roundup from our portfolios

October was punctuated by high profile moments in foreign relations, notably with the US and Japan. At the beginning of the month, Pence made waves with blunt assessment of China’s strategic threat. Attacking it as paranoia, Chinese commentary absorbed it as laying a new baseline, while also subtly framing it as judgement on Beijing’s earlier naivety. The US-Mexico-Canada Agreement also drew heat with its clause on ‘non-market economies’, widely interpreted as anti-China.

The threat of similar clauses in other US trade agreements is prompting China to mend fences with other potential ‘victims’, with Japan’s Abe’s visiting Beijing at month’s end, drawing reassuring reactions from analysts hoping to shore up ties with Japan. 52 corporate-level agreements were made under the Third-Party Market Cooperation framework, and a currency swap of up to C¥200 bn. Meanwhile, the RMB is under significant depreciation pressure. At a 26 October press conference, Pan Gongsheng 潘功胜 SAFE director reminded would-be short sellers of SAFE’s successful defence of the currency in 2015-16.

In other trade war news, China Feed Industry Association released new standards for pig and poultry feed, potentially cutting soybean demand by over 10 million metric tonnes. While the adjusted standard may not fully eliminate US soybean imports this year, it is likely the beginning of a permanent shift away from the commodity. State Council also released a three-year action plan to promote consumer spending on 11 October, relaxing market access across a range of service industries. While implementation remains unclear as detailed plans are still pending, most analysts are optimistic about the plan’s eventual impact.

Xi Jinping’s call for state-owned enterprises (SOEs) and internet giants to ‘bear more responsibility when the nation is at risk’ renewed fears of a new phase of ‘state advances, private retreats’. The distinction is slowly blurring, as SOEs and governments purchase equity in struggling private firms. Anxiety over the issue prompted state officials to reaffirm their ‘unwavering support’ for the private sector. Jointly interviewed by People’s Daily, Xinhua and CCTV on 19 October, Liu He 刘鹤 vice premier pledged to stabilise and reform the stock market, solve private enterprise financing challenges and push forward SOE reform. The state, Yi Gang 易纲 PBoC governor announced, is considering applying the principle of ‘competitive neutrality’ in its treatment of SOEs. High-level consensus suggests the idea may soon become a new benchmark for SOE reform.

Central United Front Work Department and All-China Federation of Industry and Commerce has listed 100 ‘private entrepreneurs of excellence’, token of the state’s ‘firm commitment’ to the private sector and market economy, according to Xinhua. But the list is also a reminder that the state picks winners, and nudges businesses to align their work with its priorities.

Efforts to win the ‘three battles’poverty alleviation, pollution prevention and managing financial riskstrive on, but not without friction. A second round of poverty alleviation work inspections launched, with a pre-inspection meeting reminding local leaders to do a better job cooperating with Beijing. Increasing central supervision drew ire, as some argue it merely increases the load on already overworked cadres and hampers experiments.


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october policy movers

policy professionals in and out of the establishment

Zhong Sheng 钟声| Tolling Bell (Party pseudonym)

A homophone for ‘the voice of the centre,’ Zhong Sheng 钟声 is one of a handful of anonymous bylines that are considered authoritative Party voices. Likely written by the People’s Daily International Department with the quiet imprimatur of Politburo staff, Zhong Sheng comments on a wide range of subjects ranging from China–US relations to Party matters. Commentaries ‘authored’ by Zhong Sheng are seen by officials and other readers as carrying far greater weight than most named authors, as they reflect Party consensus and do not simply represent a particular point of view looking for support. Other authoritative bylines include ‘Ren Zhongping’ (任仲平) (which sounds like ‘important People’s Daily commentary’) and ‘Zhong Xuanli’ (钟轩理) (homophonous with ‘CPC Propaganda Department commentary’), and like Zhong Sheng are meant to signal that a prevailing view within the leadership has been attained and the debate shop is currently closed.

Xu Qiyuan 徐奇渊 | Chinese Academy of Social Sciences senior researcher

In contrast with official calls for self-sufficiency, Xu reframes China’s economic interests to emphasise the benefits of economic integration. Believing that the US wants economic disengagement from China, Xu advocates moderate compromises to maintain economic ties. China’s core economic interests, argues Xu, are its current position in the global supply chain, its potential to move up the chain, and maintaining a fine balance between increased efficiency and risks arising from further integration. Xu advises China to win support from US corporations by amending its policies on technology transfer, market access and unreasonable subsidies. Most importantly, Xu stresses that China should continue to engage with the US; the closer the ties, the more difficult it is for the US to attack.

Jiang Xiaojuan 江小涓 | Chinese Academy of Social Sciences (CASS) professor

Laureate of the Sun Yefang Economic Science Award, Jiang joined the circle of core economic policy advisors in 2004, as vice director of the State Council Research Office. Commenting on recent economic headwinds, Jiang passionately advocates liberalisation and globalisation, urging the state ‘to grasp the strategic opportunity to step up reform’. Her recent analysis includes calls to ‘open the services market to adjust US-China trade balance’ (11 August, at China Finance 40 Forum) and ‘redraw the boundary between state and market with connectivity technologies, AI and big data’ (18 August, at Tsinghua Public Administration Forum). Even in theory, a planned economy is untenable, argues Jiang. AI, big data, cloud and connectivity technologies may enable the state to optimise economic planning, target service delivery, and improve supervision and market trust. But they can never replace the market in setting individual risk tolerance and budget and incentive compatibility constraints.


policy ticker highlights

gems from our feed of policy releases and domestic debate

geopolitics

‘going global’ and anti-China rhetoric
Global Times | 22 October

context: Analysts like Bai have taken a common approach to refuting Pence’s 4 October address, generally arguing that US criticism is hypocritical and politically motivated, and that China is the nation ultimately concerned with global welfare.

US Vice President Mike Pence labelled China’s Going Global strategy ‘untenable’ and responsible for causing varied problems within the international economic order, writes Bai Ming 白明 Ministry of Commerce International Market Research Institute deputy director. Western multinational corporations also exert negative global influence, Bai notes, yet the US has never criticised them.

US accusations against Chinese companies, explains Bai, rest on three theories

  • that Going Global is a vector of ‘debt diplomacy’
    • Pence labelled Chinese infrastructure projects deals ‘opaque’
    • in fact, China’s construction of the Hambantota port will improve Sri Lanka’s
      • regional transportation infrastructure
      • international shipping industry
      • employment opportunities
  • ‘resource grab theory’
    • at this stage, Chinese companies’ Going Global is based on mutual benefit and win-win cooperation
      • the Belt and Road Initiative (BRI) reflects these beneficial values
  • ‘technology theft theory’
    • many believe that Beijing is coordinating Chinese businesses’ investment in the US to steal American technology
      • yet some former US officials deny this: Chinese technological development is due to education and scientific talent

The US complains that China does not contribute enough to globalisation, writes Bai, while simultaneously depriving China of economic opportunities. Chinese companies’ process of Going Global should not be disrupted by those with ulterior motives, he says.

finance

Liu He 刘鹤 interview on economic and financial issues
Xinhua Net | 19 October

context: China is experiencing economic turmoil on both domestic and international fronts. Top financial policymakers, including central bank governor Yi Gang 易刚, are going all out to stabilise market expectations.

Liu He 刘鹤 vice premier received a joint interview by three key state media—People’s Daily, Xinhua and CCTV. He discussed a range of topics concerning recent developments in macroeconomy and financial markets, including

  • plummeting stock market
    • contributed to by interest rate rises in major economies, trade friction, China’s economic restructuring and market concerns regarding the private business environment and property rights protection
    • consensus between international and domestic financial agencies is that China is still one of the most valuable investment destinations
  • more reform measures from financial regulators on
    • market stabilisation
      • allowing banks’ wealth management subsidiaries to invest in capital markets
      • risk management on equity-pledged financing
      • encouraging participation of local government funds and private equity in equity-pledged financing
    • market institutions
      • equity repurchasing for listed companies
      • marketising M&A procedures and a new over-the-counter stock market trading system
      • enhancing support for sci-tech listed companies
    • long-term financing sources for the stock market
    • fostering state-owned enterprise (SOE) mixed-ownership reform asset-backed financing schemes for private firms
    • further deepening opening up
  • on private enterprise financing difficulties
    • acknowledging the importance of private firms in China’s economic development
    • targeted policies to support small and micro enterprises, but they should also improve business practice to acclimate market development
    • State Council is conducting field research on small and micro enterprise development
  • ‘state advance, private retreat’ argument is one-sided and wrong—they should complement and help each other
  • balancing de-leveraging and growth is a core task of China’s economic restructuring; three aspects will contribute to a bright future
    • the rise of the middle class and aging population to create huge and diversified demand
    • new technological revolution featuring bio and information technologies
    • green development concept

agriculture

new industry standard cuts protein requirements in feed
Feedtrade | 27 October

context: This adoption is not a surprise. It follows a 30 September 2018 call for comment, and months of direct statements from the feed industry that soy ratios would be cut. While imported protein sources were discussed, US soybeans were not directly named as a factor in coverage of the event.

China Feed Industry Association (CFIA) held an event to release two new group standards for ‘piglet, feeder and fattening formulated feeds’ and ‘layer and broiler formulated feeds’ on 26 October 2018. Wang Linwen 王黎文 CFIA quality and certification division director presented the new standards, noting key factors including

  • a need to reduce demand for feed ingredients, particularly protein feed inputs where import dependence is close to 80 percent
  • an interest in cutting the protein ratio to reduce metabolic burden on farmed animals and decrease the environmental impact of livestock waste
  • advances in technology and research enabling lower crude protein and phosphorus in compound feed through addition of synthetic amino acids and enzymes

A group of 29 leading feed and livestock enterprises have committed to adopt the standards, including New Hope Liuhe, Dabeinong and Guangdong Wens Group. The event included livestock industry association leaders, academic experts from leading agricultural research universities and institutes, representatives from leading livestock companies, and government officials including Yang Zhenhai 杨振海 National Animal Husbandry Station director and Zhang Haitao 张海涛 Ministry of Agriculture and Rural Affairs (MARA) administrative office director.

society

MoE to evaluate world-class universities
ScienceNet (1), ScienceNet (2) | 22 October

context: World-class 2.0 is a higher education development strategy to create world-class universities and disciplines. It marks a shift from the 985 and 211 world-class university projects that channelled funds to a small number of elite universities. Announced by State Council in late 2015, the plan combines and opens up 985 and 211 funding to more universities, making higher education funding more competitive and equal.

One year after announcement of the world-class universities name list (including 36 level A universities and 6 level B universities), there have been indications that MoE will begin evaluations of their operations shortly.

MoE convened a meeting on pushing forward world-class 2.0 construction on 29 September in Shanghai, with participants from 137 universities. Chen Baosheng 陈宝生 MoE minister spoke, noting Xi Jinping’s recent speech at the national education conference, and urged universities to

  • cultivate high-quality talents
  • serve national strategic needs
  • improve innovation through fresh thinking
  • deepen international cooperation
  • enhance development and evaluation of teaching quality
  • examine individual universities’ competitive advantage

A meeting at Renmin University on world-class universities was held on 10 October. Liu Weida 刘伟达 Renmin University president directed the university to attach importance to evaluations and accelerate world-class 2.0 construction because MoE will give a ‘yellow-card warning’ to those moving slowly. A similar meeting was held at Zhongnan University, where Zhou Kezhao 周科朝 Zhongnan University vice president began a mid-session evaluation to help the school works towards world-class status.

governance

Beijing confronts officials’ ‘middle kilometre problem’
People’s Daily | 23 October

context: Recent evidence indicates that Beijing is open to being more creative when it comes to evaluating local officials. But it is becoming painfully apparent that nearly constant inspections of lower-level governments are taking a heavy toll on cadres and their local responsibilities.

Referring to growing concern and complaints from some officials that central-level investigations of local affairs are taking time away from the very task Beijing has insisted they carry out, a report in People’s Daily asks, how did formalism emerge in inspection work?

Inspection and assessment, the article notes, should improve the work style of local cadres by holding them accountable for implementing central directives and carrying out their duties. But local officials often do not know whether they should be spending more time and energy implementing solutions to local problems or preparing for another round of investigation that will likely require rectification on their part. Beijing urges local officials to concentrate on the ‘last kilometre’—making sure solutions reach everyone in society. But continual rounds of inspections are creating bureaucratic burdens for the ‘middle kilometre’, the cadres assigned to implement those solutions. Enormous amounts of money, time and other resources are spent, according to the paper, on officials readying and presenting materials for inspection, instead of allowing them to focus on actual policy.

The article argues that the standard should be about whether the masses are happy and satisfied, for it is only officials who read inspection reports and investigation results, not residents. Investigations should start focusing on the current state of local affairs, rather than trying to determine whether cadres are sufficiently diligent in all their duties.

trade

experts brush off US effort to block Chinese trade with FTA provisions
Yicai | 11 October

context: The US-Mexico-Canada Agreement includes a provision that allows the US to terminate the deal if other members initiate trade negotiations with China without prior notice, as a ‘non-market economy’ by the agreement standard. If it becomes a prototype of other US trade deals with the EU or Japan, it may undermine China’s trade expansion efforts.

China has stressed on multiple occasions that there is no ‘non-market economy country’ clause in the WTO multilateral trading rules, says Gao Feng 高峰 MofCOM spokesperson. Clauses of this type only exist in domestic laws of certain member countries, he says. Gao maintains that the goal of establishing free trade zones is to facilitate trade instead of sidelining other countries.

The practical impacts of the clause are limited, because other countries may not accept US demands to sever trade relations with China, says Tu Xinquan 屠新泉 UIBE China Institute for WTO Studies dean, adding that China can promote trade with Mexico and Canada in ways that do not involve a free trade agreement.

A consensus has yet to be reached within the EU regarding provisions on reduced tariffs and other issues in the US-EU trade deal. Due to competing demands of different countries within the EU, a consensus will not be easy, says Dong Yan 东艳 Chinese Academy of Social Sciences researcher.

China opposes the concept of domestic laws overriding international law, says Gao, stating that countries should attract trading partners based on market potential and policy environment.

Regarding the US-China trade war, Gao says that as the world’s two largest economies, a certain degree of competition between the two is natural. However, both past precedents and the current environment both suggest a larger demand for bilateral cooperation, concludes Gao.

industry and environment

environmental experts: winter pollution targets not relaxed

Jiemian | 16 October

context: These experts’ comments indicate the steel sector is likely to experience at least the same level of output decline as last winter. Implementation of ultra-low emission standards in the steel sector alongside environmental inspections also suggest that environmental requirements remain stringent and enforced.

Ministry of Ecology and Environment (MEE) has not relaxed this winter’s pollution control requirements by setting lower pollution reduction targets, say environment experts close to MEE. The 2018 winter pollution control plan requires that both average PM2.5 concentration levels and heavily polluted days drop 3 percent year-on-year, lower than the 5 percent initially proposed. The ministry lowered targets because

  • this year’s base-level pollution is relatively low, as Jingjinji and surrounding regions exceeded pollution reduction targets last year
  • unfavourable weather conditions make pollution reduction more difficult

The experts add that city-specific targets and accountability mechanisms continue pressuring local governments, who are also incentivised by additional central financial support for air quality improvements. Many cities, including Handan and Tangshan in Hebei and Linfen in Shanxi, have released production suspension regulations. Jiemian also notes that this year’s production suspension has expanded to include areas outside of Jingjinji such as the Yangtze River Delta. The draft ‘Air pollution control plan for Yangtze River Delta autumn and winter 2018-19’ aims to achieve around 5 percent reductions in both PM2.5 levels and the number of heavily polluted days.

Daily crude steel output might experience some level of decline as production suspension policies kick in, predicts Wang Guoqing 王国清 Lange Steel Information Research Centre director.

science and innovation

autonomous car industrial policy to learn from NEV failures
Weixin, 21st Century Business Herald | 18 October

context: With NEVs in the implementation phase, industrial policy is shifting focus towards AD. Although the state will seek to avoid the subsidy misallocations and poor infrastructure planning that plagued NEV policy, its approach and policy tools have not fundamentally changed.

Car makers and internet giants pledged to increase collaboration at the annual Connect and Autonomous Vehicle (CAV) Summit held 18-21 October 2018 in Beijing, reports China Auto News. The autonomous vehicle industry should be identified as a strategic emerging industry (though it is not yet explicitly listed in the Catalogue), said Dong Yang 董扬 China Association of Automobile Manufacturers executive director at the event, noting its

  • high value-added potential
  • extensive industry chain, including specialised firms and SMEs
  • technological sophistication
  • spill-over effects in knowledge, skills and institutional management

Having learned from new energy vehicles (NEV), industrial policymakers will avoid subsidy-induced overcapacity for CAVs, said Miao Wei 苗圩 Ministry of Industry and IT (MIIT) minister. Miao called for

  • balancing funding for research and manufacturing capacity
  • global cooperation
  • firm-led innovation
  • standard harmonisation
  • research, development and demonstration (RD&D)

Wan Gang 万钢 former MIIT minister highlighted challenges, including

  • inconsistent national strategic planning
  • technological barriers to autonomous driving (AD)
  • integration between information, telecommunications, automotive and transportation industries
  • lack of infrastructure (Note: an issue also for NEVs)

Car makers called for tech self-sufficiency, indigenous innovation and standards to be set before rather than after vehicles go into mass production, agreed Xu Heyi 徐和谊 BAIC president, Li Shufu 李书福 Geely president and Wang Chuanfu 王传福 BYD president. Developing CAVs also needs internet connectivity, testing data sharing, and AD software and services, added Pony Ma 马化腾 Tencent CEO, Li Yanhong 李彦宏 Baidu CEO and Wang Jian 王坚 Alibaba CTO.



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