roundup from our portfolios

Protests in Hong Kong continued to beleaguer Beijing. A spate of authoritative editorials and commentary sent mixed messages. Support for the Hong Kong government waxed and waned, while economic development was cited as the ‘golden key’; media increasingly blamed ‘foreign forces’ for further stoking the turmoil.

China-US competition continued to occupy headlines in August. US withdrawal from the intermediate-range nuclear forces treaty and its attempts to deploy missiles in Asia further escalated tensions, sparking fears of an arms race. As both sides increased tariffs, Zhong Sheng 钟声 (a People’s Daily avatar of the Central Committee) criticised ‘some people in the US’. Liu He 刘鹤 vice premier called for calm in a Caixin interview (wrongly interpreted by Trump as readiness to ‘make a deal’).

US-China tariff hikes and rising global trade protectionism are adding pressure to the economy. July economic data came in weaker than expected. The RMB-USD exchange rate broke the 7:1 threshold 5 August, but the Politburo made clear that it will not resort to short-term housing market stimulus. The PBoC has, however, adjusted its calculation of the loan prime rate, providing an opportunity for it to further support business. Beijing also detailed measures it will take to cut red tape and make quality of life improvements for businesses across the country, aiming to break down hidden barriers to foreign investment.

The month also saw a flurry of activity surrounding special zones. State Council released its plan for the Shanghai FTZ’s new Lingang area early in the month, and approved a batch of six new FTZs 26 August, each with its own distinctive mission. The new zones will help drive regional growth and provide momentum for a range of national development strategies. Already a special economic zone, Shenzhen is now also the first ‘socialist demo zone’, and joins Beijing, Shanghai and Hefei as a ‘comprehensive science centre’. Beijing plans to make the city a bastion of high-quality and innovation-driven development, featuring ventures in digital services and currencies. The city’s new status will help accelerate the Greater Bay Area initiative, drawing further support from the national sci-tech ecosystem.

A major step forward in land reform efforts and the rural revitalisation campaign, collectively owned rural construction land was officially marketised in the Land Management Law amendment passed 26 August. The revision allows transfer of use rights via renting, swaps and mortgages, helping guarantee land supply for rural economic investment. The land remains restricted to commercial and industrial use, however, preventing it from flowing into housing.

Weaker than expected production controls in Tangshan, Hebei, along with growing inventories, contributed to an extended drop in steel prices through August. As profits kept falling, steel producers agreed to begin voluntary output cuts. Weakening demand and eased supply pressure also led to an iron ore price slump early in the month, a sharp reversal from its five-year high in July.

Efforts to improve care for the very old and young dominated social policy in August. State Council set up an inter-ministerial mechanism for aged care, aiming to address the lack of care services and improve quality of life for the elderly. Pro-natal efforts are stuttering, due in part to parental concern for childcare and education. Chen Baosheng 陈宝生 Minister of Education reported to the NPC on preschool education, noting progress but calling attention to shortages of teachers and affordable schools.


august policy movers

policy professionals in and out of the establishment

Zhang Jun 张军 | Fudan University Research Institute for Shanghai FTZ director

Zhang is a prominent expert on economic transition. Opposed to using FTZs as reform testbeds, he suggests the Shanghai FTZ should not be unique, but follow international standards like those in Singapore, Busan, and Hong Kong. The number of FTZs is no measure of economic openness, he argues; they simply concentrate intermediary, offshore and service trade around ports with limited customs supervision.

He Xuefeng 贺雪峰 | Wuhan University professor

He Xuefeng has been active in rural policy for many years, and often advises policy makers. In rural aged care, He argues that since most aged migrant workers return to rural farmlands, the state should support elderly farmers and their agricultural practice. He favours rural self-organisation and self-governance, exemplified in his proposed mutual assistance model for rural aged care.

Cong Liang 丛亮 | National Development and Reforms Commission (NDRC) secretary general

Cong joined the seventh round of US–China trade negotiations in February. Recently vocal on trade, he dismisses Trump’s claims that China reneged on promises to purchase US ag products as ‘groundless’, citing a series of deals made after the Osaka G20 summit. He blames normal commercial issues for some failed deals on commodities including corn and ethanol. He began his career in 1997 at the predecessor of the National Development and Reform Commission (NDRC). He worked in the national economy department for over two decades before promotion to his current role in June 2018. He joined the NDRC Party leadership group in February 2019, where he is a ‘young’ (born after 1970) cadre. In addition to policy research, planning, and design of economic reforms, he is also in charge of propaganda, serving as NDRC spokesman. [/people]


policy ticker highlights

gems from our feed of policy releases and domestic debate

geopolitics

Zhong Sheng 钟声 against ‘stay the course’
People’s Daily | 26 July

context: Two open letters published in June and July, co-signed by US China experts, made recommendations regarding Washington’s China policy. The first was ‘dovish’ and the latter ‘hawkish’. The latter, titled ‘Stay the Course on China: An Open Letter to President Trump’, praised his approach to China and warned against Beijing’s malign influence. They have been met with stern opposition from the media and MFA.

Both letters are ‘ridiculous’ attempts to influence domestic and foreign opinion about China, writes Zhong Sheng 钟声, an influential pen-name (‘voice of China’), in People’s Daily.

The latest letter lacks logic and evidence for what it condemns: China’s

  • opposition to the existing international order
  • suppression of freedom of speech and religion
  • strengthening of military power
  • expansionism

Zhong Sheng paints the US as hypocritical, noting that it, not China, violates human rights and sovereignty for the pursuit of its own interests, harming international stability and promoting militarisation. China’s foreign policy, in contrast, is independent and pursues peace. The latest Defence White Paper, for example, states that China will never pursue hegemony.

Bullying China has become a means for scoring political points, claims the article. It notes a recent comment by Neil Bush, former US president George H.W. Bush’s son, who stressed the uniqueness of each country’s governance. (CP note: Neil Bush warned against US nationalism fuelling US–China relations, and called for undertaking an approach similar to his father’s in handling China–US relations.)

Unlike the US, stresses Zhong Sheng, China does not export its governance system and values, does not cause economic stagnation in foreign countries, and does not support autocracies.

Western countries’ arrogance compels them to act as a ‘teacher’ towards China. Instead, Zhong Sheng hints, they should be learning from China’s recent history and achievements instead.

finance

monetary policy goals for H2 2019
Jiemian | 12 August

context: Amid a slowing global economy, US-China trade frictions, SME and small- and medium-sized bank problems, and RMB depreciation, the PBoC released its quarterly monetary policy report. Problems in the banking system mean that traditional monetary easing policies are not effective, but the report touches on interest rate consolidation and lending prime rate (LPR) reform goals.

The People’s Bank of China (PBoC)’s ‘Q2 2019 Monetary Policy Execution Report’ notes increasing international and domestic instability and outlines the bank’s plans for H2 to

  • guide financial agencies to increase medium- and long-term financing for manufacturing and private enterprises
  • explore a long-term real estate management mechanism
  • enact interest rate consolidation and lending prime rate (LPR) reform
  • allow the exchange rate to stabilise the economy and the balance of payments

Analysts believe that PBoC will either enact slight monetary easing policies or remain neutral in H2. China International Capital Corporation (CICC) believes the PBoC will slightly increase money supply through open market operations and reducing the reverse repo operating interest rate. However, CITIC believes PBoC will use a variety of tools such as targeted RRR cuts, medium-term lending facilities (MLFs), re-lending, and re-discounting to maintain neutral monetary policy. Huachuang Securities thinks PBoC will increase the money supply to offset capital flight caused by the recent RMB depreciation.

The RMB breaking the 7:1 threshold with the dollar made headlines, but domestic analysts are unified in believing it will stabilise between 6.8 and 7.2 to the dollar. Huachuang points to PBoC releasing central bank bills in Hong Kong as proof that the RMB will not depreciate further. However, CITIC contends that it still might, if trade frictions with the US escalate.

Combating SMEs’ financial troubles has been a goal of PBoC all year, and this looks to continue as the bank reiterated the importance of clamping down on shadow banks and inter-bank assets. CICC pointed out that PBoC believes liquidity is not the main problem for small and medium banks, but rather their lack of capital. Large and medium banks will look to bolster their capital through perpetual bonds, while small banks will need other channels such as preferred stock.

With the current credit stratification, PBoC is having trouble ensuring their easing measures benefit SMEs and not big companies or SOEs. One way to address this would be to reform the current two-track interest rate system. In Aug 2019, PBoC took the first step by reforming the LPR mechanism. CITIC thinks the next step is to further reduce the actual loan interest rate level, especially the small and micro enterprise loan interest rate.

trade

State Council reveals overall plan for six new pilot FTZs
State Council | 26 Aug

context: New pilot FTZs cover coastal, inland and border provinces, highlighting their different functions in both bolstering local economies and strengthening international cooperation with neighbouring countries. The addition of six new FTZs brings China’s total number of pilot FTZs to 18.

The State Council released ‘Notice on issuing overall plan for six new pilot Free Trade Zones (FTZs)’ on 26 Aug 2019, stating the new batch of pilot FTZs shows China’s determination to further open markets and release the dividends of opening-up.

The Notice specifies

  • new pilot FTZs shall be located in six provincial regions
    • Shandong, Jiangsu, Hebei, Yunnan, Heilongjiang and Guangxi
  • FTZs will serve as pioneers of the country’s reform and opening up as they test new styles of foreign investment management, trade facilitation, and transformation of government functions to better integrate the economy with international practices
  • each pilot FTZ will carry out distinctive and differentiated pilot reform tasks, aiming to address systemic issues centred on investment, trade and finance, and deepen trade and economic cooperation with neighbouring countries and regions
    • Shandong pilot FTZ will
      • accelerate the shift of growth drivers and develop the ‘blue economy’
      • focus on cultivating new modes of trade
      • foster distinctive maritime industries
      • explore subnational economic cooperation among China, Japan and South Korea
    • Jiangsu pilot FTZ will
      • improve overseas investment cooperation
      • strengthen the financial sector’s role in supporting the real economy
      • support innovative manufacturing industry development
    • Guangxi FTZ will
      • make efforts to connect the 21st Century Maritime Silk Road with the Silk Road Economic Belt through China’s southwest gateway
      • construct smooth international transport routes
      • build a pioneering pilot zone for China-ASEAN cooperation
    • Hebei FTZ will
      • build Hebei into
        • a major international trade and logistics gateway
        • a new-type industrial base
        • an international innovation platform
        • a pioneering zone for opening-up and development
      • facilitate international trade in commodities
      • push for innovation and development in life sciences and biotech
    • Yunnan FTZ will
      • build an important link connecting major corridors in South and Southeast Asia
      • strengthen connectivity between BRI and Yangtze River
    • Heilongjiang FTZ will
      • emphasise transformation and upgrading of the real economy
      • deepen industrial restructuring and build a hub for regional cooperation with Russia and Northeast Asia

Wang Shouwen 王受文 Ministry of Commerce vice-minister says that the new FTZs will contribute to national strategies such as

  • BRI
  • Jing-Jin-Ji
  • Yangtze River Economic Belt
  • Northeast revitalisation
  • the development of a strong maritime power
  • innovation-driven development.

Wang notes that the overall plan highlights

  • innovative institutions
  • further opening-up
  • high-quality development
  • the service sector integrating with national strategy

agriculture

Land Management Law revision passed
Xinhua Net | 26 Aug

context: This revision legalises marketisation of rural construction land following five-year pilots in 33 counties. Farmland acquisition procedures have also been further regulated, but the revision makes little progress on homestead land reform despite concern over potential land grabs by cities. The revision addresses fundamental distortions in the land market, as urban land prices have risen for decades while rural land is heavily under-valued. It is only the first step, however, and many problems remain unsolved such as pricing and taxation of construction land. Expect more pilots to come.

Land Management Law (revision) was passed at the 13th National People’s Congress (NPC) Standing Committee 12th meeting held 26 August, and will come into effect 1 Jan 2020.

Major revisions cover

  • farmland acquisition procedure
    • clarifying ‘public interest’ for eminent domain farmland acquisition
      • for military and diplomatic use
      • construction of public energy, transportation, irrigation, communication and postal infrastructure
      • land use for technology, education, culture, healthcare, and environmental protection and other public welfare projects
      • land use for low-income housing projects, and relocation for poverty alleviation projects
      • land use for development and construction, approved by provincial governments and organised by county governments, in accordance with overall land use plans
      • other situations in line with laws and regulations
    • acquisition requirements
      • carrying out land condition investigation
      • publishing related information
      • consulting with farmers
      • signing contracts with farmers
    • shifting compensation basis from annual land output to comprehensive land price of the region, taking location and economic conditions into consideration
  • collectively operated construction land owned by rural collective economic organisations
    • use rights can be transferred or rented to entities and individuals that are not members of the rural collective economic organisation, on the conditions
      • construction land is registered legally
      • it is agreed on by more than two thirds of organisation members
    • users of construction land can re-transfer use rights through swaps and mortgaging
  • homestead land reforms
    • encouraging rural villagers who have settled down in urban areas to withdraw from homestead land on a paid basis
    • activating idle homestead land
  • permanent basic farmland
    • name changed from ‘basic farmland’ to ‘permanent basic farmland’ in the law
    • building a database of all registered permanent basic farmland
    • removing a requirement that 80 percent of farmland must be identified as permanent farmland in a province; the ratio will now be determined by State Council according to conditions of each province
Marketisation of construction land owned by rural collectives is the highlight, says Wei Lihua 魏莉华, Ministry of Natural Resources Department of Laws and Regulations director. The revision’s primary aim is optimising the supply structure of construction land, says Yang Heqing 杨合庆 NPC Standing Committee Legislative Affairs Commission economic law office vice director. He argues marketisation of rural construction land will not greatly impact land supply overall, however, because
  • rural construction land can only be used for industry and commercial development, not real estate
  • rural construction land must be legally registered
  • use of the land must follow annual land use plans

society

MoE to clamp down illegal foreign teachers
Southern Weekly | 5 July

context: While China continues to open up education and welcome foreign teachers, it has not yet put foreign teachers under tight regulation. MoE is seeking to close this gap as soon as possible.

Ministry of Education (MoE) issued ‘Implementation opinions on regulating online extracurricular tutorials’ on 12 Jul 2019, requiring all platforms to disclose foreign teachers’ names, profile pictures and certifications. But many online education institutions have yet to comply with these rules, reports Southern Weekly.

The issue of unqualified foreign teachers garnered public attention in 2019 after some physically punished students in Chengdu, and seven from Education First (EF) were involved in a drug case in Xuzhou.

Qualification standards are high for foreign teachers. They must have no criminal records or diseases of public health significance, have proper training, hold a valid work visa, and only teach their native languages. However, statistics from Xinhua’s Banyuetan show that, as of 2017, only one-third of China’s 40,000 foreign teachers are compliant. The bulk of them come through intermediate agencies that help them work on travel or business visas, and some even forge certificates and qualifications.

Supervision has been fairly weak due to lack of technological methods for authorities to verify documents’ authenticity, says Southern Weekly. The paper also found that education agencies do not conduct background checks on foreign teachers, relying on intermediate agencies to ensure their legality instead. Institutions such as EF, which runs a large number of franchises, struggle even more to maintain uniform standards across all branches.

governance

People’s Daily op-ed blames ‘Hong Kong Gang of Four’ for demonstrations
People’s Daily
| 19 Aug

context: Even when placed amidst growing condemnation of violence, this signed commentary on the website of the Party’s flagship newspaper represents a further escalation of rhetoric. But by insisting ‘traitors’ and ‘foreign forces’ are pushing the protests, some in Beijing might be signaling there is still time and room available to reach a peaceful resolution with the demonstrators themselves.

A commentary on the People’s Daily website said chaos in Hong Kong was produced by ‘extremist violent elements and people who do not know the truth, the Western anti-China forces who hide behind them, and middlemen traitors who specialise in internal and external collusion’. The commentary named Li Zhiying 李志英 Hong Kong One Media founder as head of ‘the unfortunate harbour’s Gang of Four’, for using his publications to fool the younger generation, incite and ignite conflict between Hong Kong and the mainland, and urging his ‘foreign masters’ to interfere. Opposition politicians He Junren 何俊仁, Li Zhuming 李柱铭 and Chen Fangan 陈方安 are named as the other members of the ‘Gang of Four’.

The protests, the commentary argues, have developed into large-scale violent crimes because of Li and others like him who collude with the United States and Britain to intimidate Hong Kong citizens. Hong Kong would not be so vulnerable to chaos unless there is such collusion and manipulation of public opinion. Together, the Hong Kong Gang of Four seeks to challenge the SAR Government, alienate Hong Kong from the mainland, and create opportunities for its foreign paymasters, the commentary contends. They have incited young people in Hong Kong to make trouble in the streets, but none of their children have participated because they are currently studying in Britain and the United States, and their families have foreign passports for protection.

Hong Kong’s violent demonstrations have the marks of a ‘colour revolution’, even though regions all over the world subverted by ‘colour revolutions’ have, without exception, come to a tragic end. Hong Kong people, the commentary concludes, should clearly see that these ‘foreign slaves’ will not hesitate to sell out Hong Kong’s interests and its future.

industry and environment

steel producers to enforce joint production cuts
Caixin | 13 Aug

context: Steel output hit a record level in H1 2019 due to domestic consumption growth. But prices declined in Q2 2019, posing challenges to steel producers’ profitability. In light of falling profits — with which the relatively weak Tangshan August output controls offered little help — many steel producers underwent production cuts, hoping to boost prices and reduce inventories.

Steel producers have been undertaking voluntary production cuts recently. In particular

  • 19 plants in four provinces – Shanxi, Shaanxi, Gansu and Sichuan – decided on 12 Aug 2019 to cut production by 35,000 tonnes per day
  • six privately-owned plants in Shandong decided on 13 Aug 2019 to cut production by around 400,000 tonnes
  • six Fujian electric furnace plants’ planned cuts could affect daily output of 7,850 tonnes
  • a Sichuan steel producer announced 11 subsidiaries’ production cut plans

Steel futures rebounded by two percent immediately following the announcement of production cuts in Shanxi, Shaanxi, Gansu and Sichuan, although those only account for only one percent of nationwide output. More steel producers will likely join the production cuts in the coming months.

A recent price decline drives the production cut measures. China Steel Price Index fell to 107.68 on 9 Aug from a high of 112.67 in April. Meanwhile, total steel inventories reached 17.41 million tonnes as of 12 Aug, up 3.95 million tonnes y-o-y. Weak steel fundamentals exerted pressure on raw materials: iron ore futures fell by 17 percent between 1-13 Aug.

Xu Xiangchun 徐向春 MySteel.com analyst explains that China’s H1 2019 steel production grew significantly and June output reached 107 million tonnes, up 12.6 y-o-y. However, producers were slow in adjusting to the weakening demand that started in Q2 2019. Most steel products have now become unprofitable, excluding low-cost rebar and wire products.

Xu claims production cuts will help stabilise prices. But whether the steel outlook will improve depends on demand and inventory depletion, which would require at least a 10-percent output cut from the current level.

science and innovation

Shenzhen to set up scientific apparatuses, international development bank and big data centre
21st Century Business Herald (1), 21st Century Business Herald (2) | 20 August

context: Shenzhen has been pioneering reform and opening-up for four decades. Already one of the four core engines of the GBA, the city has garnered international recognition for its innovation and entrepreneurship, and at the same time is becoming a ‘socialist demonstration zone’. Meanwhile, state media is growing defiant over protests in nearby Hong Kong.

Aug 2019 State Council ‘Opinions’ call for a comprehensive national science centre to be built in Shenzhen, reports 21st Century Business Herald. (note: Shenzhen is the fourth city to get this top institution, after Beijing, Shanghai and Hefei.)

Guangdong province and Chinese Academy of Sciences (CAS) advocated for the centre in Jan 2019, notes the report. Shenzhen will gain support from the national sci-tech ecosystem, argues Wan Lu 万陆 Guangdong Academy of Social Sciences. To develop further, Guangdong needs more basic research, but most R&D facilities are hosted by firms, notes Wan. CAS will build institutions in Shenzhen, says Chen Guanghao 陈广浩 CAS Guangzhou Branch vice president, and Shenzhen’s sci-tech development should link up with local industry and Greater Bay Area (GBA) strategy.

Shenzhen is also exploring banking services for marine development, adds 21 Century Business Herald. An international development bank would introduce global financial institutions to the marine industry, suggests Hu Zhenyu 胡振宇 China Development Institute Sustainable Development and Marine Economy Department deputy director, who points out that Shenzhen submitted a proposal to State Council in Dec 2017.

Other major sci-tech initiatives announced in the Opinions include



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