August: culling swine, relaxing economy
‘Stability’ is the watchword as economic priorities respond to a slowdown. The Politburo used the word 18 times in the press release from its 31 July meeting, vowing to stabilise growth, investment, employment finance and, most importantly, market expectations. Efforts to take on structural challenges such as implicit local government debt, the housing bubble and budget indiscipline, are relaxing as the state juggles growth and stability. Local government financing vehicles (LGFVs)—a major source of financial risk in the cross-hairs of deleveraging policy—got a reprieve. Ministry of Finance (MoF) urged local governments to expedite special debt issuance to support new infrastructure, and People’s Bank of China relaxed macro prudential indicators. Confidence in LGFVs remains despite a first-ever LGFV default, in Xinjiang (the debt payment came through only two days late). Commercial banks also moved into local government bonds after MoF announced that they could be offered at an interest rate 40 basis points higher.
The ag sector finds itself under intensifying pressure this month as policymakers struggle to respond to China’s first cases of African swine fever. The origin of the outbreak remain unclear, but it is already affecting soybean futures as traders weigh the potential of a massive cull to control the disease, and may force a reevaluation of trade war tariffs on US pork and soybeans. Meanwhile, a new ‘Ag and Rural Pollution Control Action Plan’ will add additional pressure for pig farmers as well as other companies in livestock and agrochemicals.
Anxieties about policy implementation resurfaced, fueled by the recent scandal over ineffective vaccines. Investigations led to a mid-August personnel shakeup in Jilin province and the drug regulatory system, while a number of officials in cities connected with pharma manufacturers also resigned. Well-known pharma regulation reformer Bi Jingquan 毕井泉 resigned from his posts as State Administration for Market Regulation Party secretary and vice director. His departure brings uncertainty to ongoing reforms in the pharmaceutical and medical device industries.
The Central Commission for Discipline and Inspection newspaper warned all cadres that failure to rectify problems exposed in the recent round of local inspections is tantamount to disloyalty to the Party. Localities will soon be under further scrutiny; State Council dispatched 31 inspection teams on 22 August to check whether central government decisions have been carried out, and made surprise return visits to some sites to check on progress.
Some experts proposed Chinese citizens under the age of 40 should pay an annual fertility tax until they have a second baby, prompting a major debate on family planning policy, fertility and childcare on social media. Meanwhile, education reform, on the eve of a start to a new school year, showed little sign of being more than some local experiments and increasing central oversight of private and for-profit ventures.
Trade war escalation continued: both China and the US pushed ahead with US$16bn tariffs on 23 August despite resuming talks. Contrary to the reported growth in FDI and ODI, the sharp drop in China’s overseas mergers and acquisitions foreshadows a bleak outlook under strengthened foreign investment screening processes in the US and major European countries.
Elsewhere, China moved to consolidate its bilateral partnerships. Yang Jiechi (杨洁篪) held joint consultations with Russian counterparts to improve bilateral strategic planning. A ‘China–Russia Ag Cooperation Plan’ is nearing completion, and has already expanded market access. Beijing established diplomatic relations with El Salvador (replacing Taiwan). Turkey showed signs of drawing closer to China in response to recent US tariffs on steel and aluminium but is deemed not fully detachable from the US and EU. Official media remain defensive about the Belt and Road Initiative. Malaysian PM Mahathir Mohamad’s visit to Beijing also signalled trouble for Chinese investments in Malaysia,
Faced with external strife and growing trade uncertainty, the government is prioritising domestic market reforms through improving the business environment, incentivising investment at home and facilitating talent flow in the Greater Bay area. 68 sci-tech experts were invited to top-level closed-door meetings in Beidaihe. They will have discussed industrial policy, as tension with the US has caused officials to downplay Made in China 2025.
People’s Daily called for a similar top-level, long-term ‘digital China’ blueprint with a full-page spread containing three guest commentaries, ignoring warnings that it would offer US trade hawks an extra focal point. In the meantime, internet policy is set by 5-year plans and ministerial 3-year action plans. Ministry of Industry and IT and National Development and Reform Commission issued the ‘3-year action plan for boosting and upgrading digital consumption (2018-20)’ 10 August. The plan calls for extending internet to 98 percent of administrative counties.
The new Ministry of Ecology and Environment, set up at the March government overhaul, appears to be taking shape after a period of uncertainty. An unpublished document specifying the new agency’s mission, structure and staffing is circulating in the media. The document creates new departments for marine environment, climate change, and solid waste and chemicals. The formation of a stand-alone department for solid waste followed stepped-up state action to address solid waste pollution and the 17 July draft amendments to the Solid Waste Pollution Prevention and Control Law, the most significant revision since the law’s release in 1995. Industry experts are, however, concerned the revisions are overly stringent and will impose undue compliance costs.
Media is also circulating an unreleased draft of the autumn and winter heating season plan for the Jingjinji region. It confirms that winter industrial production controls will continue in 28 Jingjinji region cities 2018-19 and reflects a new norm of prioritising pollution management and industrial production controls, even in non-heating seasons.
august policy movers
policy professionals in and out of the establishment
Zan Tao 昝涛 | Peking University Centre for Global Modernisation Studies deputy director
As a scholar of the Middle East, Islam, and China–Turkey relations, Zan analyses how imbalances in China–Arab states relations contribute to tensions. On China–Turkey ties, Zan writes that trade imbalances and competition in fields like textile exports have created an uneasy relationship with Turkey. While Turkey is seeking areas of cooperation where politically feasible, China must realise that it will be unable to openly support Beijing’s policies in Xinjiang, as Turks view Uyghurs as compatriots. Although Turkey is not a major power, Zan writes, its perceptions of China’s rise cannot be ignored, as China’s influence in the Middle East is still relatively weak.
Bi Jingquan 毕井泉 | former State Administration for Market Regulation Party secretary and vice director
Bi resigned along with many other officials in the wake of the government investigations into the vaccine scandal. Reassigned from National Development and Reform Commission and State Council, Bi was appointed State Food and Drug Administration director in 2015 without any experience in drugs and medical devices. Bi pushed key reforms and developed an excellent reputation in the pharmaceutical sector, with some saying that the progress he made in three years exceeded that of the past 30 years. Bi argued that China should develop pharmaceuticals that can be sold worldwide, and that generic drugs should be be able to compete with brand-name ones on quality. Under Bi, China joined the International Council for Harmonisation, which is expected to help it internationalise its pharmaceutical regulatory practices. Industry observers fear that his departure may end momentum for these efforts.
Lu Chuncong 鲁春丛 | Chinese Academy of ICT Institute of Economic Policy director
The digital economy contributed 55 percent of China’s 2017 GDP growth and 32.6 percent of growth in the tertiary sector, calculates Lu. Despite its strength, Lu says, the digital economy is restricted by four major problems: 1) over-dependence on imports of high-end sensors, industry control systems and software; 2) underdeveloped industrial internet platforms; 3) risks of cyber-attack, especially in finance, transportation and energy; 4) a tendency toward monopoly/oligopoly that undermines market competition. The digital economy is highly volatile, and preventive construction of defensive cyberspace architecture is imperative. To exploit the full potential of digital transformation, Lu recommends accelerating the deployment of industrial internet; upgrading digital and internet infrastructure in manufacturing; improving internet governance and digital public services; and ensuring access to skilled labour, investment and data sharing.
policy ticker highlights
gems from our feed of policy releases and domestic debate
geopolitics
how to avoid the Thucydides trap
Aisixiang | 17 August
context: Chinese analysts have used the word ‘hegemon’ in association with US trade war policy, arguing that tariffs are an attempt to maintain US economic control. In response, experts advocate varied solutions, ranging from a wait-and-see approach to more proactive measures.
In the context of the unavoidable trade war, China must continue and deepen its reform and opening policy to avoid the Thucydides trap, argues Zheng Yongnian 郑永年 South University of Technology Institute of Public Policy Academic Committee chairman.
The trade war reveals that the US desire to maintain hegemony remains the essence of China–US relations. Nevertheless, both parties’ nuclear arsenals deter total military confrontation, yet limited conflicts could still lead to another military and political cold war.
The current trade war is a ‘technological Cold War’, writes Zheng, in which the US wants to
slow down China’s process of modernisation
facilitate China’s descent into ‘middle-income trap’ or ‘poor socialism’
Before taking actions to respond to the trade war, China should acknowledge that it lacks technological innovation and development, which China must address by
limiting the trade war to areas where it can find replacement countries for imports
such as automobile and agricultural industries
importing US energy products, such as shale oil, to balance trade deficits
a constant point of focus for Trump
utilising multilateral institutions
opening the internet sector to the global market to promote technological innovation and attract capital
developing national opening platforms (国内的开放平台), such as Guangdong–Hong Kong–Macao Greater Bay Area, to attract foreign investment
improving intellectual property protection to encourage China’s enterprises to innovate and operate according to international rules
finance
high-quality growth and demand expansion need strategic rethinking
Jiemian | 27 August
context: Facing slowdown pressures, high-quality growth and economic restructuring were overshadowed by the return of fiscal and monetary stimulus. Current strategy still weighs heavily on traditional growth drivers like infrastructure, which only exacerbates structural problems and undercuts efforts to address them.
While the economy is experiencing downward pressure, this has little to do with the trade war; mixing these events together will overlook many important problems, says Liu Shijing 刘世锦 Chinese People’s Political Consultative Conference economic commission deputy director. Liu advocates for a paradigm shift, involving
lowering expectations on economic growth rate
emphasising high-quality growth requires high employment, controlled financial risks, profitable enterprises, sustainable environment and stable income; the latter four are very unstable as a result of high-speed, unsustainable growth
the hundred-year development goal can be completed with 6.3 percent annual growth over the next three years; it is advisable to maintain a moderate speed at 4-5 percent annual growth, which, according to international experience, can persist for ten years
stabilising growth should not rely on infrastructure; other growth drivers should be cultivated
real estate and infrastructure net fixed-asset creation through investment already passed their peak and governments’ land financing strategy has reached its end; the model is unsustainable as the former adds on household debt and the latter exacerbates local government debt
smoothing urban-rural production factor movement, especially land reform, is a key aspect to unleash consumption potentials
active fiscal policy should address weak spots in medical care, aged care, education, social security and basic research; even infrastructure investment should revolve around these areas
cultivating domestic service markets in aged care, culture and recreation prior to building a highly-quality, open-market economy
goods consumption plateaued as the economy reached a certain point; service is key in consumption upgrade
reforming monopolistic sectors in oil and natural gas, electricity, telecommunication, railway and finance
finance
Han Jun: continue opening agricultural trade despite trade war
People's Daily | 11 August
context: The US trade war will impact domestic farmers and consumers alike—but here the country’s leading ag policy advisor reiterates commitment to ag trade liberalisation. The timing of his full-page interview to coincide with senior officials’ traditional summer retreat to Beidaihe suggests this topic is high on Xi’s agenda.
Active, consistent and ongoing opening-up of agricultural product trade is the general trend, clear policy orientation and ‘correct choice’ despite trade tensions, says Han Jun 韩俊 Central Rural Work Leading Group vice director and Ministry of Agriculture and Rural Affairs (MARA) vice minister in People’s Daily. China and the US are highly complimentary agricultural trade partners, and a large and growing market awaits US farmers if healthy trade relations can be re-established. Over C¥24 bn of US agricultural products were imported in 2017, accounting for 19.2 percent of domestic agricultural imports by value.
The US has ignored prior consensus and continues to escalate trade tensions, pushing domestic policymakers to introduce countermeasures that have long-term implications for US agricultural product market share. Han further notes
additional tariffs imposed on US ag products will reduce market share dramatically
if competitors occupy the market, lost market share will be hard to regain
if other countries prove to be more reliable suppliers, they may gain market access benefits
a number of steps have been taken to diversify trade partners and substitute for US soybeans
domestic aquatic product industry and fruit and vegetable producers may feel the impact of US tariffs
the US purchased over 15 percent of aquatic product exports by value in 2017
MARA will support
finding new buyers for aquatic products
cracking down on smuggling
incentivising domestic consumption of aquatic products
the domestic market has the capacity to absorb additional fruit and vegetable production
society
uncertainty surrounds pharmaceutical regulatory reform after removals and resignations
Caixin | 17 August
context: Five months after being named the new State Administration for Market Regulation Party secretary and vice director, Bi Jingquan has resigned. Held accountable for the vaccine scandal in Jilin, Bi had a reputation as the most qualified and reform-minded drug regulator in two decades.
Although Bi Jingquan 毕井泉 former State Administration for Market Regulation Party secretary and vice director was in charge of drug regulation and led the inspection group that examined the vaccine scandal, his resignation alone won’t solve anything; the real problems behind vaccine regulation started with institutional reforms in 2008, argues Caixin. In 2008, local governments were provided supervising powers over manufacturers in an effort to deregulate the market, but local officials lacked experience and the required expertise to oversee manufacturing and safety matters.
Bi conducted crucial reforms as State Food and Drug Administration director from 2015 to 2018, including
streamlining drug and medical device approval processes
pushing evaluations of generic drugs to ensure quality and develop the industry
approving overseas clinical data in China and accelerating the process for imported drugs and innovative medical devices
Bi’s resignation brings uncertainty and may result in backsliding because current stakeholders may use it as an opportunity to resist further reforms, says Caixin.
governance
Zhou Li’an: incentives and constraints for cadres require balancing
Nanjing Daily | 15 August
context: one of the unpublicised but privately acknowledged understandings about the annual Beidaihe conclave is that leaders will not overtly seek support for their policy views outside those meetings. Nonetheless, others will work to print essays and commentaries that reflect certain leaders’ views, to signal developments at the meetings or seek support for views or proposals. This brief article advocating more autonomy for local governments, originally printed in Beijing Daily and now finding its way into other Party media, is likely one of those efforts.
Three major challenges face efforts to modernise governance, says Zhou Li’an 周黎安 Peking University Guanghua Management School vice president, reports Nanjing Daily
redefining boundaries between the government, the market and society
defining boundaries of power and responsibility between central and local governments
achieving a balance between incentives and constraints for officials
Zhou advocates reforming the tournament system (competition between localities) to both constrain and motivate local officials. He argues that including criteria beyond economic development into performance appraisal indicators, such as achievement in innovation, greenifying cities and environmental protection, will achieve that. Secondly, Zhou argues for introducing bottom-up in addition to top-down assessment in performance appraisals, with cross-governmental sector and regional competition in public services.
With these checks and balances, the dilemmas of decentralisation can largely be avoided, says Zhou. Therefore, more power can be delegated to local governments (taxation and borrowing rights) while restricting local government intervention in the supply of national public goods (such as maintaining a unified market, eliminating local protectionism and regional discrimination in the labour market). Powers of central and local government should be adjusted, continues Zhou, with increased spending responsibility for local governments: central government should increase tax transfer payments to improve the balance between local government powers and their financial resources.
trade
China should pursue accomodating industrial policy
Caixin | 1 August
context: Some of the Sino-US trade war is focused on industrial policy, with US concern over China’s ambitious ‘Made in China 2025’ program. Despite Beijing downplaying the initiative,global mistrust plagues China’s ambitions for global leadership.
A key reason for supporting industrial policy is that it can improve efficiency, said Bai Chong’en 白重恩 Tsinghua University School of Economics and Management executive vice president in a keynote speech at the China Competition Policy Forum on 31 July 2018. A series of empirical analysis on Chinese and Japanese industrial policies reveal, however, that these policies don’t achieve the desired effect on total factor productivity. While policy measures to strengthen competition improve efficiency, policy measures which hinder competition are not conducive to achieving efficiency, reports Caixin.
Whether some countries will be passive or forced to adopt certain industrial policies in order to address some aspects of vulnerability is a question, Bai said at the end of his speech. In an interview with Caixin, he later revealed that this statement was a reflection of the ZTE incident, asserting that international technology governance needs to be addressed now. Although rules exist which are targeted at enterprises, they are powerless at the national level, stated Bai.
In the short and medium term, he argues there is limited room for discussion with the US given conflicting interests, but that Europe may be a potential negotiant given its vulnerability. In order to cooperate with the continent, Bai believes that China’s approach to industrial policy as well as its objectives have to be adjusted. Whereas Europe will almost certainly choose US over Chinese hegemony on the basis of ideology, Bai asserts that if China pursues industrial policy which is non-subjugated and pluralistic, then the EU and Japan will be sympathetic and seek alternative technology outside the US, thus allowing the potential for a united front.
industry and environment
facilitating nuclear power standardisation
National Energy Administration, State Council | 9 August
context: US and French standards have long dominated China’s nuclear power industry. Developing a unified and self-designed standard system is critical for creating China’s independent nuclear power brand and exporting its nuclear technology.
State Council issued ‘Guiding opinions on promoting standards in the nuclear power sector’ on 9 August 2018, aiming to
by 2019, develop a unified and self-designed nuclear power standard system that is in keeping with the country’s overall nuclear power development
by 2020, substantially increase the proportion of self-designed standards adopted by the nation’s independently developed nuclear projects, and significantly improve international recognition of China’s standards
by 2027, play a leading role in developing international nuclear power standards
Key tasks include
improving self-designed standards, with a special focus on mechanical components of pressurised water reactor (PWR) nuclear islands that are crucial for strengthening nuclear safety
optimising standard structure, which should include general and specialised standards
improving policies and regulations relevant to the nuclear power projects, and incorporating the adoption of self-designed standards into the assessment of nuclear power projects
improving standard verification and setting up a mechanism to review the implementation of the standards
deepening international cooperation
establishing a platform to facilitate informatisation in nuclear standardisation process and promoting talent development
conducting research on nuclear power standardisation
As of now, around 900 nuclear power standards have been issued, covering the entire life cycle of nuclear power plants, according to National Energy Administration. The country also aims to raise nuclear power generation capacity to 88 GW by 2020.
science and innovation
next steps to execute digital economy action plan
Sina Tech, China Economic Times | 12 August
context: MIIT is calling upon the digital economy to reach C¥6 tn by 2020 and contribute considerably to overall GDP. This may be difficult due to a sluggish economy, external risk, reliance on imported technology and legal uncertainty. Top policy advisors call for boosting support and clarifying privacy regulations, among other things.
Promoting the digital economy will stimulate consumption, but it will also have profound implications for the supply side, nudging manufacturing enterprises towards big data analytics, internet of things (IoT), cloud computing and artificial intelligence (AI), says Li Yizhong 李毅中 former Ministry of Industry and Information Technology (MIIT) minister. Li argues that becoming a manufacturing powerhouse and an internet powerhouse has so far been facilitated by
improvements in internet infrastructure
high-speed broadband networks accessible by 53.3 percent of the population
fibre-optical network accessible by 86.7 percent of households
46.2 percent decline in mobile data cost
ICT industry added C¥7 tn in value in 2017, 8 percent of GDP
R&D in core technologies
67.4 percent adoption rate of digitalised tools in R&D
9.8 patents per 10,000 people
60 percent of patents filed by private sector
Li highlights hurdles for further growth
technological bottlenecks
core components
high-end chips
integrated circuits (IC)
basic software
data processing, analysis and visualisation
reluctance among industrial enterprises due to insufficient ICT knowledge
concerns over impact of automation on employment
two million workers were laid off during Zhenjiang’s ‘Robotics campaign’
cybersecurity and privacy concerns
An Hui 安晖 China Centre for Information Industry Development Institute of Electronics director recommends
improving policies
issue a national ‘digital economy blueprint’ in 2018
extend local pilots
Guizhou, Shanxi and Fuzhou issued digital economy development plans
promoting cross-sector integration to
coordinate R&D, manufacturing, logistics and consumption
apply ICT in manufacturing
collaborate in R&D
exchange skilled labour
addressing ethics, data protection and individual privacy
standardising statistical and quantification measurements
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