roundup from our portfolios

March began with a disappointing Hanoi Summit; while a few experts saw positive signals in the summit, others diverged, arguing that denuclearisation is a long-term process. At the Two Sessions, analysts’ concern over BRI’s reach aligned with emerging caution on international developments. China-US tension played out in a dispute over the status of the Belt and Road Initiative (BRI) in Afghanistan at the UN Security Council, and over Huawei in Germany. BRI ended the month on a huge upswing, however, with Italy (and later Luxemburg) signing onto the scheme. Xi Jinping’s trip to Europe could be reported at home as a resounding success, despite reservations expressed by other European powers.

Some of the gloss was removed by perennial issues at home. Party reform discussions revolved around identifying the right officials to take up leading positions and curbing onerous meetings and paperwork, especially at the grassroots. The Xi leadership’s prescription remains strong politics and reminders to all that Party loyalty is critical. However, some within the Party believe institutional incentives need resetting, and that overburdening the grassroots damages credibility of local Party committees and governments, adding to the perception that only Beijing knows and controls all. These deep governance issues were thrown into focus by an explosion at a chemical industrial park in Yancheng, Jiangsu on 21 Mar 2019, leaving scores dead and many injured. Behind the specific causes appear to lie dereliction of responsibility and top-down management issues often seen in earlier disasters.

The Two Sessions were subdued in comparison to the full reorganisation of government in 2018, but the meetings were productive nonetheless. Premier Li Keqiang 李克强 delivered the annual Two Sessions government work report on 3 March; major macroeconomic themes were consistent with the December 2018 Central Economic Work Conference, focusing on internal demand expansion through state-led infrastructure investment, tax cuts, and consumption promotion. Li was to reiterate much of the content in his keynote for the Boao Forum on 28 March, talking up the economy but downplaying prospects of a major stimulus.

Top items on the domestic agenda include employment stabilisation, ‘improving weak links’, supporting private business, reforming markets, and enforcing fair competition. As pressure builds, the state is striving to mitigate concerns that it will backslide on the environment, ramping up efforts to promote both upstream oil and gas exploration while promoting renewable energy without exacerbating wastage. Fighting pollution was also set as a top priority, although MEE acknowledges the difficulty of continuous emission reductions.

The new Foreign Investment Law was passed, despite concern that a lack of detail may lead to discretionary implementation. Top officials pledge revision to existing laws and regulations and new rules to ensure effective rollout. The Law bans forced technology transfers, promises better intellectual property rights protection and stipulates equal treatment for foreign firms in government procurement. The manufacturing sector will be fully opened to foreign investment, added Miao Wei 苗圩 Ministry of Industry and IT (MIIT) on 25 Mar 2019, as NPC delegates and officials called to reduce the ‘stranglehold’ of foreign imports in several sectors.

In other areas, delegates reached consensus to increase central spending on pensions, expand basic medical insurance coverage, and fortify community clinics at the bottom rungs of multi-level healthcare systems. Low fertility is also a concern, and State Council moved to unify maternity and basic medical insurance as NHC began rolling out epidural childbirth analgesics. Another topic of concern for the public and planners alike was the pig farming sector: late March saw a series of moves to shore it up against African swine fever, which has spread nationwide and which MARA admits will require a ‘long battle’ to contain.


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march policy movers

policy professionals in and out of the establishment

Ma Yu 马宇 | Chinese Academy of International Trade and Economic Cooperation Foreign Investment Department director

Affiliated with the Ministry of Commerce (MofCOM) for many years, Ma began helping draft Foreign Investment Law in 2011. MofCOM released a draft in 2015, but interministerial conflict prevented it from reaching the NPC. Articles that overlap with other laws, like Company Law, were deleted to focus on investment promotion and protection. Foreign Investment Law’s rushed passage was driven by external pressure from the US, WTO, and other international trade agreements, he notes, while admitting that many issues were not thoroughly discussed.

Huang Shouhong 黄守宏 | State Council Policy Research Bureau (SC-PRB) director

Chief consultant to the State Council, Huang has led drafting of government work reports in recent years. He previously directed rural affairs, often helping write the annual No. 1 Document. Lowering the GDP target, says Huang, is acceptable when employment, income growth and the environment improve. Higher-than-expected growth in 2017 and 2018, complex challenges, and downward economic pressure all constrain growth prospects this year, and justify lowering the target. While demand-side management through stimulus remains important, Huang sees increasing awareness of efficient production factor allocation on the supply side.

Ma Weiguang 马卫光 | Shaoxing, Zhejiang Municipal Party Committee secretary

A Zhejiang native, Ma has extolled the ‘Maple Bridge Experience’, saying that the model of mobilizing local residents has endured because it relies on ‘people’s supremacy’. Ma argues that the main responsibility for promoting and implementing reform, development and stability needs to take place at the grassroots. Modernising governance, he insists, must focus on improving conditions at the street and community level.


policy ticker highlights

gems from our feed of policy releases and domestic debate

geopolitics

expert analysis of China’s key foreign affairs focus
Observer | 11 March

context: Foreign Minister Wang Yi attended a press conference for the 2nd session of 13th National People’s Congress and answered questions regarding Chinese foreign policy and international relations.

Jin Canrong 金灿荣 RUC School of International Studies Associate Dean summarises Wang Yi’s 王毅 account of China’s diplomacy in 2018, opportunities and challenges of major powers diplomacy, and implementation of Belt and Road Initiative (BRI).

In terms of China–US relations, Jin proposes three reasons for the appearance of structural contradictions:

  • China and US have developed along different paths
    • China firmly sticks to its own path
    • the US is disappointed that it failed to transform China according to the US model
  • US politics has witnessed increasing populism and nationalism
  • China’s rise can no longer be concealed
    • ‘Taoguang Yanghui’ (韬光养晦, or ‘hiding and biding’) is no longer practical

In its relations with the US, China basically safeguards its interests in trade issues while maintaining general stability in bilateral relations. China remains calm and self-restrained in 2018

  • Chinese officials refer to ‘trade friction’ rather than ‘trade war’
  • China did not take extreme measures such as
    • completely banning rare earth exports
    • withstanding US use of financial methods
    • retaliating against service trade
    • striking market shares of US companies
  • China–US high-level exchanges continue

China and US should, suggests Jin, prevent two major risks in 2019

  • full-scale new Cold War
  • armed conflicts in Taiwan Strait and South China Sea

With regard to BRI, Jin argues that the initiative is motivated by

  • China’s response to US returning to Asia
  • the needs of economic development
    • to export excess industrial capacity
  • the desire to overcome unbalanced development between eastern and western China
  • the goal of enlarging China’s global sphere of influence by enhancing cooperation with developing countries

The severe reactions of western countries against BRI, argues Jin, indicate the huge success of the project. Unable to find new reasons to disregard it, the West can only fabricate excuses to blame BRI. However, it is undeniable that as a new initiative in global governance, BRI still faces difficulties

  • nurturing human resources
  • building institutions
  • understanding local cultures
  • selecting foreign partners

Regarding denuclearisation of the Korean peninsula, Jin argues that further negotiations between the US and DPRK have good prospects despite the fact that the Trump–Kim summit was fruitless, both countries’ media reacted negatively, and the future situation on the peninsula is still unpredictable.

China–Japan relations are very likely to improve, suggests Jin, because

  • China’s attitude towards Japan has improved
    • China is paying more attention to its neighbours after the deterioration of China–US relations
  • Japan intends to eliminate US control
  • Japanese mainstream society is gradually accepting China’s rise

finance

prudent fiscal expansion for targeted and mild stimulus
21st Century Business Herald (1), 21st Century Business Herald (2), Jiemian (1), Jiemian (2) | 6 March

context: Slow growth is motivating the state to increase public spending and stabilise domestic demand and employment. In the run-up to the Two Sessions, National People’s Congress expedited 1.39 tn local borrowing quota for quick delivery of fiscal stimulus. There has been a vibrant public debate over the merits of fiscal deficit exceeding 3 percent. This lower-than-expected budget deficit signals central prudence in fiscal expansion.

The 2019 government work report set the fiscal deficit at 2.8 percent, 0.2 percentage points higher than last year. 2.15 tn of special local bond quota has been approved, marking a 800 bn increase y-o-y. The report also allows local governments to sell debt swap bonds to alleviate interest burdens. This moderate rise in the deficit comes from consideration of fiscal revenue and special bond issuance, and leaves policy space for the future, says Li Keqiang 李克强 premier.

The report promised to invest 800 bn in general railways, and another 1.8 tn in highway and waterways, key water reserve projects, the Sichuan-Tibet railway, intercity railway, logistics, urban facilities, disaster control, and civil aviation. Localities need fiscal enhancement to reasonably expand investment; the central government explicitly supports compliant borrowing and forbids illicit financing, says Huang Shouhong 黄守宏 State Council Policy Research Bureau director and lead author of the report. Implicit debt growth is being curbed, and existing implicit debt is shrinking, adds Huang.

The report also fleshed out a combination of inclusive and structural tax cuts, including lowering VAT for manufacturing from 16 to 13 percent, and construction and transportation from 10 to 9 percent, plus tax returns for other industries. Tang Dajie 唐大杰 Wuhan University visiting researcher estimates total VAT cut of 713.2 bn based on 2018 tax revenues. Tax rebates incentivise market participants, and increasing government investment will boost domestic demand, says Liu Shangxi 刘尚希 Chinese Academy of Fiscal Sciences president.

Consistent with previous high-level meetings, growth strategies from the government work report include

  • highlighting investment and consumption to foster a robust domestic market and unleash internal demands
  • developing new competitive advantages and enhancing international economic cooperation; promoting opening up of goods, factors, and creating rule-based institutions; diversifying and upgrading exports

agriculture

MARA moves to stabilise pig farming sector
Ministry of Agriculture | 22 March

context: The impact of African swine fever has begun to show up clearly in ag market data, with live pig population down over 16 percent y-o-y and the price of pork and piglets beginning to creep upward on tight supply. International media have cited credible sources suggesting the extent of the outbreak is substantially higher than officially reported domestically; these opinions were published the morning after international media broke that story. Rumoured outbreaks at the relatively small number of piglet breeding bases that supply large farms are of critical concern, and explicitly targeted in this document.

Ministry of Agriculture and Rural Affairs (MARA) released ‘Opinions on stabilising live pig production, and guaranteeing supply for market’, stipulating

  • implementing measures to stabilise live pig production
    • effective implementation of subsidy policies for pig culls
    • supporting large-scale pig farms to resume production
    • provincial ag and finance agencies to introduce temporary production assistance and subsidy policy for large-scale farms
    • giving appropriate subsidies for building ASF-free zones and transportation vehicle disinfection centres
    • cooperating with financial institutions to ensure loan access for live pig farming and processing companies
  • strengthening monitoring of production and market data, including
    • pig slaughter
    • market price and transaction information
    • breeding farm monitoring
  • optimising epidemic treatment and transportation regulations
    • scientifically determining the scope of pig culls by considering local geographical conditions, transportation infrastructure, and farm management capacity
    • dynamically adjusting pig farming ban zones as needed
    • guaranteeing piglet and pig transportation
  • promoting standardised large-scale farming
    • improving farming equipment
    • implementing pig waste management measures
    • guaranteeing land supply for pig farming
    • encouraging small farms to scale up
  • optimising live pig industry layout
    • increasing live pig self-sufficiency in feed
    • strengthening connection with farming bases in nearby provinces to guarantee supply
    • building regional joint prevention and control mechanisms in pilot provinces
    • scientifically planning slaughter industry layout according to production and consumption
  • strengthening promotion and application of technologies concerning
    • ASF epidemic treatment and control
    • disease prevention
    • disinfection
    • high-quality pig variety promotion
    • increasing sow reproductive rate and piglet survival rate
  • safeguard measures
    • ensuring stable supply of beef, mutton, and poultry products

society

altering policy course to better serve reproductive rights
21st Century Business Herald, Guancha | 12 March

context: Academics and policymakers are approaching consensus on policy neither controlling nor encouraging births, but ensuring people are biologically, financially and socially able to have children should they wish.

Ren Yuan 任远 Fudan University Institute of Population Research argues China is not in the middle of a demographic crisis. Risks are manageable because

  • delayed retirement can increase labour supply
  • healthier, more affluent elderly can build a strong grey economy
  • children of migrant workers (whether settled in cities or left behind in rural areas) can make up a vibrant younger generation

Rather than encouraging more births, Ren advocates better serving the needs of those willing to raise or are raising children. Policy shouldn’t rule out how many children a couple can have, insists Ren, but should focus on making people not be afraid of having children when they intend to. Such services include

  • access to assisted reproductive technology
  • prenatal and perinatal maternal care
  • birth defect detection during pregnancy, baby care, newborn screening and immunisation plan
  • prevention of unintended pregnancy with access to family planning and contraceptive methods

Ren argues for expanding the scope of population research and comprehensively tackling issues related to low fertility, ageing population, migration, population health and human capital.

He Dan 贺丹 China Population And Development Research Center director supports family planning and moving birth policy higher in the state’s agenda. Yet, He acknowledges birth decline is inevitable as demographic transition correlates with social development. Instead of implementing one-dimensional pro-natal policies, more attention should be paid to enhance labour skills and population health. That requires dedicated investments in vocational education, and prevention and control of diseases, disability and injury.

He urges expanding residential- and community-based day care facilities for children aged 0-3 years old. This can partially resolve work-family conflicts many young parents struggle with and creates jobs, says He.

He argues that an ageing population does not mean that China’s demographic dividend is disappearing. Rejecting demographic determinism theory, He holds that the yield of demographic dividend depends more on the extent policies are aligned with population size and structure, geographic distribution and human capital stock. She urges the government to promote mass education, lifelong learning and free movement of people.

governance

cadres warned against signing away responsibility
People’s Daily | 26 March

context: Holding more officials accountable—for their conduct and work—has been a hallmark of cadre management under Xi’s leadership. This commentary is part of an ongoing debate over whether better personnel management lies in institutional adjustments or ideological work, and thus far, prioritises the latter.

A People’s Daily commentary states that having cadres sign letters of responsibility for important tasks and objectives may be seen as a way to put pressure on them and promote implementation. In reality, however, some sign them without hesitation and see the signing in itself as problem-solving, having little regard for actual grassroots difficulties. Layers of responsibility thus become layers of irresponsibility, resulting in formalism, it argues.

The commentary states that excessive ‘signing’ is neither responsible nor practical. It cites an example of higher-level units assigning two village committees responsibility for managing highway safety when they had no enforcement power. Some cadres adopt the attitude that as long as nothing goes wrong, that is enough. When responsibility loses its original meaning, however, it

  • damages the credibility of local Party committees and governments
  • leads to grassroots cadres being unable to grasp key issues and the correct direction as they have too many responsibilities
  • exhausts cadres who must prepare materials to receive ensuing inspections

If research is not conducted in advance and those at the top only give orders and distribute responsibilities, how can work be effective, asks the commentary. Ending excess in letters of responsibility requires cadres at all levels to be realistic, change their ideas, correct their concepts of political achievements, take real responsibility, do practical work and see actual results. Authority and responsibility should be divided scientifically and rationally among different levels of government, the commentary adds.

trade

draft Foreign Investment Law emphasises fair competition
People’s Daily, China Economic Daily, People’s Daily Online | 9 March

context: The draft law aims to ensure equal treatment and fair competition for both domestic and foreign investments, resonating with the principle of applying ‘competitive neutrality’ to all forms of business ownership, mentioned for the first time in 2019 Government Work Report.

Compared with the existing three laws on foreign investment, the new draft Foreign Investment Law attaches greater importance on equal and fair treatment to both domestic and foreign investment, says People’s Daily.

Following the Party’s 19th Congress Report which calls for equal treatment to all enterprises registered inside China, the draft law stipulates that foreign investors receive the same treatment as domestic investors when they invest in sectors not listed on the negative list.

We used to approve foreign investments case by case, and those failed to be approved could not set up a presence in China, says Wang Shouwen 王受文 MofCOM vice minister. Under the ‘pre-establishment national treatment + negative list’ approach introduced in the draft law, only investments in sectors mentioned on the list will need to be approved, and those not listed can enjoy equal treatment as domestic enterprises, says Wang, noting that the negative list is getting shorter, with only 48 items on it requiring approval.

Wang also points out that the draft law now allows foreign investors the same right as domestic investors to engage in the standard setting process, compete in government procurement and enjoy preferential policies.

Wang Chen 王晨 NPC Standing Committee vice chairman points out two more aspects that ensure equal treatment

  • various parties of an investment deal should agree on the terms for technical cooperation in an equal and fair manner; administrative bodies and their staff must not use administrative means to force technology transfer
  • relevant authorities should review foreign investors’ licensing applications the same way they review those of domestic investors

industry and environment

NEA director discusses high-quality energy development
People’s Daily | 12 March

context: Energy transition is crucial for China’s anti-pollution fight. However, as Zhang points out, obstacles remain. While the state is working hard to scale up renewable energy consumption, it also needs to address the risks posed by rising oil and gas dependency on foreign imports to domestic energy security. Meanwhile, fossil fuels will continue to dominate China’s energy mix for a long time.

China still faces challenges in ensuring energy security, increasing the share of renewables in the energy mix, obtaining core technology, optimising energy market structures and continuing supply-side structural reforms, says Zhang Jianhua 章建华 National Energy Administration director, when discussing high-quality energy development with People’s Daily. High-quality energy development should reconcile energy production growth with green development, as well as strike a balance between the government and markets, and between international and domestic energy development, adds Zhang.

He lists 2019 NEA’s energy priorities

  • scaling up market-based power trading
  • standardising mid-and long-term power trading
  • piloting power spot markets
  • setting up power ancillary service markets
  • enabling large-scale renewable participation in market-based power trading
  • continuing incremental power distribution reform
  • improving power transmission and distribution pricing mechanisms
  • reforming oil and gas exploration regulatory mechanisms
  • reforming oil and gas pipeline operation mechanisms
  • partially resolved issues of renewable curtailment by 2020
  • accelerating construction of peak power sources
  • improving the flexibility of coal-fired power plants
  • implementing renewable energy quota measures
  • ensuring guaranteed purchase of renewable energy
  • encouraging local consumption of renewable power
  • strengthening crude oil legislation and supervision
  • further improving the efficiency of the refining industry
  • improving refining industry entry and exit mechanisms
  • studying and drafting policies to eliminate backward refining capacity

science and innovation

liberating scientists from bureaucracy with flat-rate system
Caixin, Science and Technology Daily | 11 March

context: Ongoing efforts by the state to cut red tape for scientists get bogged down by rigid bureaucratic and accounting requirements, designed to battle the corruption and conflicts of interest that have also plagued the allocation of (research) funding.

The 2019 government work report mentions pilots with flat-rate contract responsibility for scientific research fund management. 60 research institutes, mostly in basic research, have been selected for these pilots, says Wang Zhigang 王志刚 Ministry of Science and Technology (MoST) minister. The pilots seek to find a long-term solution to the conflict between the uncertainty of research and the strict demands of funding management by handing some control down to research institutes. Only institutes with a good track record are eligible for the pilot, says Wang. Although this is deregulation, the state will not relax oversight, emphasises Wang.

Between 2011 and 2015, China invested 5 percent of its research funding into basic research and 85 percent in R&D, whereas the US spent 17 and 64 percent, respectively, according to a US National Research Council report. In China, only the centre invests in basic research, says Wang, whereas state governments and corporations also contribute in the US. A number of domestic high-tech firms have started investing in basic research and MoST will encourage a broader range of entities to commit funding.

In the press conference, Wang also discussed

  • sci-tech transfer data for 2017, lauding the impact of Sci-tech Transfer Law of August 2017
  • scientific ethics
  • job hopping by opportunistic young scientists

Bureaucracy remains the main bottleneck for sci-tech innovation, says Zhou Guohui 周国辉 Zhejiang CCP Political Consultative Conference deputy chair. Zhou recommends reforming

  • R&D support
    • stop treating researchers as thieves; flat-rate contracts are a step in the right direction
    • promote researcher self-discipline by emphasising credibility and ethics
    • set up project-internal supervision mechanisms
  • tech transfers
    • greatly increase the cost of IP infringement penalties


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