roundup from our portfolios

Geopolitical maneuvering at multilateral meetings was in sharp focus this month, following the APEC and G20 summits. Outcomes were modest on all fronts, with the APEC summit failing to produce a joint statement and G20 efforts constrained by continued China–US tensions. A deep divide remains between China and the US on a wide spectrum of topics, which seems unlikely to change in the 90-day truce brokered at the G20 Xi-Trump meeting. On a brighter note, the China International Import Expo finished on 10 November, racking up deals worth some US$58 bn.

Policymakers remain committed to diversifying trade partners, passing up the US and its allies and favouring a host of smaller suppliers across Belt and Road countries. Market newcomer Kazakhstan gained access for barley and corn just as an anti-dumping investigation into Australian barley was announced by the Ministry of Commerce.

In a special seminar with private entrepreneurs, Xi Jinping 习近平 addressed widespread private sector concern over a new phase of ‘state advances, private retreats’. Central and local government agencies, state-owned banks, and politically connected financiers were also called on to provide financial relief funds for troubled firms.

National Development and Reform Commission greenlit stimulus in the form of three infrastructure projects with total investment of 132.41 bn, more than quadrupling the volume of investment in Q2. While one official claimed ‘hitting annual employment targets will not be a problem’, State Council passed a proactive employment stability plan the next day. Commentators see unemployment pressures mounting, including in cities dependent on traditional industries where factories are closing but employment support does not follow.

With the arrival of peak winter power demand, coal imports are under the spotlight again. NDRC is determined to keep prices high and cap them at 2017 levels to benefit domestic producers. This leaves very little room for imports in November and December, but it remains unclear whether the restrictions will continue into 2019. Numerous senior leadership changes in the power sector this month also signal potential reforms and M&As, with new heads of State Grid, Huaneng Group, State Power Investment Corporation, China Southern Power Grid, and the National Energy Administration.

Debate over Party and state reform continues to strain centre–local relations. While leaders now seem to agree on the importance of selecting better candidates, a number of localities are experimenting with their own initiatives to improve governance with those already in place. Guangdong is employing big data; a city in Jiangsu has constructed an early-warning system to identify residents’ concerns and see how cadres respond to them; and in Sichuan, lazy cadres are being punished. But the government is quick to note that more than a few have been unjustly accused. These local experiments offer some hope for alternative models of political or at least administrative reform.

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november policy movers

policy professionals in and out of the establishment

Tan Tieniu 谭铁牛 | Chinese Academy of Sciences (CAS) academician

An IT engineer and globally renowned automation scientist trained at Imperial College London, Tan is ‘China’s top AI expert’. Founder of AI software firm Watrix, he leads the CAS Institute of Automation, where he researches image processing, computer vision, and pattern recognition. Tan was a delegate to the 16th, 17th, 18th and 19th National Party Congresses, and appointed deputy director of the Liaison Office of the Central People’s Government in the Hong Kong Special Administrative Region (SAR) in 2017. His posting to Hong Kong was widely interpreted as an assertion of Beijing’s cyber and data sovereignty over the SAR. Prior to the Politburo study session on AI, Tan delivered a lecture on AI history and trends to the National People’s Congress standing committee, encouraging studies on AI’s social impact and legal frameworks. He also highlighted original research, indigenous and controllable innovation, talent training and global governance.

Long Yongtu 龙永图 | former Ministry of Foreign Trade and Economic Cooperation (now Ministry of Commerce) vice minister

Long says the global trading system is going through profound, complex and unprecedented changes. These include the under-fulfillment of WTO functions to formulate trade rules and arbitrate trade disputes. Other challenges come from regional and bilateral trade agreements which are gaining popularity and thus undermining the credibility of the WTO. In response, Long suggests that China prepare a contingency plan: both firmly support the authority of the WTO system and proactively seek to join widely accepted plurilateral rules as substitutes. In particular, he notes the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Initiatives by companies towards the formulation of global trade rules should also be supported, adds Long, citing the Electronic World Trade Platform (eWTP) founded by Alibaba.

Jin Keyu 金刻羽 | LSE associate professor of economics

Jin, a Harvard economics PhD and LSE professor, is not overshadowed by her distinguished family background as daughter of Asian Infrastructure Investment Bank president Jin Liqun 金立群. She writes for international economic journals, discussing industrial structure and capital flows, composition and growth effect of current account, and growth impact of credit constraints. An eloquent communicator, she writes and speaks frequently in the Chinese and English media. On the economy, Jin argues that despite opening up and reform, redistributed labour resources and improved efficiency, capital still concentrates in inefficient state-owned sectors that enjoy over 50 percent investment but contribute only 30 percent of GDP and 15 percent of employment. Correcting distorted capital allocation will bring enormous growth potential for China—a 60 percent productivity increase if capital utilisation is comparable to the US, estimates Jin. Currently, financial stability is more important than GDP growth because potential financial risks have a domino effect on many other problems, she says.

policy ticker highlights

gems from our feed of policy releases and domestic debate


G20 progress unlikely to resolve China–US tensions

Cfisnet | 27 November

context: Expectations are high for the G20 summit, following disappointing results from the recent APEC summit in Papua New Guinea and ongoing frustration with WTO reform. While a range of issues are on the agenda, Chinese analysts have expressed early interest in the meeting’s impact on trade war tensions.

Despite keen interest in outcomes of the Trump–Xi meeting on the sidelines of the G20 summit, they are unlikely to moderate current tensions in the China–US relationship, writes Lu Feng 卢锋 Beijing University National School of Development professor. However, through acceptance of a bilateral framework agreement, both sides can increase cooperation and decrease tensions. Improvements in China–US relations will in turn benefit the G20, helping to protect global economic development.

US unilateral policies damage the interests of other nations and create tremendous global economic uncertainty, writes Lu. In response, Chinese policymakers have redoubled efforts to promote open and inclusive economic development. Despite these measures, the Chinese economy is facing increasing downward pressure, increasing the need to eliminate institutional obstacles to economic growth and control trade war risks.

In the medium and long term, Lu argues, China needs to coordinate the economic needs of both the US and China in order to continue to adhere to principles avoiding conflict and confrontation.


Li Yang: capital markets are troubled, with too many political functions

Finance World | 13 November

context: A bearish stock market increases equity-pledged loan default risks. When price reaches the risk-tolerance redline, investors have to sell equity collateral to avoid more losses, creating a vicious spiral that leads to further stock price decline. Financial policymakers have been mobilising resources to save the market. Long-term consequences of these emergency responses, however, remain uncertain.

The current capital market arrangement is pretty depressing, says Li Yang 李扬 Chinese Academy of Social Science researcher. He argues China’s capital market is still tangential to the national economy, with several outstanding issues

  • capital market has a low correlation to economic fundamentals
  • capital market does not provide risk management mechanism; it becomes a source of risk
  • participants focus more on fundraising and less on value investments
  • the original intent of building capital markets was to improve corporate governance through corporatisation, but many listed companies’ governance structures are chaotic and worse than non-listed firms
  • developing capital markets should improve investment structures and raise direct financing ratio, but they don’t contribute much to de-leveraging

Capital markets are associated with too many political functions, adds Li. Achieving political goals should not be incumbent on capital markets, as they are not all-powerful. The only thing that capital markets can do is improve resource allocation efficiency, and making them a political tool will distort this function. But now capital markets have even become a vehicle for poverty alleviation.

Using political logic to develop capital markets could easily fall into the trap where regulators over-emphasise stock price, financing volume, transaction, and total market volume. These indicators are implicitly or explicitly treated as convenient indicators for market performance, overlooking micro-level issues, says Li.

Capital markets become a casino for speculative money, as they cannot reflect either economic fundamentals or company operations—capital markets should be a financing channel in themselves, but now they require external support to sustain operation, adds Li.


rising demand, diversified trade partners, and a shift west for grain and oilseed imports

China Securities Journal | 13 November

context: As policymakers look to diversify grain import sources away from reliance on the US and toward Belt and Road countries, the role of land ports and infrastructure in western and northern regions has become increasingly prominent. Russia, India and Kazakhstan are all on track for major market access gains in grain and oilseed categories this year. Ye’s forecast that meat consumption will reach 123 million tonnes annually stands in stark contrast to current levels, estimated at roughly 70–80 million tonnes.

Despite substantial progress in safeguarding food security, Ye Xingqing 叶兴庆 State Council Development Research Centre (DRC) Rural Economic Research Centre director argued more diversity is needed in grain import sources as domestic grain consumption has not yet peaked, reports China Securities. On the basis of population and economic development scenarios as well as diet structure, Ye believes future annual meat and grain consumption will reach 123 million tonnes and 750 million tonnes, respectively.

Diversifying import sources by strengthening cooperation with Belt and Road countries will have a significant impact on the grain and oilseed sector, argues Ye. It will impact the varieties imported, structure of the market and key trade relationships in the sector, he notes. Furthermore, it will increase the importance of western ports and logistics networks and shift agricultural commodities import business to new geographic locations. This may reshape domestic grain markets, price and distribution patterns, and employment centres in agriculture.


Li Keqiang highlights further efforts to promote employment and assist those without jobs

Ministry of Human Resources and Social Security | 2 November

context: Ministry of Human Resources and Social Security said employment remained stable in the first three quarters. But a State Council meeting the next day appears to indicate that Beijing is increasingly concerned about unemployment and its social consequences.

Li Keqiang announced proactive policies to address unemployment in a 2 November State Council executive meeting, including

  • reducing enterprises’ unemployment insurance costs by providing a 50 percent rebate
  • encouraging startups to promote employment by offering state financing guarantees, with loans and financial support focused on private companies and SMEs
  • supporting more people to undertake job skills training
  • expanding training subsidies from graduated students to all unemployed people aged 16-24
  • allowing people who contribute to unemployment insurance for one year to qualify for skills improvement subsidies
  • offering more training to the unemployed and using unemployment funds to pay medical insurance costs for those in need

Li also announced that State Council would continue the current policy cutting enterprises’ unemployment insurance contribution rate from 3 percent to 1 percent.


Xi Jinping: strict standards and fairness in cadre appointments

People’s Daily Online | 27 November

context: What shape Party reform should take and how to handle officials and their activities is a continuing and deepening discussion. After a lengthy wait, Xi Jinping has weighed in on at least part of the conversation, arguing that better cadre management starts with locating better cadres. Institutional reform, it seems, is not something Xi sees as the answer to the present challenges.

On 26 Nov 2018, CCP Central Committee Politburo held a study session in which Xi Jinping 习近平 CCP General Secretary addressed the issue of cadre quality, and called for strict standards on integrity and fair personnel appointments. Political integrity, professional ethics, social morality and family values should be the primary considerations where selection and appointment are concerned–standards with a long historical tradition in China, he noted.

Cadres should firmly safeguard the authority of the Party Central Committee and centralised and unified leadership, and be measured by how well they implement the Party line. The Party in its turn should make timely use of outstanding cadres with outstanding abilities, and professional spirit. Xi stressed that the Party should select diverse talents to improve the professionalism of cadre teams. What and how much cadres have accomplished and whether the masses approve should be the basis for promotion.

Xi also emphasised that cadres should be freed from unnecessary administration. Controlling frequency of inspections and report requests will allow cadres to spend more time on implementation.


rules of origin and FTAs new fronts of US-China trade war

Comnews (1), Comnews (2) | 21 November

context: The trade war between the US and China has legal undercurrents. Manipulating rules of origin to prevent the flow of Chinese goods is one such tactic, attacking China’s position in the global supply chain.

The non-market economy Article 32.10 in the US-Mexico-Canada Agreement (USMCA) and a recent ruling by US Customs suggest new directions to block inflows of Chinese goods, says Wang Feng 王峰 King Wood & Mallesons Customs and Trade Compliance director. Wang claims that Article 32.10 aims to prevent China from exporting goods to the US by way of entering free trade agreements with certain countries. Wang compares the clause to ‘poison pill’ provisions common in corporate acquisitions.

On 14 Sep 2018, US Customs ruled on the origin of a batch of DC motors imported from Mexico. The products had three components produced in China. According to NAFTA rules, they would be classified as originating from within the free trade zone. However, US Customs ruled that a 25 percent tariff shall be levied on them on grounds that no “substantial transformation” occurred during the assembly process in Mexico.

The substantial transformation principle, Wang points out, is implemented case by case and is subject to debates. Origin identification is also governed by three sets of rules in the US, which adds more uncertainty

  • Federal Trade Commission rules
  • US Department of Commerce rules
  • preferential rules of origin in bilateral and multilateral trade agreements

The recent ruling is also against the convention that preferential rules of origin are applied to determine tax rates and non-preferential rules are applied for labelling, says Wang. Wang predicts that the US will apply the principle to products that enter the US under other FTAs or the MFN principle and urges Chinese firms to prepare accordingly.

industry and environment

China Coal Industry Association project on 2019 coal market | 15 November

context: Coal industry saw an overall good year in 2018, as a result of deepening of supply-side structural reform. In the first eight months, major coal producers’ profitability saw 16.6 percent growth. However, it is questionable whether the situation will continue with central efforts targeting curbing coal consumption and the industry itself facing problems such as high debt ratios, low railway transport ratio and imperfect geographical layout.

China’s coal consumption will continue to grow in 2019 as a result of economic growth, however development of renewable energy and economic upgrade will slow down coal consumption growth, notes Zhang Hong 张宏 China Coal Industry Association deputy secretary general. In 2019, overall coal market situation will be more stabilised and supply will be more sufficient, adds Zhang. The projection is made based on

  • growth of large-scale coal mines, especially mega mines with annual capacity over 10 million tonnes
  • coal imports, which became a key source for coastal regions’ power plants, were stable and continued to grow
  • coal transport capabilities will be strengthened, especially with the operation of the coal transport line Inner Mongolia-Jiangxi Railway being put into operation

However, he also warned over potential seasonal volatilities caused by unpredictable climate and weather conditions as well as reasons related to unstable transport, highlighting

  • electricity supply-demand structural changes caused by expanded gaps between peak and low demand
  • the increasing ratio of renewable power means that coal-fired power’s function as baseload power is becoming more significant therefore it is required to be more flexible and responsive to accommodate climate and weather conditions that impact renewable energy
  • imperfect layout of transport and demand markets
  • trading activities are increasingly active; as they influence market expectations, this can exaggerate seasonal supply shortages

science and innovation

state innovation fund: AI over-hyped, investments overheating

Yicai | 18 November

context: Industrial policy tends to lead to low-end overcapacity, especially in China, where state intervention can be massive, and local governments are incentivised to experiment and compete in implementation, leading to overlap and duplication of efforts. In artificial intelligence, private investors and firms are also keen, increasing the risk of a bubble, but also increasing the prospects of less local protectionism and better consolidation once the frenzy ends.

Artificial intelligence (AI) firms are over-valued, says Wu Jianfeng 吴建锋 State Development and Investment Corp (SDIC) Innovation Fund chief inspector (Note: SDIC is the state’s largest investment holding company). Such an unhealthy climate is bad for start-ups, argues Wu, as unrealistic expectations raise the threshold to generate interest in the next funding round.

Chinese AI firms may reach a total value of 100 bn in 2018 and 160 bn by 2020, says Zhang Zijun 张梓钧 China Centre for Information Industry Development AI Industry Research Centre general director. Investors poured 12 bn into AI in 2017, and Q1-3 2018 investments exceeded the combined total of 2016 and 2017, adds Yicai.

The hype puts pressure on AI technologies to prove themselves in the market, says the report. In 2017, computer vision held 37 percent of the AI market, generating 8 bn, according to a February 2018 report by Ministry of Industry and IT’s China Academy of ICT. The technology attracted 23 bn in 2018, a third of investments, says Yicai. New applications are being developed for autonomous driving and medical images, but security video analysis, including facial recognition, is likely to remain the tech’s main application, generating 67.9 percent of income in 2017.

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