roundup from our portfolios

Preparation for the PRC’s 70th anniversary on 1 October dominated domestic media in September. Beijing is doing all it can to ensure National Day celebrations bolster patriotism and showcase China’s strength to the world, drawing attention away from a slowing economy, US-China conflict, and continuing protests in Hong Kong. In a speech to the Central Party School on 3 September, Xi Jinping 习近平 acknowledged accumulation and deepening of such risks, calling to overcome them with courage and ‘tenacious struggle.’

While the military parade will draw much attention, cybersecurity also featured heavily. Xi called to ‘balance security and innovation’ during the national Cybersecurity Week 16-22 September. Ministry of Science and Technology issued guidelines laying groundwork for 20 AI innovation and policy experiment zones by 2023. The state is poised to invest trillions in the integration of services and advanced manufacturing over the next five years. The initiative, under the Ministry of Industry and IT, will be sped up by policies passed by the Central Deepening Reform Commission on 10 September.

As the trade-tech war grinds on, Beijing continues seeking regional workarounds. Premier Li Keqiang 李克强 paid an official visit to Russia 16-18 September, his first since relations were upgraded to a ‘new era comprehensive strategic partnership’ during Xi’s trip there in June. The meeting comes amid efforts to revitalise Northeast China and boost trade with neighbours, including border area FTZs announced in August, and negotiation of deals like the China-Japan-South Korea FTA.

Weakening of the /US$ exchange rate below 7:1has failed to energise trade, with falling US-bound shipments dragging exports and imports down in August by 1 and 5.6 percent y-o-y respectively. Trade with ASEAN, BRI and EU countries grew. Some of that growth, however, may reflect transhipment of Chinese goods through intermediary markets to avoid high tariffs.

At home, the African swine fever crisis has pushed pork prices to a record high. Pork supply is a political priority; State Council is driving ministries to provide subsidies and expand production, but recovery will take years. Xinhua reported 13 September that US pork would be exempted from trade war tariffs. The Ministry of Agriculture and Rural Affairs also announced support for family-run farms on 9 September, transitioning away from upscaling via heavy subsidies and supporting capacity-building.

Despite market expectations that the People’s Bank of China would cut interest rates in September by lowering the medium-term lending facility and loan prime rates, it made only minor changes, reducing the LPR rate by five basis points. This is likely a reaction to the reserve ratio requirement cut announced on 16 September, helping reduce banks’ capital costs and increasing liquidity by some 900 bn. By making small adjustments to follow the US Fed, says Zhong Zhengsheng 钟正生 Caixin Insight, the PBoC can defer major moves for the time being.

Fiscal policy saw more activity, with State Council advancing part of the 2020 local government bond quota and expanding its scope, allowing local bonds to be used for investment principal on a wider range of project types. The measure, which is unlikely to be felt before early 2020, will sustain infrastructure investment after exhaustion of the 2019 quota well ahead of schedule.

Local bond funds can now be applied to a wide range of water-related areas, including conservation, waterway logistics hubs, pollution treatment, and water supply. The change will help localities catch up on ‘Water pollution prevention and control action plan’ targets. Many cities are lagging behind, due to lack of pollution treatment plants and a 400,000 km shortage of pipes to connect them. The National People’s Congress also passed Resource Tax Law on 26 August, set to help green the country’s tax system along with the 2017 Environmental Protection Tax Law.


september policy movers

policy professionals in and out of the establishment

Zhao Yang 赵阳 | MARA Policy and Reform Department director

Zhao directed the Central Rural Working Group office before moving to MARA’s Policy and Reform Department during institutional reforms in March 2018. Gaining a great grip over rural land reform in the reshuffle, his department took over from the former Ministry of Land and Resources. Wary of blindly pursuing large scale farming, Zhao insists on ‘proper scale’, set by the pace of rural-urban migration and growth of ag tech and services. He supports upscaling farming services as an alternative to farmland transfers. The practice is being promoted as a critical part of agricultural production trusteeships.

Zhang Bo 张波 | MEE Water Environment Department director

Zhang formerly directed the Shandong Environmental Protection Department, where he was praised for improving water quality. A key reason for rebounding water pollution is, says Zhang, lack of coordination between total pollutant load and quality standards. He estimates that treatment of ‘black, foul-smelling’ water will cost over 1 tn. Phosphorus has emerged as a key water pollutant, particularly in the Yangtze river region, notes Zhang; over 70 percent of it comes from rural non-point sources.

Niu Fengrui 牛凤瑞 | former CASS Institute for Urban Development and Environmental Studies director

Coming from rural research in Hebei, Niu worked on rural revitalisation, urbanisation and the property market during his years at CASS. Accelerating urbanisation is, he argues, key to boosting rural development. He sees opening population flows between rural and urban areas as key. Niu advocates hukou reform and trade in homestead plots. While optimistic about the property market, he argues for long-term government intervention.


policy ticker highlights

gems from our feed of policy releases and domestic debate

geopolitics

China’s alternative international order
Weixin | 2 September

context: Analysts and officials have recently urged China to take a stronger international moral stand to boost its ‘discourse power’ (话语权 huayu quan). Author Zheng Yongnian 郑永年 is director of the National University of Singapore’s East Asia Institute and concurrently chairman of South China Normal University’s Institute of Public Policy (IPP) Academic Committee. He is a prominent columnist, and able to comment relatively more freely than many domestic analysts from his position in Singapore.

China needs more international space, argues Zheng Yongnian 郑永年, which the existing order is unwilling to provide. Hence, China advocates building a new regional order, often leading to tension with the US. Zheng recommends China

  • continue reforming and playing a major role within the existing international order
  • build its own international order discourse, clarifying
    • why it should advocate a new regional order (as an alternative, not a replacement)
    • the relationship between the new and the current one
      • ‘open regionalism’: open, participatory, international
  • establish closer relationships with some traditional US allies, hence defusing US resistance

Ex-colonies only gained territorial independence, contends Zheng; their thinking remained ‘colonised’. A rising power, China expects to challenge the current international order because it

  • is rising within the existing order
  • has sufficient capacity to reshape it

The notion of ‘international order’ originated with the US and, as such, the US possesses moral supremacy.

Zheng recalls Henry Kissinger’s views on international order

  • there is never a single order, but multiple coexisting
  • every civilisation has its own view of it
  • since modern times, it has been established, dominated, and spread from the West to the rest

Non-Western states, explains Zheng, have accepted the West’s international order due to

  • its profitability
    • easier to gain benefits
  • powerlessness to change it or to create a new one
  • lack of an alternative

governance

Xi speech at Central Party School urges ‘tenacious struggle’ to meet challenges, risks
People’s Daily | 4 September

context: Authoritative Party media returned to the theme of ‘struggle’ on the eve of the annual summer leadership meetings, and so it is not especially surprising that Xi would use it as a clarion call at an opening ceremony for cadres beginning the autumn semester.

Xi Jinping 习近平 CCP Central Committee Chairman addressed young and middle-aged cadres at the Central Party School on 3 September, and emphasised the need for strict ideological, political and practical training to carry forward the spirit of tenacious struggle [顽强奋斗] , and realise the Chinese dream of the great rejuvenation of the Chinese nation.

Xi pointed out that many major events were full of hardships, born, developed and strengthened in struggle, including the

  • emergence and development of Marxism
  • birth and development of socialist countries
  • establishment of the Chinese Communist Party
  • founding of the People’s Republic of China
  • implementation of reform and opening up
  • promotion of socialism with Chinese characteristics in the new era

The tasks of reform, development and stability are arduous, Xi noted, and China faces both rare historical opportunities and a set of major risks. In order to succesfully achieve goals and tasks set by the Party, cadres must strengthen their ability to struggle and carry that spirit forward. The struggles are not short-term but long-term, and require fortitude, courage, and a firm will. Risks are becoming more complex, Xi noted, and include dangers to

  • the leadership of the Party and socialist system
  • sovereignty, security and development
  • core interests and major principles
  • the people’s fundamental interests

We should be particularly clear-headed and firm in our stance, Xi stated, steadfastly grasp the correct direction of struggle, and be unafraid and calm.

Xi pointed out that China’s development has entered a period when various risks are accumulating and deepening: some of the major struggles to be faced are economic, political, cultural, social, ecological, and also involve national defense and army building, as well as work concerning Hong Kong, Macao and Taiwan, diplomacy, and Party building. Leading cadres should acquire the ability to predict potential risks scientifically, to know where the risks are, what they indicate and their likely trajectories, and to fight.

Xi emphasised that struggle is an art, and cadres need to be good at it. Cadres should come as soon as they are called, be able to fight and win the battle, and strive for and secure unity.

Xi stressed that the spirit and skill of struggle are not innate: cadres should undergo rigorous ideological tempering, political experience and practical training, and dare to

  • take the initiative to engage in all kinds of struggles
  • show their swords in the face of major and minor issues
  • confront difficulties and stand up in the face of crises and difficulties
  • fight resolutely against unhealthy practices
  • serve as commanders and combatants
  • cultivate and maintain a tenacious fighting spirit, tenacious fighting will and a superb fighting ability
  • deal with major natural disasters, mass incidents, ‘evil forces’, and other challenges

Central Party School President Chen Xi 陈希, Politburo members Wang Huning 王沪宁, Ding Xuexiang丁薛祥, and Huang Kunming 黄坤明 attended.

finance

advancing new quotas for local special-purpose bonds to counter slowdown
21st Century Business Herald, Securities Daily, Economic Observer | 9 September

context: The promised ‘mild and targeted’ stimulus may turn into yet another full-fledged expansion as the economy remains stagnant. Previous fiscal incentives struggled to boost investment data, whereas the state has a weaker influence over consumption and exports. More ‘countercyclical’ policies undoubtedly exacerbate structural and debt problems.

A State Council executive meeting on 4 Sep 2019 intensified implementation of its ‘six stabilisation’ policies by advancing part of the new special-purpose bond quota for the next year. The meeting decided that raised funds can be used in critical infrastructure, emphasising project management and prevention of misappropriation.

Ministry of Finance (MoF) held a press conference on 6 Sep 2019 with Xu Hongcai 许宏才 vice minister and Wang Kebing 王克冰 budget bureau inspector, explaining

  • this move is justified by National People’s Congress’ end 2018 authorisation that State Council could advance the next year’s new special-purpose bond quota up to 60 percent of the current year’s quota, effective from 1 Jan 2019–31 Dec 2022
  • MoF strongly emphasises projects’ actual embarkation
  • coordination between fiscal, development and reform, and financial authorities will strengthen
  • the central government will not be responsible for local debts
  • projects qualified for using bond-raised funds as investment principal are expanding from four areas (railway, highway, electricity and gas supply) to 10 (adding airports, waterway hubs and ports, parking lots, water conservation, polluted water and garbage treatment, and water supply)
  • the policy prioritises regions with thoroughly-prepared projects and that are well-equipped for winter 2019 and spring 2020 construction

Securities Daily reports that, as of early September, a total of 3.98 tn in local debt had been released, with 2.01 tn new special-purpose bonds out of 2.90 total new bonds.

Within the 20 percent limit of advanced funds being used as initial capital, this could have a multiplier effect of 1 tn to reach 2 tn in investment, calculates Mao Jie 毛捷 University of International Business and Economics professor. Fu Yifu 付一夫 Suning Institute of Finance senior researcher says infrastructure investment falls behind manufacturing, and the average infrastructure share still lags behind developed countries’, especially in rural infrastructure. Fu notes public facilities in education, healthcare and culture sectors need improvement as well.

Tao Chuan 陶川 Fangzheng Securities chief analyst says H2 2019’s fiscal contractionary effect grew prominent as localities have nearly run out of their new bond quota for the year. Assuming this policy’s effect will be felt beginning 2020, fiscal easing will support infrastructure investment in H1 2020, adds Tao.

trade

ASEAN will not replace China as ‘world’s factory’
Jiemian | 9 September

context: China is pursuing a ‘front shop, back factory’ strategy, hoping to attract and keep more high-end FDI in coastal areas, while encouraging the central and western inland to absorb low-end manufacturing bases. But hiking tariffs have hit Chinese companies badly, and both Chinese and foreign firms have accelerated moving production out of China due to intensifying US-China trade war.

Amid Chinese products’ increasing transshipments via third markets to avoid high tariffs, some have speculated that Vietnam and India could become the next ‘world factory’. But ASEAN countries are far from replacing China’s status in the global value chain in terms of production scale and management, argue He Fan 何帆 Shanghai Jiao Tong University Antai School of Economics and Management professor and Shi Zhan 施展 China Foreign Affairs University World Politics Research Centre director.

There is a large gap in population and economic size between Vietnam and China, He notes. Vietnam imports about US$7 bn of Chinese products, and 2018 data shows Vietnam’s exports totalled US$243.5 bn while the total value of China’s exports was US$16.4 tn.

Despite some production chains relocating to Vietnam, Vietnam still imports raw materials from China, which will eventually help China expand its supply chain, He notes, using the phrase ‘when China sneezes, Vietnam catches a cold’ to express the two countries’ close ties.

Most enterprises that have relocated from China to Vietnam prefer hiring Chinese managers to supervise production, Shi notes, and they control the key tech and resources.

The challenge for the global value chain is not US-China trade disputes, but better controlling changes from future consumer demand and technology, He says. Future consumption demands will be personalised, and China’s large domestic market creates favourable conditions for their development, He says. The ball is in China’s court as it has the technology; if some materials change, the whole industry will have to adjust.

Future policymaking should consider market entities’ perspectives, as they are the foundation of China-US relations, Shi suggests. The tighter US policy is, the more businesses seek to work with Chinese companies to avoid worst outcomes. Although the US government aggressively contains Huawei with sanctions, both American and Chinese companies finding ways around them. In most circumstances, the US private sector’s choices are not consistent with US policy, Shi adds.

agriculture

building family farm capacity
Ministry of Agriculture | 9 September

context: The traditional development approach of family farms that rely heavily on subsidies is fiscally unsustainable, especially considering tightening local budget constraints. Beijing seeks to shift to a system that supports capacity building to improve farms’ independence.

Ministry of Agriculture and Rural Affairs (MARA) and ten other central agencies published ‘Guiding opinions on implementing family farm cultivation programs’ to support family farm development. The Opinions specify

  • development goals
    • by 2020, set up a basic policy system to support family farms; steadily increase number of family farms with standardised operation and diversified industries
    • by 2022, further improve policy system on family farms; develop strong production capacity
  • improving registration and profile management
    • reasonably determine the scale of operation based on local resources and conditions
    • optimise registration services and set up an information sharing mechanism between market regulation and agricultural departments for family farm data
    • improving profile system for family farms with regulated data collection, demonstration farm selection and operation analysis
  • enhancing effects of pilot demonstrations
    • choose demonstration family farms based on application and selection principles
    • set up family farm demonstration counties
    • encourage diverse talent to set up family farms, especially local talent, educated people and youth
    • actively guide family farms to develop cooperative operations and explore cooperation approaches
  • establishing and improving policy support system
    • protect land use rights of family farms and encourage land transfers with standardised documentation and processes
    • enhance infrastructure construction and guarantee land supply for farm facilities
    • improve social services and training system to meet knowledge, technology and labour needs
    • provide subsidies for water use and tax reductions for farm operations
    • strengthen financial and insurance services to increase accessibility and coverage
    • support ‘internet + family farms’ mode and develop e-commerce
    • explore social security policies suitable for family farms
    • accelerate family farm legislation

society

Longgang becomes first town upgraded to a county-level city
National Business Daily (1), National Business Daily (2), Yicai, 21st Century Business Herald | 30 August

context: NDRC’s ‘2019 key tasks for “new urbanisation” initiative’ called for developing medium-sized cities. In recent years, a raft of counties have been approved to become cities, but the central government has been cautious with towns. While urbanisation is the sure way forward, simply upgrading administrative statuses will not be enough, and the government will need to consider how urbanisation could stimulate further economic development.

State Council approved Longgang to become a county-level city on 30 Aug 2019, the first township to do so. Wenzhou will govern the new city and apply a flat administrative system, according to Wang Jianhou 王建侯 Zhejiang Civil Affair Bureau director. It will have no lower administrative levels, and employ 40 percent fewer government staff compared to other cities with similar population size. The upgrade will enable Longgang to access better resources.

Longgang has been unique since its founding in 1984, when farmers set it up entirely from the bottom up without any government investment. Villagers were allowed to transfer to urban hukou as soon as they bought land, lived and worked in Longgang, and it was also the first town where people could buy land usage rights. These measures enabled Longgang’s economy to take off; in 2018, it boasted the 17th highest GDP among townships nationwide.

Longgang exemplifies a model of urbanisation focusing on medium-sized cities, comments National Business Daily. Elsewhere, arbitrarily set administrative hierarchy often restricts county and town development. A Central Financial and Economic Affairs conference on 26 Aug 2019 reiterated the importance of city clusters as an engine of economic development.

Other towns boasting even larger economies than Longgang’s are likely to follow in its footsteps. But Niu Fengrui 牛凤瑞 Institute for Urban and Environmental Studies Chinese Academy of Social Sciences research fellow has warned about upgrading’s repercussions, and says the new city may undermine the development of other jurisdictions within the old county. Peng Peng 彭澎 Guangdong Society of Economic Reform vice president suggests upgrading towns to districts of cities or giving towns county-level powers may be better alternatives.

industry and environment

Guangzhou announces comprehensive support for hydrogen energy
China Coal Resources Net | 11 September

context: Guangdong is one of the most active provinces encouraging hydrogen energy, and considers hydrogen equipment a priority industry. Many of its cities have already released local plans. This policy provides comprehensive support for the entire hydrogen energy industrial chain. Guangzhou Development District aims to form a complete industrial chain by 2020.

Guangzhou Huangpu District and Guangzhou Development District jointly announced ‘Hydrogen energy industry development measures’, laying out support for

  • investment
    • up to 100 million for newly settled major projects
  • R&D
    • 10 million for nationally certified R&D, and testing institutes
    • 5 million for provincially certified R&D, and testing institutes
  • industry associations
    • one-time subsidy for officially registered hydrogen industry associations
  • industrial parks
    • one-time incentives of 250,000 plus 3-year subsidies
  • hydrogen fueling station
    • subsidies of up to 6 million for constructing different types of hydrogen fueling stations
    • subsidies of up to 20 per kg for operating hydrogen fueling stations
  • special financial support for
    • firms obtaining production or R&D loads through commercial banks or financial guarantees
    • entrepreneurial firms that obtain investment risk for the first time

science and innovation

state to invest trillions in advanced manufacturing
Economic Information Daily | 12 September

context: Rolling out industrial internet and getting companies to move onto the cloud is a top priority for MIIT, as economic headwinds and trade uncertainties are add urgency to climbing the global value chain. It set ambitious 2019 goals and is drafting support policies. Local governments are preparing for a major push.

Ministries are drafting plans to integrate services into industrial upgrading and to nurture advanced manufacturing clusters, reports Economic Information Daily. These plans will implement

Local governments have already increased support over the last month, the report says, noting

  • Hubei said it aims to attract 10 tn over five years to advanced manufacturing, prioritising
    • optical communication
    • new energy
    • connected vehicles
  • Sichuan announced a 1 tn megaproject, focusing on
    • electronic and information technology
    • equipment manufacturing
    • advanced materials
  • Shanghai launched 21 projects worth 4.6 bn
  • Foshan supports 50 projects with a 105 million fund
  • Qingdao will build an advanced manufacturing park in its free trade zone with an industrial output of 150 bn by 2023

Megaprojects are counterbalances to steady the economy, says Hou Yanquan 侯彦全 CCID Planning Institute Regional Development Lab vice director, expecting more to focus on high-end smart equipment, next-gen IT and new materials. Provincial governments use megaprojects to promote synergy across industrial chains and create industrial clusters, says Economic Information Daily.

Yang Chunli 杨春立 Ministry of Industry and IT (MIIT) Microelectronic Development Research Centre vice director points out challenges, including

  • technological infrastructure
  • key basic materials
  • core industrial software
  • industrial cloud
  • smart service platforms

The state should set up a national industrial internet application innovation centre, argues Yang, to support the roll-out of applications. MIIT-affiliated CCID expects the market for industrial internet platforms to break the 600 bn mark in 2019.



China Policy is a Beijing-based research and advisory company. Supporting our clients at multiple levels, from in-house research teams to CEOs and boards, we help them anticipate, understand and respond to China’s changing domestic policy and geopolitical environment. Contact us for more information on our services.