December: CEWC, consumption stimulus, zombie enterprises
Pressured by economic slowdown and external political tensions, Beijing is promoting consumption and supporting the service and high-tech sectors at home. The Q4 Politburo meeting and 2018 Central Economic Work Conference (CWEC) both stressed the need for a robust domestic market. December also saw monetary easing via reserve ratio lowering and more medium-term money becoming available. Fiscal expansion will continue into 2019 in the form of infrastructure construction (with the focus on 'smart' i.e. fast trains, 5G), local government bond issuance, and personal income tax cuts, with new deductions for education, healthcare and housing expenses.
The much anticipated 2018 nationwide market access negative list appeared on 25 December 2018. The list, says Cui Fan 崔凡 UIBE professor, is aimed at further opening the economy to domestic and foreign capital. It may also be a vehicle for State Council's promised competitive neutrality.
The Party’s ‘self-revitalisation’ continues. The Central Committee issued regulations to standardise discipline, inspection and supervision organs, and confirmed their expanded role as overseers of political life. The Civil Servants Law was also revised, with stricter political requirements and clearer boundaries that civil servants are not to cross. This release was swiftly followed by an authoritative commentary penned under a pseudonym for the Party’s Organisation Department, which emphasised its benefits.
Support for the tech industry includes speeding up rollout of 5G technology, scheduled to go live in 2019. But international scrutiny of ZTE and Huawei bode ill for their efforts to dominate 5G equipment. Huawei's CFO was arrested in Canada at the request of the US, (and another executive in Poland in early January) and Japan announced it will exclude ZTE and Huawei products from government procurement. A temporary sales ban on certain Apple products granted by a Chinese court in the Qualcomm v. Apple case came amid a further push to strengthen intellectual property rights (IPR) protection, highlighting China’s potential as a major site for global IPR competition. The latest legislative move in this area is the draft Foreign Investment Law, currently under NPC review, which further prohibits IPR theft.
NDRC and ten other agencies brought zombie enterprises back into the public eye, moving to settle their debts by end 2020. In one of the most critical supply-side structural reform (SSSR) policies of 2018, the centre lays out the first detailed timetable and slates companies for bailouts or liquidation. Banks and local governments are prevented from granting preferential loans or subsidies to hopeless firms, says Li Jin 李锦 China Enterprise Research Institute, a notable departure from earlier SSSR approaches in 2015-16 that encouraged M&As and discouraged liquidation.
With just one year remaining to win Xi Jinping’s ‘siege on poverty’, rural and ag development was also listed among top priorities at CWEC. The Central Rural Work Conference laid out a detailed agenda spanning rural anti-poverty efforts, village housing and infrastructure upgrades, and further industrialisation of the agricultural economy. Little space was devoted to traditional themes like boosting staple crop output, with policymakers instead pushing a shift toward livestock feed and cash crops, boosting non-farm employment through new rural business categories, and accelerating rural land reform efforts.
december policy movers
policy professionals in and out of the establishment
Chen Xiang 陈翔 | Hailing district Party Secretary, Taizhou, Jiangsu
One of the new breed of front-line cadres who spend much of their working time outside, inspecting projects and urging progress, Chen rarely refers to ideology or political slogans, and instead emphasises the quality of urban life and industrial innovation. He describes his constituents as marginally affluent and slightly entrepreneurial, but too anxious about small troubles. Chen advises residents to reach outward, and leave insularity and old habits and standards behind–and for officials to do the same.
Ge Jun 戈峻 | former Apple and Intel vice president China
Multinationals still struggle in China, complaining of selective legal enforcement, invisible market barriers and unfair competition. Ge considers the long-awaited market access negative list overly abstract and lacking in enforcement clarity. Inconsistencies between global and domestic technology standards also add to multinationals’ R&D and compliance costs. Lastly, Ge points out that industrial policies might produce inefficiencies and render final products less competitive. As an example, Ge says the Cybersecurity Law safeguards national security, but prevents consumers from enjoying high-quality services from overseas. Ge calls for policy makers to balance competing interests, such as national security and technology neutrality, industrial policy and the market economy, as well as fair use and IP protection.
Li Jin 李锦 | China Enterprise Research Institute chief researcher
A journalist by trade, Li has over 40 years of experience researching China’s economic and social reform, and is one of the most active voices in SOE reform. On the zombie enterprise debt policy, Li suggests that rising prices for steel, coal, cement and other commodities in recent years have given some zombie firms a new lease on life. In addition, employment and stability considerations further incentivised local governments and financial institutions to bail out zombie enterprises. Li argues stronger measures, such as an accountability system, should be set up to prevent localities from granting subsidies and loans to zombie firms.
policy ticker highlights
gems from our feed of policy releases and domestic debate
geopolitics
BRI needs its own theory
Sohu | 5 December
context: Once solely a government project, Chinese academia has worked to incorporate the Belt and Road Initiative as a field for intellectual debate. Sohu’s project is unique in the way in incorporates experts from varied fields and backgrounds.
To be properly understood, the Belt and Road Initiative (BRI) needs its own original international relations theory, reports Sohu News. Sohu News collected views from experts working on a major National Social Science Fund project on ‘BRI Strategy and Xinjiang’s Social Development’.
Zhao Lei 赵磊 Central Party School Institute of International Strategy BRI Institute director writes that BRI
has three levels of goals
economic diplomacy’s top-level design
building a community of common destiny
participation in global governance and provision of public goods
seeks to connect the periphery to the core
is ‘decentralised’ and ‘unpolarised’
unlike the US-centric alliance system
allows for dissemination of different cultural values
Zhao Ke 赵柯 Central Party School Institute of International Strategy associate professor
BRI seeks to provide a new and more durable impetus for global economic growth through expanding markets and improving regional specialisation
Xiong Jie 熊洁 Central Party School Institute of International Strategy associate professor
BRI has surpassed traditional economic growth models of market expansion by emphasising technological and system innovation and progress, within and between countries
Zhao Minghao 赵明昊 CPC Central Committee External Affairs Department China Center for Contemporary World Studies researcher
BRI acknowledges that the world will be ‘multi-centre’, not multipolar, by
affirming and safeguarding sovereignty
promoting cooperation
respecting the diversity of civilisations and international development models
Cao Feng 曹峰 Tsinghua University Center for Social Risk Assessment in China deputy director
BRI is an effective strategy to create a sense of unity for all Chinese, in the mainland and overseas
China should introduce measures to increase the Chinese diaspora’s sense of identification with the mainland, because
overseas Chinese, especially along the BRI, are an invaluable source of support for the initiative and community of common destiny
the ‘China dream’ is for all Chinese people
Yuan Jian 袁剑 Minzu University Institute of Global Ethnologies and Anthropology associate professor
BRI is a future-oriented framework, aiming to eliminate colonialism and hegemony
BRI should take into account each country’s needs for equality, security and religious and civilisational differences
China must pay attention to overseas Chinese and issues of identity
Yang Mei 杨梅 Xinjiang University School of Politics and Administration associate professor
China is crucial to the next step of globalization
despite challenges from the current ‘anti-globalisation’ movement, China is promoting a new type of international relations based on mutual respect, fairness, justice and cooperation
BRI’s global governance framework has become clear, and emphasises building a community of common destiny to counter anti-globalization movements and represent the development needs of all nations
Zheng Liang 郑亮 Xinjiang University School of Journalism and Communication associate professor
geopolitics and US containment have caused China to review its Silk Road policy
BRI is the means to achieve economic development in China’s western regions
Tang Jian 唐健 Central Party School Institute of International Strategy assistant researcher
the community of common destiny is China’s solution to problems created by the US-led international order
the China solution is based on
diversity
a global vision
the Western solution is based on
exclusivity
greed
disappearance of diversity
BRI can help achieve a diversity-based international order
finance
CEWC pep talk for a tough year ahead
Xinhua Net | 21 December
context: While the overall tone remains ‘all is well under the Party’s leadership,’ the annual top-level economic conference touched upon some of the most pressing challenges facing the economy in 2019. Determined to turn the unfavourable environment into opportunities, the state is providing the best possible top-level design, but the extent to which it can be implemented at local level remains a big question.
Central Economic Work Conference (CEWC) convened on 19-21 December 2018, with all seven Politburo standing members participating. Ahead of the upcoming 70th anniversary of the country’s establishment, the meeting discussed the following priorities for 2019
carrying out active fiscal and robust monetary policies (note: ‘neutral’ was deleted here) while strengthening countercyclical adjustments
on the fiscal front, larger-scale tax and fee reduction and significantly higher local government bond issuance expected
on the monetary front, improving policy transmission and solving financing difficulties for private economy
‘three sieges’ to focus on
preventing aberrant oscillation in financial market and appropriately dealing with the local government debt problem
poverty alleviation to emphasise such deeply impoverished regions as the ‘three districts and three prefectures’
doubling down on environmental protection efforts while avoiding over-simplified measures
fostering high-quality growth and supply-side structural reform
speeding up market clearance in overcapacity industries
improving industrial chain quality and creating new competitive advantage with technological innovation and industry clusters
building key national lab system, enhancing SME support, emphasising IPR protection and creating innovation incentives
forming robust domestic market
improving product quality and developing service industries in education, early childhood care, aged care, healthcare, culture and tourism
enhancing infrastructure investment in 5G commercialisation, AI, industrial internet, IoT, inter-city railway, logistics, and urban and rural facilities
advancing rural revitalisation strategies
prioritising ag and rural development, especially grain production
adjusting ratio of grain, cash crop and feed
cultivating family farm and cooperatives as new management actors
integrating small peasant production into modern, upscaled ag development
improving rural residential environment
reforming rural land system
accelerating economic institutional reform
state-owned enterprise reform to emphasise separation of government and business as well as fair competition
supporting private business by creating law-based environment and protect entrepreneurs’ personal and property safety
financial institutional reform to encourage private and community banks, while urging urban commercial banks and rural credit unions to focus on their main business
improving financial infrastructure building and enhancing regulations
creating compliant, transparent, open, vibrant and resilient capital markets by
improving quality of listed companies and trading system
introducing more medium- and long-term capital
operationalising Shanghai Stock Exchange sci-tech board
promoting fiscal reform and disciplining local borrowing behaviour
reducing government intervention in resource allocation
promoting full-fledged opening up
improving people’s livelihood
prioritising employment stabilisation, especially that for college graduates, migrant workers and veterans
enhancing investment in preschool education, early development of children in rural and impoverished areas and vocational education
improving aged care system, especially in big cities
emphasising food and drug safety, production and traffic
deepening social insurance system reform by
adding national pension fund coordination on top of provincial management
covering more quality medicine under health insurance
adopting locally specific approach to real estate sector to suppress speculation, improve market system and affordability and establish long-term mechanism
agriculture
2018 Central Rural Work Conference highlights anti-poverty, rural land reform
Xinhua Net, People's Daily, Tencent | 29 December
context: As the deadline approaches on a state goal to eliminate poverty by 2020, poverty alleviation tops the rural policy agenda. Ag-related goals are increasingly on the sidelines as the rural revitalisation strategy, first clearly outlined at last year’s CRWC, shifts focus to rural infrastructure, housing, and non-farm employment. Policymakers devoted little time to staple crop output or food security, instead supporting the ongoing shift toward livestock feed and cash crops, and calling to accelerate rural land reforms.
The 2018 Central Rural Work Conference (CRWC) was held in Beijing on 29–30 December 2018, chaired by Xiao Jie 肖捷 State Council secretary general and attended by Xi Jinping 习近平 president and Li Keqiang 李克强 premier. The meeting highlighted 2019 rural policy priorities, aimed at winning the battle against poverty and building a moderately prosperous society by 2020.
Plans discussed at the meeting include
focusing anti-poverty efforts in key areas within Tibet, Xinjiang, Yunnan, Sichuan and Gansu
substantially improving rural living environments
ensuring food security by stabilising production area and optimising planting structure
cracking down on farmland misuse
strengthening African swine fever (ASF) prevention and control
developing rural non-farming sector
deepening rural land reform
improving rural infrastructure
strengthening rural grassroots party-building
improving rural social morality
upgrading rural governance systems based on principles of self-governance, rule by law and ‘rule by virtue’
Xinhua reports that the December 2017 CRWC called for rural areas to be prioritised during four government processes, namely assignment of cadres, allocation of resources, investment of public funds, and provision of public services. The 2018 meeting has again raised these ‘four priorities’, notes the coverage. Cheng Guoqiang 程国强 Tongji University School of Economics and Management professor says delivering on rural development goals will require these ‘four priorities’ to be implemented. He argues these priorities are reflected in the set-up of state supported rural credit and investment guarantee mechanisms, which will play a key role in attracting private capital investments into the rural sector.
Ye Xingqing 叶兴庆 State Council Agricultural Economy Development Research Centre director general notes this year’s priorities have been defined as hard requirements by the state, specifically because progress in these areas are lagging. More effort is needed if 2020 anti-poverty goals are to be met, as rural living environment and infrastructure upgrading closely correlates with farmers’ welfare, happiness and economic development in the longer term.
Liu Heguang 刘合光 Chinese Academy of Agricultural Sciences (CAAS) researcher says better incentive and supervision mechanisms are needed, along with clear instructions to local officials expected to deliver on rural development and anti-poverty agendas. Capable teams should be sent to struggling areas, and ‘rational’ allocation of funds to complete work is also needed, he argues. Rural production capacity is currently constrained, he argues, and should be liberated through the reform process.
Zhu Xinkai 朱信凯 Renmin University vice president says agriculture should not be viewed as a backward industry, as it has technology, economic forces, and national security at its core—a versatile industry that supports rural development and social progress. Rural areas, he says, should not be associated with poverty but with natural and pastoral beauty.
society
distance learning cannot bridge the rural-urban divide
Caixin (1), Caixin (2) | 14 December
context: China Youth Daily published a special report on how distance learning courses offered by Chengdu No.7 High School have provided students in Yunnan Quanlu No.1 Middle School higher chances of success in gaokao exams. The article provoked wide debate in the media on the role of education as ‘the great equalizer’ in upward social mobility and the impact of skills-based technological change on the equality of opportunity.
While the story of ‘life changed by a small screen’ is promising, the role of live streaming video in bridging the rural-urban digital divide should not be exaggerated, argues Li Jinguo 李进国 China Association for SOS Children’s Village president. Live streaming connects the two ends of the country’s educational hierarchy: one of its top-ranked high schools and an unknown rural middle school in one of its poorest counties. According to Li, the yield of live streaming on coursework tutoring and knowledge transfer is very limited. What really matters, he insists, is peer pressure: that is, watching how urban elites study and live motivates rural students to strive for better grades and a better life.
The success of distance-learning depends largely on the capacity of its audience, argues Tang Min 汤敏 state councillor. Tang notes that most rural schools are ill-equipped to provide the necessary amount of offline teacher-student interaction and face-to-face tutoring, which have negative effects on student learning outcomes. Rolling out such programs also requires subsidies and policy support from the government, adds Tang.
There is a stronger correlation between rising undergraduate enrollment rates in Quanlu and the policy of college admission quotas for rural candidates initiated in 2012, says Xiong Bingqi 熊丙奇 21st Century Education Research Institute. The poverty alleviation campaign has further boosted education spending in rural areas, he adds. More needs to be done to fundamentally solve the lack of equality in educational opportunities between rural and urban regions than just distance learning, Xiong argues, highlighting investing in training rural teachers and empowering grassroots schools.
governance
Zhong Zuwen: Civil Servants Law revision combines deep concern with strict management
People's Daily | 3 January
context: It is rare to see an authoritative commentary appear so quickly after a law has been released. Its appearance is likely because new regulations on civil servants caused consternation in some quarters. The increasingly invasive role of Party branches in some institutions, as well as calls for loyalty and ‘strong politics’, is of some concern to those who hope that expertise is at least as important as ideological fealty.
Zhong Zuwen 仲祖文 (pen name for Central Committee Organisation department) explains that the revised Civil Servants Law realises CCP General Secretary Xi Jinping’s 习近平 proposal for combining strict management and deep concern, encouragement and restraint, to extend civil servants better career prospects, and increase their motivation and sense of security regarding remuneration.
Unblocking career development channels and instituting a parallel system of duties and ranks is an important revision, says the commentary. Drawing on pilots, the reforms look to change non-leadership duties into ranks, link salaries to rank, and explain promotion conditions, thereby expanding the space in which civil servants, particularly those in the grassroots, can develop their careers and carry out their duties.
Improving mechanisms that guarantee the rights and interests of civil servants is a concrete realisation of concern for civil servants, the commentary notes. Acknowledging that civil servants have heavy workloads, are under great pressure and work overtime frequently, the commentary explains that they will receive compensation and time off in lieu. Civil servants can also exercise their legitimate rights to criticise, lodge appeals, bring charges and report offences.
The commentary insists that strict discipline and supervision builds a ‘firewall’ within which civil servants can carry out their duties correctly–that is, with a clearer sense of what is permissible and what is prohibited.
trade
former Intel legal advisor: tech legislation should balance different interests
Weixin | 6 December
context: Forced technology transfer is a major source of conflict between the US and China. Since it is an area where US interests align with other economies such as the EU and Japan, it is high time for China to address this problem to avoid risks of market exclusion.
The previous trend of global convergence is being replaced by increasing divergence, says Ge Jun 戈峻 former Intel China chief legal advisor, especially in technology development. Many countries are formulating their own rules which apply different standards, says Ge, citing examples of cross-border data transmission. While the US requires openness, China confines all important personal data within its borders unless they go through strict inspection.
China has shifted from import to export in capital, technology and ideology. As it grows more engaged in global rule-making, it is also becoming more involved in conflicts. China needs to safeguard rules and mechanisms working in its benefit and modify disadvantageous ones, contends Ge.
Ge acknowledges the difficulties multinationals face in China
selective enforcement of Consumer Protection Law and Anti-monopoly Law which seems to target foreign enterprises
market access
China’s government procurement laws restrict foreign goods and service providers from bidding except in areas where domestic capacity lags
the negative list still employs abstract language which lacks enforcement clarity
inconsistencies between global and domestic technology standards increases R&D and compliance costs
operations and competition
industrial policies that favour local businesses might produce inefficiencies and render final products less competitive
Although Cybersecurity Law aims to safeguard national security, it prevents consumers from enjoying high-quality services from overseas, says Ge, calling for legislature to balance between competing interests
national security and technology neutrality
industrial policy and market economy
platform liability and individual responsibility
fair use and IP protection
industry and environment
zombie enterprise debt to be settled by 2020
National Development and Reform Commission | 4 December
context: Zombie enterprises and companies impacted by de-capacity are under the spotlight again, with the joint release of this policy aiming to settle their debt by end 2020. One of the most important de-capacity policies released in 2018, it is the first detailed timetable with central authority. The heavy emphasis on bankruptcy reflects central resolve to now quickly eliminate non-performers. The policy touches on unemployment and other tangential issues, but provides little in the way of detailed solutions.
NDRC and ten other agencies jointly released ‘Notice on further pushing forward debt settlement for zombie enterprises and de-capacity enterprises’ on 4 Dec 2018. The policy aims to further push forward supply-side structural reform by actively dealing with debt issues of zombie enterprises and enterprises impacted by de-capacity campaign (hereafter de-capacity enterprise). It stipulates
principles for debt settlement
ensuring market plays the core role and the procedure is in accordance with laws
government should play guidance role
effectively and actively preventing risks
scope and settlement measures
direct debts: debts directly borne by zombie or de-capacity enterprises with clear debtor-creditor relationship
evaluating enterprises business value, debt repayment capabilities and liability situations
using bankruptcy liquidation, bankruptcy restructuring, debt restructuring or M&As
actively seeking repayment for enterprises still possessing liquefiable assets to prevent escape from debt liabilities
packaged debts: conglomerates’ debts that are partially borne and used by zombie and de-capacity subsidiaries
distinguishing zombie enterprise liabilities from the rest of the conglomerate and settling the liabilities as direct debts
guaranteed debt: debts on zombie and de-capacity enterprises with a guarantee from their parent conglomerate or the third party
removing part or whole of contractual guarantee obligations of the conglomerate or the third party based on mutual consent by creditors and borrowers
procedure and time: all settlement should be finished before the end of 2020
step I: determining the list of enterprises: localities are asked to submit the list within three months from now
step II: formulating plans and implementing them
enterprises still have operation values: encouraging companies’ debt settlements, M&As and seeking strategic investors (to be done within six months after step I)
enterprises qualified for bankruptcy restructuring: local governments, SOE supervision agencies and finance agencies should actively push forward the restructuring (to be done within six to nine months after step I)
enterprises qualified for bankruptcy liquidation: liquidating them immediately
step III: follow up measures for enterprises facing settlement difficulties
putting them on a watchlist
strictly controlling their financing and business operations
requiring enterprises to submit plans to lower debts and if qualified, to enter bankruptcy procedure
improving policy and institutional environment
actively using property trading, rental, securitisation of assets and other measures to facilitate debt settlement
making targeted finance policies
strictly controlling financing support towards zombie enterprises and prohibiting preferential treatments
encouraging financial institutions to grant debts for qualified enterprises in support of their M&As
improving social securities, finance and taxation policies
supporting employment settlement
strictly prohibiting local government subsidies in support of zombie enterprises
supporting reuse of vacant land
setting up an enterprise credit system that documents their debt and business operations
implementation
strengthening coordination between governments and courts. No organisations, agencies, enterprises or individuals should hinder enterprises’ filing of bankruptcy case applications to courts
strengthening credit management and joint penalisation
ensuring coordination among central agencies
science and innovation
industrialisation and information technology work conference
Shanghai Securities News, 21st Century Business Herald | 28 December
context: China-US conflict made 2018 a difficult year for export-oriented manufacturing sectors, although front-loading means impacts will only become visible in 2019. Attacks on ZTE, Huawei and Made in China 2025 galvanised resolve to end reliance on foreign technologies.
Added value of above-scale manufacturing firms grew 6.3 percent y-o-y to meet 2017 goals, said Ministry of Industry and IT (MIIT) at its annual work conference. The meeting did not set new growth targets, reports 21st Century Business Herald. It did set priorities for 2019
advanced manufacturing
evaluate manufacturing innovation centres
IP regulations
industrial upgrading
steel overcapacity inspections
connect 98 percent of poor villages to broadband internet
smart manufacturing
launch 2i integration 2.0
currently 13,000 firms have implemented 2i standards, and 3,000 firms have been evaluated, says Zhou Jian 周剑 ETIRI Informatisation Research and Promotion Centre director and 2i Integration Work Group leader
promote industrial internet, including a network of nodes
the current bottleneck is to coordinate identifiers across long industrial chains, says Li Meihua 李海花 CAICT Industrial Internet Labelling Management Centre vice director
guiding documents on industrial internet construction and cybersecurity will come out soon, says Li
domestic markets
encourage digital consumption, including of wearable devices, drones, service robots and virtual reality
promote ultra high definition displays, internet of vehicles and general aviation
finalise new energy vehicle credit system
set ‘level 5’ fuel economy standards for passenger cars
encourage private investments in sci-tech development
deal with the China-US conflict
company competitiveness
guarantee a level playing field for large, medium, small and micro firms
support mergers and reorganisations
digital economy
speed up 5G development
improve individual data protection
reform and opening up
reduce VAT and corporate income tax
devolution
draft the 14th 5-year plan
implement the negative list
open up shipbuilding, aircraft and automobile sectors for FDI
progress with opening up the telecom sector
internet infrastructure, equipment manufacturing and capacity cooperation along Belt and Road
Party and ideology
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.