier Han Zheng’s 2020 goal. Meanwhile before a nationwide pension management mechanism is fully operational, notes Dong, provincial governments are still liable for ensuring basic pension fund stability.

Wang Sicheng 王斯成 | China Photovoltaic Society vice director

Wang predicts that the state will reorient its policies to support solar power projects that can compete with coal without government subsidies sometime in the next three years, with total installed solar capacity of over 150 GW by 2020. Immediately after the June policy announcement, Wang urged the government to reconsider, warning that it would lead to losses of more than 1 tn and 2.5 million jobs. Wang also leads research efforts in solar power technologies and complementary wind–solar systems and helped draft national solar power standards.


policy ticker highlights

gems from our feed of policy releases and domestic debate

geopolitics

increased China–Russia energy cooperation needed
Weixin | 8 June

context: While press releases following the 24 May 2018 meeting between Vladimir Putin and Vice President Wang Qishan express a shared vision for China–Russia international cooperation, the failed sale of a stake in Russian oil firm Rosneft to the Chinese firm CEFC China Energy created friction. Qatar stepped in to replace China, leading some analysts to speculate that Putin’s ‘pivot to the east’ is actually a pivot to the Middle East.

In recent years, international resource management underwent deep change, including technological innovation and shifts caused by changes in supply and demand. The impact on China’s energy strategy and relations with Russia was profound, writes Feng Yujun 冯玉军 Fudan University International Research Institute vice president. China should increase its cooperation with Russia and promote a long-term energy management strategy.

Several factors have prompted this shift, writes Feng, including

  • the US ‘shale revolution’
    • shale trade has loosened oil export controls, increasing prospects for China–US energy cooperation
  • Western sanctions have depressed oil prices and created impediments for Russia’s energy industry
    • Russia already extracted peak value from existing resources; it will need to increase its investment in Siberia, the North Pole or the far East if it hopes to maintain its current manufacturing power
    • regarding natural gas, Russia’s pricing expectations are out of line with reality, making it unable to compete in the Chinese market
  • OPEC’s decreasing global importance
  • increasing energy cooperation in Eurasia, East Asia and among Caspian Sea countries

To address these challenges, China needs to understand global resource development trends, and establish its own medium and long-term strategy. Feng argues that any Chinese approach must promote

  • technological innovation
  • creation of a Shanghai Cooperation Organisation energy cooperation mechanism
  • engagement in global and regional resource governance
  • a balanced approach to economic development and environmental costs
  • increased China–Russia cooperation
    • including in the North Pole and regarding natural gas

China’s reliance on foreign energy is both a weakness and a strength, writes Feng, as China can unleash its ‘structural power’ to influence market mechanisms. In this capacity, China should push for creation of an international natural gas trading platform.

finance

state releases more credit to support small businesses

Finance World (1), Finance World (2), Ifeng Finance, Xinhua Net | 21 June

context: The State Council executive meeting decided to lower reserve requirement and direct extra credit to small businesses. The government seeks to strike a balance between deleveraging the economy and sustaining growth.

The State Council executive meeting decided on 20 June 2018 to adopt five measures supporting inclusive financing for small and micro businesses, reports Xinhua News. The five measures are

  • raising the credit line for refinancing supporting small businesses and lowering the refinancing interest rate
  • from 1 Sep 2018 to end 2020, raising the VAT credit line from 1 to 5 million for eligible small businesses, and individual business owners
  • prohibiting financial institutions from charging additional fees to small businesses for services such as fund management
  • including loans to small businesses into the medium-term lending facility (MLF) collateral scope, up to a limit of 5 million
  • using selective lowering of banks’ reserve requirement (RR) to release credit to small businesses

Selective lowering of RR is the most controversial among the five measures. Based on two precedents this year, a selective RR cut stipulates that extra money released from lowering RR shall be used for

  • first, paying back MLF to People’s Bank of China (PBoC)
  • second, issuing loans to small businesses

Lowering RR is controversial among central bankers and investors. On one hand, banks and corporations experienced tight liquidity due to strict deleveraging policy, and the economy faces downward pressure, says Liang Hong 梁红 China International Capital Corporation chief economist. On the other hand, lowering RR might induce excessive optimism and harm the deleveraging campaign. Therefore, PBoC has been resorting to reverse repo and medium-term lending facility to inject liquidity, says Xu Zhong 徐忠 PBoC Research Bureau director.

Banks will also benefit from an RR cut with less interest spending on MLF, according to Wang Jian 王剑 Guosen Securities chief banking sector analyst. A targeted RR cut is consistent with supply-side reform and will be used regularly to hedge against tightening credit, suggests Deng Haiqing 邓海清 Renmin University visiting professor. Deng also projects further depreciation of RMB under lower RR.

agriculture

‘unmanned farming’ field test launched in Jiangsu

Farmers’ Daily | 4 June

context: As agricultural technology advances and rural labour increasingly becomes a bottleneck, policymakers are interested in the potential of automation in the farming sector. Such technologies are also promising for very large, remote tracts of farmland in Belt and Road countries like Russia and Ukraine.

A long-term field test of agricultural automation technologies including driverless tractors and unmanned aerial vehicles (UAV) was launched on 2 June 2018 in Xinghua city, Jiangsu. The field test will run for seven years, says Pang Chunlin 庞春霖 Telematics Industry Application Alliance (TIAA) secretary general. TIAA will oversee its operation, with guidance from Ministry of Industry and Information Technology (MIIT) and Ministry of Agriculture and Rural Affairs.

Wang Jianyu 王建宇 MIIT deputy inspector says the integration of sensors, precision navigation, artificial intelligence, cloud computing, big data, and automation into traditional agricultural operations is accelerating. Adopting advanced technologies can help address an aging farm labour force, low production efficiency, high pollution output and low added value of ag products, says Wang.

Yan Xiaohong 颜晓红 Jiangsu University president says the field tests will bring together a range of local technologies and techniques appropriate to unique domestic soil and crop types, including paddy fields. If automation technology can be adopted in these farm environments, it will bring about ‘earth-shaking changes’ for agriculture in China and around the world, he says.

Representatives from the Ukrainian Embassy in Beijing and a Russian agtech company attended the launch event.

society

provincial governments to set up unified pension systems by 2020
Beijing Business Today | 13 June

context: Although Beijing has recognised that some degree of central involvement is necessary to achieve regional parity in pension funds, the real pressure will be on provincial governments, who will be held responsible for for city- and county-level fund deficits.

After many years of delay and difficulty, State Council published a plan for a pension fund adjustment system on 13 June, reports Beijing Business Today. Under the plan, central government will take three percent from each provincial pension fund and redistribute it to provinces with fund deficits. At a 11 June State Council session on the plan, Han Zheng 韩正 vice premier announced a key measure to push provincial governments to set up unified pension systems for their cities and counties by 2020.

While Beijing has pushed provincial governments to take over city-level pension funds for decades, inspections found that only four municipality cities and one province have followed through. Others have only achieved Beijing’s aims nominally, such as by setting up a provincial-level adjustment fund similar to the new central one. Han Zheng’s goal calls for provinces to set up ‘real’ unified systems, which would lay the groundwork for a national system. The national adjustment fund, meanwhile, is the central government’s first step towards such a national system, says Qi Chuanjun 齐传钧 Chinese Academy of Social Sciences Social Security Research Centre.

governance

new era requires intelligent governance
People’s Daily | 20 June

context: This piece embodies the technocratic view on improving governance: with better digital tools, government will be more effective and responsive to new challenges. Calling for breaking through institutional constraints, the commentary demonstrates high-level concern with fixing the currently fragmented employment of technology which has stymied improvements in efficiency; lack of standardisation and data compatibility has been a headache in building a better social grid and making effective, centralised decisions.

We must fully recognise intelligent governance as an inherent requirement of the New Era, says an essay in People’s Daily, recommending to

  • establish the concept of intelligent governance, speed up intelligent-isation to face new challenges created by technology
  • improve digital services
    • integrate and share government data
      • break through current data constraints by building an integrated internal government information system and resource platform for sharing information
      • strengthen and improve public services using new technologies and encourage governing bodies to use data according to the law
      • solve imbalances in urban-rural data collection and sharing
  • build smart cities
    • strengthen building of smart infrastructure
    • promote connectivity of data in different fields
    • improve efficiency of data use by integrating cloud computing, big data analysis and AI, and mining of ‘data pools’ to better enable real-time data updates
  • explore new models of online governance
    • explore implementation of Internet+ mass line, mobilise the active participation of the masses in governance
    • adhere to the guidance of socialist core values and strengthen publicity
    • encourage private volunteers and social organisations to participate in governance

trade

EU and China to set up joint working group on WTO reform
21st Century Business Herald,The Paper | 25 June

context: While Trump threatens to impose 20 percent tariffs on EU automobile exports, the EU is negotiating with China to expedite a bilateral investment agreement and reform WTO rules. The China–EU dialogue aims to boost confidence in the global trade system and fend off a growingly protectionist US.

The seventh China–EU High-level Economic and Trade Dialogue, co-chaired by Liu He 刘鹤 vice premier and European Commission vice president Jyrki Katainen, was held on 25 June 2018 in Beijing.

Liu outlined some goals for both sides

  • exchange lists of proposals regarding a bilateral investment agreement during the 20th China-EU Leaders’ Summit to be held next month in Beijing
  • determine the timeline for the 17th China-EU Geographical Indication Agreement negotiation and announce it during the 20th Leaders’ Summit
  • expedite China’s signing of the Government Procurement Agreement
  • open up market access for agricultural products and set up mutual accreditation process for organic products
  • EU to expedite legislative process and set a clear timeline on authorising Chinese accrediting institutions
  • sign a document related to climate change and a joint investment fund during the 20th Leaders’ Summit
  • promote cooperation under the Belt and Road initiative
  • organise a series of events related to China–Europe Tourism Year

On the issue of market access, Liu appealed to the EU to relax investment restrictions in acknowledgment of China’s efforts to liberalise the market for foreign investment.

In addition, both sides agreed to set up a joint working group to strengthen the multilateral trade system through reforming and adapting World Trade Organisation (WTO) rules to accommodate new global trends, reports 21st Century Business Herald.

industry and environment

NEA puts the brakes on solar power
National Energy Administration, Jiemian, Caixin EnergyState Council | 4 June

context: The policy, dubbed ‘the most stringent solar power regulation’ yet, dealt a heavy blow to a solar industry already bruised by delayed subsidies and overcapacity. On the positive side, it will spur a new round of consolidation.

On 31 May, National Development and Reform Commission (NDRC), Ministry of Finance and National Energy Administration adjusted 2018 solar power construction quotas and on-grid tariffs, specifically

  • suspending allocation of utility-scale solar power quotas in 2018
  • allocating a quota of about 10 GW for distributed projects
  • starting 31 May 2018, reducing benchmark on-grid tariffs for newly operational solar power projects by 0.05 per kWh
  • lowering subsidies for specified distributed solar power projects by 0.05 per kWh
  • not changing subsidy rates solar projects undertaken to reduce poverty
  • allocating utility-scale solar projects through a competitive bidding processes

The new policy has sparked turmoil in the solar sector. It will shatter the solar manufacturing industry, leading to losses of more than 1 tn and 2.5 million jobs, estimates Wang Sicheng 王斯成 China Photovoltaic Society vice director. Expecting declining demand from domestic solar power producers, some manufacturers are likely to increase exports, according to China International Capital Corporation Limited.

Reduced construction quotas suggest that only around 25 GW of additional solar capacity will be installed in 2018, predicts Wang Shujuan 王淑娟 Investment Association of China expert consultant. Solar power stocks also plummeted on 4 June, reports Caixin Energy.

The policy comes after NDRC already lowered 2018 on-grid tariffs for solar power by 0.05 on 22 December 2017. Cutting tariffs twice in one year indicates that the government has broken with tradition, and more frequent revisions are possible as the government subsidy gap continues to widen, notes Wang.

science and innovation

Science and Technology Daily editor-in-chief: don’t believe the hype, China is behind in these 30 technologies
Weixin, Science and Technology Daily | 26 June

context: State media have hyped Chinese scientific achievements for years, often forgetting to mention that key components of domestically developed aircraft, high speed rail or computer chips are imported or developed through international partnerships. Especially after trade friction with the US intensified, many called for stepping up R&D to quickly close the gap. Now the editor-in-chief of Science and Technology Daily is calling for a more level-headed approach and argues China still has a long way to go in many areas, provoking fierce debate between patriots and rationalists.

China’s science and technology is much further behind other countries than propaganda suggests, says Liu Yadong 刘亚东 Science and Technology Daily editor-in-chief. Liu questions superficial celebrations of technical achievements, arguing it impedes the quest for underlying scientific principles. China lacks craftsmanship, academic persistence and patience, says Liu. Liu backs his argument with a series of articles in Science and Technology Daily that identified 30 critical technologies in which China will rely on imports for the foreseeable future, including

  • information and communication technology
    • algorithms for motion planning and control of robotics
    • operation systems
    • mobile phone radio frequency (RF) circuits
    • resistor–capacitor circuits (for mobile phones)
  • electronics
  • engineering equipment
    • aircraft engines (for domestically developed COMAC C919)
    • heavy gas turbines
    • ITO (Indium-Tin Oxide) sputtering targets
    • tunnel boring machine main bearings
    • underwater connectors
    • underwater robot welding technology
  • new materials
  • biotechnology
    • pharmaceuticals, especially
      • individual-nucleotide resolution UV cross-linking
      • immunoprecipitation (iCLIP) to identify RNA duplexes
    • transmission electron microscope (TEM)
    • imaging sensor technologies for CT applications


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