roundup from our portfolios

At the 22 September UN General Assembly, Chairman Xi pledged the PRC will reach peak carbon emissions before 2030, and carbon neutrality by 2060. Ambitious targets, they imply vast shifts in economy, energy and technology. Environment officials are wrapping up rules on a national carbon market, to be launched by year’s end. Coal-fired power remains, but construction of new plants is being reigned it.

Efforts to shape a new understanding with business turned a corner, the CCP Central Committee under Xi insisting private entrepreneurs unite around the Party. Poverty alleviation has meanwhile taken a commercial turn as NDRC (National Development Reform Commission) and 22 other agencies hailed consumption as a prime feature.

Ahead of the 5th plenum and the 14th 5-year plan it will foreshadow, all elements of society—entrepreneurs, SOEs, scientists or the military complex—are directed by leaders to serve the Party’s needs. Support for strategic emerging industries is revived, not least NEVs and ICs, as the US–China tech war plunges on.

Rebounding external demand is allaying concern, raised by the ‘dual circulation’ paradigm, about Beijing’s continued integration in global value chains. Digital trade is eyed as the next engine for export. Yet some economists fret over longer-term economic planning becoming overly risk-averse.

Beijing is prioritising increasing consumer spending and heading off financial risk. Consumer spending, not least on services, keeps weakening, prompting central agencies up to State Council to issue support measures. On the financial side, regulators are pushing for market based rescues when possible, but are stepping in when needed.

Facing falling jobs and the need to boost domestic tech skills, graduate education reform is moving towards closer integration with industry demand and national strategies, despite lukewarm student reception. With students still mostly unable to take up overseas study due to COVID-19, the reform will offer more support to Sino-foreign cooperative universities.

Beijing’s food security strategy is currently centred on waste. Following Xi’s edict to the catering sector, further measures to curb waste in the supply chain from farm to restaurant have been put in place. This pressure from the centre together with massive purchases of grain on international markets has spiked concern about supply.


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featured analysis

Civil Code: a legal coming of age for China
Civil Code: a legal coming of age for China

cp.special: China’s Civil Code slidedeck

Our Civil Code slide deck blends ease of reading with detail. Infused with expert opinions, it gives an overview of the debate and proposals during the drafting process. It highlights legislative gaps and looks forward to the future of PRC civil law. full post open access →

For an overview of the Civil Code see our cp.signal: China’s Civil Code: legally innovative, socially conservative.


september policy movers

policy professionals in and out of the establishment

Chen Yongjie 陈永杰 | Sun Yat-sen University School of Politics and Public Management associate professor

Rather than accept online education, warns Chen in 21st Century Business Herald, students prefer to defer study. The point is that unlike campus study, online halts cultural immersion; online degrees are poorly regarded, ranked with part-time programs. Online courses, Chen argues, are not ready to replace conventional ones. They will, he predicts, be shunned for many years to come by international students.

Cui Hongjian 崔洪建 | China Institute of International Studies Department of European Studies director

Sino-EU relations are less bilateral than embedded in Sino-EU-USA and Sino-EU-Russia triangles, argues Sino-EU relations expert and former diplomat Cui. While FM Wang Yi on his August Europe trip preached multilateralism, Cui urged better understanding of European states’ mission to ‘defend multilateralism’. Lobbying for balance in great power rivalry, Cui calls for carefully assessing non-US Indo-Pacific proposals.

Zhang Guoqing 张国清 | Liaoning Party secretary

With the twentieth National Party Congress only two years away, leadership jockeying in the provinces hints at who may have a ticket to the Politburo. 56, this year Zhang became the youngest serving Party secretary and one to watch. In a recent address on the 14th 5-year plan, he called for promoting ‘soft’ industries, such as the digital economy and AI, in support of Liaoning’s ‘hard’ industries, namely iron, steel and petrochemicals. Zhang was once (2008-13) one of China’s ‘masters of war’, serving as the CEO of its largest military contractor NORINCO. Prior to his nomination in Liaoning, he was (2018-20) the mayor of Tianjin.


policy ticker highlights

gems from our feed of policy releases and domestic debate

global impact

‘new business model: online ‘duty-free’

Caixin | 3 August

context: Due to tariff and non-tariff barriers, import luxury goods are priced differently in duty-free shops, regular shops and cross-border e-commerce. Before COVID-19 hit, many consumers used daigou or chose to travel overseas for purchases due to better prices and counterfeit concerns.

Duty-free operators are transitioning towards CBEC (cross-border e-commerce) as traffic in international airports remains grim. These online ‘duty-free’ shops are in fact not duty-free: shoppers do not need physical border-crossing, while operators pay VAT and consumption taxes instead of expensive airport offline rents.

Whether online ‘duty-free’ shops will cause shocks to existing CBEC operators remains to be seen, but Tmall and Kaola’s manager says that CBEC still holds advantages in food, maternity and health supplements due to higher SKUs (stock-keeping units).

Meanwhile, cross-border e-commerce platforms are seeking duty-free products to sell. Hainan Airline Duty-Free, for instance, has become the supplier for Kaola, recently acquired by Alibaba.

These new business models create opportunities for mixing duty-free and non-duty-free goods against the interests of brand owners. But they are more willing to tolerate this as global sales decline.

Non-duty-free offline shops suffered most this year. Their sales of cosmetics have been down nearly 30 percent since July 2020, due to the expanded duty-free shopping quota in Hainan, according to industry insiders. To compete with duty-free shops, which are undergoing limited expansion, non-duty-free shops will likely lower prices through sales events.

Reducing import duty could effectively stimulate consumption. Due to the variety of duty-evading strategies, import duty revenue from luxury goods is already insignificant, writes Caixin.

governance

‘People’s heroes’ honoured in the fight against COVID-19

People’s Daily | 8 September

context: The official line is still careful not to cry victory too soon, speaking instead of ‘major strategic achievements’. Yet, the ceremony per se is the most explicit signal so far of the leadership’s confidence in its methods and the way going forward. Netizens deplored that no mention was made of Dr Li Wenliang and the other whistle-blower doctors.

The entire Politburo Standing Committee led by Xi Jinping attended a ceremony held on 8 Sep 2020 in the Great Hall of the People to honour the role models that contributed to the COVID-19 containment efforts.

Zhong Nanshan 钟南山 National Health Commission COVID-19 Senior Expert Panel chair, the figurehead of those efforts, received the Medal of the Republic, the highest state honour. Three others were each declared a ‘People’s Hero’: Zhang Boli 张伯礼, Tianjin TCM (Traditional Chinese Medicine) University president and strong advocate of TCM; Zhang Dingyu 张定宇 Jinyintan Hospital director, Wuhan’s first epidemic-designated hospital; Chen Wei 陈薇 People’s Liberation Army Academy of Military Sciences Institute of Bio-engineering director, who has been conducting vaccine research.

In his address, Xi Jinping stressed that the fight against the epidemic had proven again

  • the unmatched leadership qualities of the Party
  • the unyielding will of the Chinese people
  • the notable advantages of socialism with Chinese characteristics
  • the strength accumulated by the country since its founding
  • the driving force of core socialist values and outstanding Chinese traditional culture
  • the appeal of building a community of shared future for mankind

Achievements notwithstanding, some challenges remain, including

  • pursuing normalisation of epidemic prevention and control measures
  • guaranteeing the ‘six stabilisations’ and ‘six protections’ and the realisation of a moderately prosperous society
  • accelerating the mending of shortcomings in the governance system
  • adhering to the notion of a community of shared future for mankind
  • upholding ‘baseline thinking’ and strengthening awareness of unexpected developments

macroeconomy

weak demand for bank perpetual bonds

Caixin Finance | 14 September

context: Regulators have been urging banks to recapitalise for years and perpetual bonds are one of the major tools banks can use themselves. IPOs are another way for banks to help themselves. For banks without those options, the state has allowed local special-purpose bonds to be used for recapitalisation. If problems with perpetual bond demand continue, state may look to further ease pressure on small and medium banks.

Bank perpetual bonds (called ‘perps’) are facing a serious imbalance between supply and demand; supply is increasing as more banks look to recapitalise but demand is weakening. By end August, a total of 21 banks had issued 22 perpetual bonds this year totalling 378.1 bn. Compared with the same period last year, both the number and scale of issuance and the proportion of small and medium-sized banks have increased significantly, according to Caixin. However, new regulations and a mismatch between bank assets and liabilities is weakening demand. With monetary policy tightening since May 2020, yields on perps have declined, according to Sun Binbin 孙彬彬 Tianfeng Securities analyst.

A major issue is that most perps are bought by other banks, with about 60 percent going towards wealth management products. New regulations on wealth management products will go into effect in 2021, so banks are planning ahead. The new measures have strict regulations on matching product duration with investments, something that does not suit perps, which last forever. In addition, there is debate about how to classify perpetual bonds making it harder to fit them into the new regulations which do not allow investment in equity. Issuers tend to recognise perps as equity instruments, while most of the investment side denotes them as debt instruments, explains Zhang Jiqiang 张继强 Huatai Securities fixed income analyst.

agriculture

reducing grain waste in innovative ways

National Food and Strategic Reserves Administration, Xinhua Net (1), Xinhua Net (2) | 15 September

context: Policy directives now target huge amounts of grain wasted due to poor post-harvest handling and logistics, indicating the state’s efforts to prioritise food security. High hopes are put on the Food Security Safeguard Law and the revised grain distribution management rules, both in draft.

The anti-food waste campaign is going upstream from restaurants to farms. The latest notice released by State Grain and Reserves Administration proposes comprehensive control of grain waste throughout the process of post-harvest storage, purchase, transportation, processing, and consumption. The Notice stipulates

  • strengthening legislative work
    • speed up the formulation of Food Security Safeguard Law and the revision of grain distribution management rules
    • introduce guiding opinions for reducing post-harvest waste
    • guarantee technical compliance for grain and oils storage and processing
  • improving grain management and interventions
    • strengthen post-harvest service delivery, guiding small farmers in grain cleaning, drying, storage, and sales
    • upgrade storage and logistics facilities, promoting smart and green warehouses
  • promoting tech application
    • support R&D related to grain harvesters, drying facilities, and biological agents used in warehouses
    • promote moderate processing of rice, wheat, corn, and soybeans, as well as deep processing of grain by-products
    • apply IoT, big data, cloud computing, and 5G to optimise grain transport and product traceability
  • strengthening consumer education to prevent food waste

Post-harvest service is an effective yet underdeveloped solution. Collecting grain from small farmers and handling it with modern tech and facilities, 3000 such service centres nationwide are being built by local governments, according to People’s Daily. New ag operators featuring large-scale production with modern machineries, such as family farms and cooperatives, are also playing a role in incorporating small farmers into an efficient grain supply chain, says the piece.

society

tricky path ahead to enhance education in basic disciplines

Ministry of Education, Weixin, 21st Century Business Herald (1), 21st Century Business Herald (2) | 17 September

context: Recent intensification of tech strangleholds has given more impetus to developing basic disciplines in higher education. The 2.0 version of the Plan has seen rapid growth, and the new initiative aims to tie higher education closer to national strategies in technology. But attracting talents in these areas cannot rely entirely on personal devotion. Better pay and welfare are needed.

Ministry of Education released the first batch of bases for ‘Plan to cultivate students in Basic Disciplines 2.0’ (formerly known as the ‘Everest project’) on 17 Sep 2020. In total, 33 universities are selected.

Meanwhile, the inaugural ‘Initiative to Enhance Basic Disciplines’ struggled to recruit enough students, reports 21st Century Business Herald. Many universities fell well short of recruitment plans, though Tsinghua University managed to recruit more students than planned. Experts believe many students are unsure about devoting themselves to basic disciplines. The Plan is more popular, as it allows students to pick a different major for graduate studies. The Initiative, meanwhile, prohibits students from transferring to another program.

The target of the Initiative is also unclear. The Plan explicitly targets students involved in academic competitions. These students are usually specialised in competitions, preventing them from meeting the gaokao requirements for the Initiative. Only students winning top or second prizes could join the Initiative, but these students are relatively few. In fact, all of them have been snapped up by Peking and Tsinghua University. Eventually, many students without outstanding gaokao scores were recruited.

Thus, adjustments are needed. An anonymous expert suggests students be allowed to apply to multiple universities offering the Initiative. Gaokao requirements could also be lowered and more universities could be included.

The poor reception of the Initiative is not entirely unexpected, and 21st Century Business Herald asks for patience. Stricter requirements may drive away students but those admitted would be truly committed.

energy and environment

China aims to achieve carbon neutrality before 2060

Xinhua Net | 22 September

context: Climate, again, emerges as an area where China seeks to score a diplomatic win, amidst recent mixed moves on energy transition. The hope is that targeting carbon neutrality before 2060, a bold announcement, could be a game changer for green development and geopolitics.

President Xi Jinping习近平 vows at the virtual UN General Assembly on 22 September, that China will strive to achieve carbon neutrality before 2060.

Xi adds that

  • China will scale up its INDCs (intended nationally determined contribution) by adopting more vigorous policies and measures
  • China aims to have CO2 emissions peak ‘before’ 2030 (CP Note: previously said to be ‘around’)
  • nations should unite to embrace scitech revolution and industrial transformation to drive a green global recovery

CP Note: see official English translation link

science and innovation

fuel cell vehicle pilot to reward initiatives by city clusters

21st Century Business Herald, Ministry of Industry and Information Technology, China Business Journal, Ministry of Finance | 21 September

context: Hydrogen cars were a hype in 2019, prompting more than 30 municipalities to issue local plans. But production was halved y-o-y in the first eight months of 2020, partly due to uncertainty over central government support. Now, long-awaited requirements for pilot projects are finally out. A vision of hydrogen as an energy source is also emerging.

Rather than through purchase subsidies, FCV (fuel cell vehicle) makers and other industry players will be supported through a reward system. Requirements for participating urban clusters were issued by MoF (Ministry of Finance), MIIT (Ministry of Industry and IT) and three other agencies on 21 Sep 2020. Urban clusters should use the rewards to

  • industrialise key core technologies
  • attract and cultivate talent
  • develop new tech and business models

Hydrogen production and refuelling infrastructure projects do not qualify for this particular support.

The plan, which runs as a 4-year pilot, prioritises mid-to-long-range, medium-to-large-sized commercial FCVs, reports 21st Century Business Herald. It will help build an industry chain, comments Cui Dongshu 崔东树 China Passenger Car Association secretary general. Rational planning, local advantages, and coordination are elevated by the plan, says Zhao Xiaoli 赵小丽 Vision Group strategic investment vice president, noting lessons learnt from NEV (new energy vehicle) subsidies. Whole-car manufacturers will expand their hydrogen car branches, an industry insider told 21st Century Business Herald. Rather than enterprises, the plan empowers local governments, says the insider, as these more effectively facilitate application scenarios and coordination along the industrial chain.

Local governments and firms will be rewarded for

  • FCV numbers
  • hydrogen-powered mileage per vehicle
  • relevant annual hydrogen production capacity and capped retail hydrogen price

A target price for hydrogen fuel has been set, notes Cui, at 35 per kilo. Most hydrogen needs further purification to suit FCVs, notes Cui, calling for careful tactics to meet the price target in four years.

The scheme’s promotion of cross-regional collaboration will run up against the dispersed and isolated nature of current local initiatives, argues 21st Century Business Herald. Enabling enterprises to join multiple pilots can avoid forced investment locally for pilot eligibility and quantity-over-quality construction, says MIIT. Shanghai, Beijing, Hunan and Shanxi provinces indicated submitting applications, says the report.



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