February: GBA, fiscal expansion, rural revitalisation
World headlines were dominated first by US-China trade talks and then the Kim-Trump summit in Hanoi, heavy with China implications. Both resulted in stalemate, with decisions placed on hold or rhetorically finessed. Security misgivings proliferated elsewhere: Beijing’s angst over US withdrawal from the Intermediate-Range Nuclear Forces Treaty with Russia, tensions over Taiwan and the South China Sea, and still more over Japan’s maritime overtures to ASEAN. Impact of Huawei CFO Meng Wanzhou’s extradition now threatens to ripple widely.
Major domestic developments included publication of the top annual ag policy document, unveiling of the Greater Bay Area development scheme and a long-awaited ‘education modernisation 2035’ plan. The centre’s policy goals have not changed, insist Party and state officials, and 2019 is a crucial year for achieving them. The top priority will be hitting 2020 anti-poverty targets. Most of the remaining 16 million people who must be lifted above the national poverty line by next year are in rural areas, and this target will be top of mind for nearly every official in any locality below that line.
Rural revitalisation will be a key growth engine, and the No. 1 document released 19 Feb provides a rural policy roadmap through 2020. Major agendas include expanding soybean and rapeseed cultivation, controlling African swine fever, diversifying ag trade partners, improving farmland and filling gaps in rural governance. Poverty alleviation is the top priority here as well. Warnings aimed at local governments continue, urging cadres to move on local reforms and outreach.
Central efforts to lower the share of coal in China’s energy mix have been given a boost. Upcoming oil and gas reforms will target upstream exploration and midstream pipeline operations, with changes to mining rights and work setting up a national oil and gas company also underway.
Macroeconomic stabilisation through expansionary fiscal and monetary policy is straining bank liquidity and local government budgets. Tianjin, Chongqing, Jiangsu and Xinjiang failed to hit their 2018 revenue targets; wealthier provinces and municipalities like Shanghai, Beijing and Guangdong barely managed to meet goals, and local financing will remain pressured if land financing slows as expected. To recapitalise banks, PBoC approved issuance of perpetual bonds for commercial banks and launched a central bank bill swap (CBS) scheme to improve their appeal after initially lukewarm reception.
Despite concern in some quarters over fiscal expansion, the trend may help catalyse large-scale development initiatives like the Greater Bay Area. The hope is to transform the region into a world-class urban cluster, competing against top bay area economies in San Francisco, New York and Tokyo by taking advantage of synergies between Hong Kong services and mainland manufacturing. A suite of policies is also being rolled out to support manufacturing and its labour force in response to demographic and technological changes. Fewer workers returned to factories after Spring Festival than expected, and labourers need different skills as factories automate, install robots and link up to the industrial internet.
State Council released the long-awaited ‘education modernisation 2035’ plan on 23 Feb. Pilots are kicking off first in vocational education, the lowest-hanging fruit with most immediate impact on incomes. NDRC also approved major investments to renovate public infrastructure and social welfare facilities, accompanied by measures to improve public hospital management, availability of essential drugs, and treatment for rare diseases.
february policy movers
policy professionals in and out of the establishment
Yi Huiman 易会满 | China Securities Regulatory Commission (CSRC) chairman
On 26 Jan 2019, Yi replaced Liu Shiyu 刘士余 as CSRC chairman, which financial media see as a symptom of Liu’s marginalisation in financial policy-making circles. Prior to his CSRC appointment, Yi spent 34 years at ICBC, eventually rising to become its president. With no college degree, Yi is an inspiration to many after climbing the ladder from clerk to head of the largest state-owned bank. At a 30 Oct 2018 press conference, Yi insisted that private firms’ financial difficulties were due not to banks blocking credit, but to obstacles in direct and off-balance sheet financing. New and informal channels, not banks, raised financing costs for private enterprises, said Yi.
Yin Jiuyong 殷久勇 | Agricultural Development Bank of China (ADBC) vice president
Vice president of ADBC since 2014, Yin leads the sole policy bank focused on financial services for agriculture and rural areas. In remarks at the recent 2019 Summit on Financial Services Supporting Rural Revitalisation, Yin argued rural infrastructure construction and upgrading will drive huge demand for new financial channels, along with efforts to improve rural living environments and strengthen ecological governance. As rural collective assets and industrial capital are brought to bear, he says, financial services will be urgently needed.
Weng Tiehui 翁铁慧 | former Shanghai deputy mayor
Weng recently appeared at a high-level Ministry of Education (MoE) meeting, leading WeChat pundits Zhengzhijian to suspect she has been appointed to ‘a crucial post’ in charge of higher education. A Fudan alum, Weng spent 22 years at her alma mater before joining the Shanghai government in 2003 to oversee education. She was deputy mayor from 2014 to Jan 2019 and recently made an unusual appearance in a promotional video for popular online game DOTA 2, thanking the developer for hosting its annual tournament in Shanghai (last year’s prize pool exceeded US$25 million).
policy ticker highlights
gems from our feed of policy releases and domestic debate
geopolitics
expert views on Trump–Kim Hanoi summit
Charhar Institute | 26 February
context: The second Trump–Kim summit will take place in Hanoi 27–28 February.
On 25 February, the Charhar Institute held a conference with the Centre for Peace & Conflict Studies (CPCS) for publication of their report ‘Catching the Window of Peace Opportunities on the Korean Peninsula: New Motives and New Opportunities’.
Korean peace and stability is intertwined with global peace, opined Han Fangming 韩方明 National Committee of the Chinese People’s Political Consultative Conference Foreign Affairs Committee deputy director and Charhar Institute president. China, for its part, always supported DPRK denuclearisation, inter-Korean relations, and diplomacy, vowing to maintain its efforts.
Despite the intricacies of denuclearisation and need to ease Northeast Asian tensions, argued Yu Hongjun 于洪君 Charhar Institute chief researcher, the summit will provide a new impetus for political settlement of the DPRK nuclear crisis.
Hu Yumin 胡豫闽 China Arms Control and Disarmament Association (CACDA) senior researcher suggested the Hanoi summit will prove more fruitful than Singapore.
Technical problems need to be solved gradually, argued Fan Jishe 樊吉社 CASS Institute of American Studies researcher and Strategy Institute director. A road map and timetable are necessary, and mutual political trust is required for DPRK–US collaboration. Fan remained positive, as the upcoming summit has more room for dialogue and consultation to achieve peaceful denuclearisation.
Denuclearisation is irreversible, argued Li Chunfu 李春福 Charhar Institute researcher and Nankai University Asian Studies Centre deputy director; political denuclearisation needs to be realised. Only when DPRK no longer needs nuclear weapons as bargaining chips will it denuclearise. Package plans have proved unfruitful, Li continued, and careful planning by all parties is thus required.
Wang Fudong 王付东 China Institute of Contemporary International Relations (CICIR) Korean Peninsula Research Office assistant researcher believes there is strong political will to change and normalise within the DPRK.
After much positive engagement, diplomatic failure is not an option, argued Shen Shiwei 沈诗伟 Charhar Institute researcher; both sides will seek to get the most out of it.
finance
competition policy critical to market reform
Jiemian | 21 February
context: China’s past economic success was built on an open goods markets and distorted production factors, allowing the state to subsidise favoured producers with cheap land, labour and capital. The current economic slowdown is multi-factorial, including both trade conflict and over-correction in economic restructuring. It also reflects the diminishing effect of the distorted development model on growth.
Competition policies can be a key breakthrough for a new round of market reform, says Wei Jianing 魏加宁 State Council Development Research Centre researcher at an internal seminar held by economic journal Comparative Studies. Wei elaborates that
current proposal for more government intervention is based on poor understanding of incentive and constraint mechanism of the market economy
while people often contrast Adam Smith’s Wealth of Nations and The Theory of Moral Sentiments, both actually belong to the same framework; the former discusses market mechanism and the latter, constraining factors
three defense lines against market failure
corporate ethics and self-restraint, for example environmental, social, and governance (ESG) evaluation; this mechanism is ineffective because of education failure
market punishment to drive out unethical firms through repeated games and fair competition; this is ineffective because credit systems and level playing field are lacking
government intervention; this is not to replace the market, but to eliminate obstacles to a functional market system and foster fair competition environment
core to the competition system is competitive neutrality, including equal regulatory treatment, rights and opportunities
three elements for competition policy: antitrust, anti-unfair competition and competition investigation
local government and state-owned enterprises (SOEs) should be subject to more transparent budget efficiency and competition investigation—if subsidies, for example, can be justified when private companies can do better on the same thing
Current mention of competition policy mostly touches upon structural issues, such as reform in factor markets and monopolistic industries, says Wang Zhigang 王志刚 Chinese Academy of Fiscal Sciences researcher. Enterprise costs on taxes, logistics, manpower, electricity, energy and land have been reduced in recent years, but costs incurred by monopolies remain significant. Given limited policy space by local governments, promoting market reform in monopolistic industries is a necessary but arduous step, adds Wang.
agriculture
rural land reform agenda in 2019 No.1 Document
Yicai | 19 February
context: The document lays out the rural land reform agenda and direction, although the reform process still depends on detailed special regulations. What’s new in the document includes allowing secure financing with farmland use rights, which is likely to facilitate farmland transfer. Reforms on rural land acquisition, marketisation of collective construction land and homestead reforms, which are being piloted, are likely to be implemented comprehensively.
The 2019 No.1 Document calls for substantial work on rural land reform policy agendas, reports Yicai. Pilot reforms on marketisation and collateralisation of rural land have been ongoing since 2015, says the piece, and now cover 33 county-level cities. Those pilots will conclude end-2019.
Gao Chunmao 高春茂 Shanghai Younong Internet Tech Co. Ltd president highlights efforts to allow farmland use rights to be mortgaged or used to secure financing. This will certainly encourage land transfers, Gao says, but may bring about unintended negative consequences, including
significantly increasing land rental prices
benefitting farm operators that hold land use rights but possibly excluding farming households holding land contract rights
over-complicated procedures that hinder implementation
Feng Kui 冯奎 China City and Town Reform and Development Centre secretary general says marketisation aspects of the land reform agenda are critical to removing barriers between rural and urban areas and should be viewed as a step toward a unified national land market. He argues reforms allowing direct marketisation of rural construction land, rather than requiring nationalisation as a first step, benefit rural development by
increasing land supply for industry and business use, such as developing specialty towns and rural tourism
raising income for farmers
removing local governments’ ability to abuse land conversion processes as a source of government revenue, pushing them to pursue real local development to boost tax revenue
society
DRG-based payment to replace drug sales ceiling for budget control
CN Healthcare (1), CN Healthcare (2) | 13 February
context: Healthcare facilities in China run their own pharmacies, and make good revenues prescribing medication in addition to providing outpatient care and other hospital services. The latest ‘Evaluation criteria for third-tier public hospitals’ no longer measures the ratio of prescription drug revenue to total income. Instead, it assesses the status of rational prescription (in particular antibiotics and adjuvants). Hospital business models must be redrawn to survive the overhaul.
The ratio of revenue from prescription drugs to the total was first officially measured in 1990 as a way to curb excessive drug spending, explains Fu Hongpeng 傅鸿鹏 NHC Health Development Research Centre of Pharmaceutical Policy. Shanghai made the first shift to a global hospital budget system in 1994, when care service revenues needed to grow ‘significantly faster’ than drug sales. The central government acclaimed the Shanghai approach in 1997, rolling it out nationwide in 2000. The 2009 ‘Plan for healthcare system reform’ introduced drug prescription revenue as a primary indicator of hospital performance. The 2015 ‘Guiding Opinions on reforming urban public hospitals’ set a timeline to bring drug sales down to 30 percent of total hospital income by end 2017.
In theory, this policy was designed to reduce drug costs by counterbalancing the negative impacts of drug markups (over-prescription and over-treatment). In practice, hospitals responded by
dodging unique drugs, high quality drugs, or drugs treating complex diseases (which are expensive)
duplicating tests/examinations, and prioritising complicated surgeries (to increase care service income)
Such results suggest ‘one size fits all’ requirements neither promote rational prescription nor save money, concludes Fu.
As the 15 percent drug markup policy no longer exists, it makes no sense to adhere to drug prescription restrictions, says Jin Chunlin 金春林 Shanghai Healthcare Development Research Institute director. New approaches to budget control can include
healthcare insurance payment based on diagnosis-related groups (DRGs)
prescription medication analysis and reporting
state-issued guidelines on principles and protocols of clinical use of pharmaceutical products
The ultimate solution is to increase remuneration of clinical practitioners and incentivise them to make profits by providing better care services rather than selling more drugs, says Jin.
governance
PBoC Research Bureau head criticises policy formulation process
Jiemian | 18 February
context: When Beijing has wanted to engage in self-criticism, officials have not been shy about airing their views, even in the past few years when some debate has clearly been stifled. But given the widely acknowledged slowdown, discussions of problems in economic policy-making had largely been off-limits. That period appears to be at an end.
At the China Economists 50 Forum on 16 Feb 2019, Xu Zhong 徐忠 People’s Bank of China Research Bureau director-general said that some policy documents avoid difficult areas of reform and eschew practical issues which need resolution. He attributes these tendencies to
process of policy document formulation and mechanisms of accountability
division chiefs lead drafting; departmental interests and differences in understanding make coordination difficult
issues on which they disagree are removed from documents due to specified and hard deadlines for issuing reform plans
documents aiming to be all-inclusive, which makes them vague on how things should be done
relevant departments are required to introduce implementation details
many documents are issued and when the intended purpose is not achieved that impacts market entities
documents lacking in market-orientation and incentives
administrative departments having great discretion
issuing laws, regulations and systems requires communication and coordination from top to bottom in legislative departments
divergent opinions are not written into law
administrative departments issue rules, standards and operating procedures
trade
GBA plan highlights Hong Kong’s role and addresses institutional differences
context: Investments from Hong Kong and Macao helped created Shenzhen’s economic miracle in the 1980s; a new integration plan some 40 years later in the same region aims to generate growth engines for a much larger economy beginning to slow.
On 18 February 2019, China unveiled a blueprint for development of the Guangdong-Hong Kong-Macao Greater Bay Area (GBA) in an effort to compete with other top bay areas in New York, Tokyo and San Francisco.
The core of the plan is primarily political, which is to integrate Hong Kong and Macao in China’s national development and ensure the two cities’ long-term prosperity and stability, says Ding Li 丁力 Guangdong Academy of Social Sciences director.
He explains that Hong Kong and Macao are key to GBA development. As the plan indicates, Hong Kong’s advantage in modern service sectors will play a leading role in generating business growth overseas. Hong Kong is also mentioned more times in the plan than other major cities, he notes.
Zhang Xiaoming 张晓明 State Council Hong Kong and Macau Affairs Office director says Hong Kong and Macao boast irreplaceable advantages, including Hong Kong’s status as the world’s largest offshore RMB centre as well as its high-quality education system and strong innovation capacity, which could match well with Guangdong’s sophisticated manufacturing industries.
Compared with other bay areas, GBA’s unique character—one country, two systems—could pose obstacles to implementation, reports Yicai.
As Hong Kong, Macao and the mainland have different institutional arrangements, including customs regulations, currencies, financial systems and legal institutions, it will be difficult to ensure free flow of people, capital and information in the region, says Yicai, noting that to address these differences, the GBA plan must facilitate trade, investment and mobility of human resources.
industry and environment
national oil and gas pipeline company to be announced H1 2019
Economic Information Daily | 25 January
context: As expected, this round of reforms will touch the entire oil and gas industrial chain. Mining rights will be a key area to watch next, as it is also dominated by major oil and gas companies. Opening upstream will invite more investment in exploration and drive an increase in production.
The plan to set up a national oil and gas pipeline company has been approved by National Development and Reform Commission and is expected to be released in the first half of 2019, confirmed Economic Information Daily, a news outlet managed by Xinhua. According to the article, China National Petroleum Corporation, Sinopec and China National Offshore Oil Corporation will spin off their pipeline assets to form the new company. Social capital, including government-backed investment funds and private capital will be introduced to control a stake of around 50 percent. A 19 Dec 2018 report by Sinopec Economic Development Research Institute said newly injected social capital will be used to fund new pipeline projects. The new pipeline will also seek IPO approval.
Luo Zuoxian 罗佐县 Sinopec Economic Development Research Institute vice director says the pipeline company will help
separate gas transmission and sales
improve interconnection of gas pipelines
open up basic infrastructure
improve oil and gas resource allocation
better implement pipeline transmission cost verification, which will help bring down transmission costs
Along with the new pipeline company, the government will introduce measures to reform pipeline operation, as well as oil and gas exploration and mining. China International Capital Corporation expects oil and gas producers will increase exploration expenditure, given state calls to boost production and storage.
science and innovation
integrating manufacturing and sci-tech resources across Greater Bay Area will be a challenge
context: The plan aims to position China’s southeastern region as a global tech innovation hub. Given Hong Kong’s openness and closer adherence to international norms and regulations, the project brings opportunities for foreign companies and institutions to set up collaborations in the former colony with operations in nearby mainland provinces.
State Council’s Hong Kong–Macau–Guangdong Greater Bay Area (GBA) development plan calls for an open innovation community, a better innovation environment and sci-tech innovation entities and platforms. The plan will centre on an innovation corridor, which started in 2017 along the Guangzhou–Shenzhen highway, modelled after the State Route 128 highway in California’s Silicon Valley, reports Jiemian. In July 2018, Guangdong province announced extending the corridor to Hong Kong. It will bring much-needed internationalisation to Pearl River Delta high-tech industrial resources, says Lin Jiang 林江 Sun Yat-Sen University Department of Economics.
But even Guangzhou–Shenzhen collaboration is not always a smooth process, says Ding Li 丁力 Guangdong Chinese Academy of Sciences Regional and Enterprise Competitiveness Research Centre director. The compartmentalisation of local finances encourages officials to prioritise their own areas. Still, Hong Kong and Shenzhen have the potential to create interesting synergies, says Ding.
Lok Ma Chau Loop in Shenzhen is already being developed into a Hong Kong–Shenzhen innovation and sci-tech park, notes Caixin. Next to such ‘Hong Kong enclaves’, the plan’s proposed re-industrialisation could involve setting up small Hong Kong industry parks where Guangzhou manufacturers assemble phones to circumvent import restrictions by ‘protectionist countries’, says Peng Peng 彭澎 Guangdong Comprehensive Reform and Development Research Institute vice director. Hong Kong lacks the land for a large advanced manufacturing zone, but it could set up an AI demonstration area, adds Peng.
Re-industrialisation will be key to energising Hong Kong’s economic activity and innovation, says Cao Zhongxiong 曹钟雄 China (Shenzhen) Development Institute Department of New Economy managing director. Industry is only 2.5 percent of Hong Kong’s GDP, much less than that of New York and London. The nine mainland cities included in the plan will function as incubators and accelerators, says Cao.
The plan promotes frictionless travel, work, residence and logistics in the area and opens up domestic research funding to qualified Hong Kong universities and research institutes. This opening up is one-directional, says Ding, noting that hurdles remain in the mainland-to-Hong Kong direction. Integrating sci-tech resources will be key for the plan’s success, adds Lin, but it will take years to harmonise IP protection, research ethics and lab practise standards. Differences between market- and state-led approaches will also hamper big data centre and international platform construction, says Lin.
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