July: floods claim party attention
Beijing is in diplomatic ‘fight or flight’ mode, its loss of soft power troubling relations even with client states. Those with the US are toxic: ‘wolf warrior’ rhetoric escalates on both sides, despite respected voices calling to tone it down. Beijing is now gaming out a Biden electoral victory in November: not everything would be reset, it is agreed, despite hopes for soft landing.
Economic imperatives move on a separate track, a new ‘dual circulation’ paradigm (see signal below) setting up buffers ahead of strong appeals to multilateralism and stepped-up ‘reform and opening’. Marching on in Cambodia with a Free Trade Agreement, BRI is in trouble with secondary impacts of COVID-19. A potential currency crisis threatening progress in Central Asia is a case in point.
Flooding swamped senior leaders’ attention. Policies such as poverty alleviation are set back not only by disasters: in the centralist mantra, regions are impervious to Beijing's directives. Senior commentator Zheng Yongnian 郑永年 reverts to pre-Xi talk of ‘de facto federalism’, with more discretion granted to localities. Editorials lauded new national security legislation for Hong Kong as a ‘breakwater’: the hotbed of subversion is now imagined as an outsized buffer zone.
Despite weak consumer spending, infrastructure powered a turnaround, Q2 growth reaching 3.7 percent. Officially positive, growth is allowing for cutbacks in monetary easing and a pivot to reigning in financial risks. Private sector, above all SMEs benefitted from State Council measures forcing SOEs and localities to pay arrears. Local real estate regulations are being tightened back up, as markets recover to 2019 levels.
Floods and pests in southern China presage tightening food supplies. In tandem with rising demand for proteins and feedstuff, already delicate food security is at risk. The autumn harvest and food prices have been headline issues, and the vast northeastern farmlands the repository of high hopes. Curbing reliance on imports, the 2020 ag budget signals changes in planting structure, further subsidising domestic corn producers.
Increasingly aligning programs with national strategies for advanced technology, universities must cope with funding cuts and miserable graduate job prospects. Expanded vocational courses aim to alleviate structural joblessness.
Revived to create jobs, ‘mass entrepreneurship and innovation’ will soon be supported by upgraded high-tech zones. Advanced manufacturing is served by policy incentives on all sides, e.g. the one-year-old Shanghai STAR board. Inviting high-profile foreign firms, the (virtual) 9 July World AI Conference struck globalist notes. But dreams of a C¥150 bn AI sector by 2020 are proving too ambitious. Basic research took a serious hit when mass resignations at a key state research institution prompted a State Council-ordered investigation.
Energy sector reform and consolidation surged in July. Two Shandong-based coal giants will merge to form the second-largest coal concern in the country. Pipe China, a new pipeline network company, has acquired the pipeline assets of oil and gas SOEs. Divested, the SOEs’ control over industry supply chains is restricted. Regional energy cooperation and mixed-ownership reform in power are being rolled out as well.
featured analysis
new macroeconomic paradigm
Current talk by Xi and other top leaders of a ‘dual circulation’ system imagines a two-track economy, featuring a strong domestic base and new avenues for international cooperation and competition. Experts suggest in normal times they are complementary but kept separate during external shocks will buffer the nation. full post open access →
july policy movers
policy professionals in and out of the establishment
Yao Yang 姚洋 | Peking University National School of Development dean
US-trained Yao once championed Amartya Sen’s ‘freedom as development’. He was in the 2000s a prime theorist of social justice, a then-alien concept squeezed into the Party agenda under Xi Jinping’s predecessor Hu Jintao 胡锦涛. Lauding the rise of the China Model, he theorised it rested on the Party’s ‘neutrality’ between state and market. In May 2020 he drew a sharp line with reversion to ‘hiding and biding’, proposed days before by fellow Peking University professor Jia Qingguo 贾庆国 in Yao’s Institute. Yao argued it is ‘no longer possible to hide’ Beijing’s policy agenda.
Yang Weidong 杨维东 | North China Electric Power University Research Institute on Education Funding vice director
Universities, argues Yang, are over-reliant on state funding. Diversifying channels, they should work with the private sector for mutual development. The student experience on campus must improve, encouraging them (US style) to donate on becoming alumni. Current budget cuts are a chance for campuses to upgrade governance and, via their academic strengths, source new funding.
Qu Xiaoli 曲孝丽 | Shanxi Provincial Organisation department chair, Shanxi Provincial Party School
One of the few women in senior roles guiding Party education, ideology is not, Qu insists, what young cadres most need. Facing residents and their issues at the grassroots level, they gain a grasp of the ‘national condition’ and public sentiment only through practical application. Vigour and passion are laudable, notes Qu, but insufficient. Novice cadres should eschew elaborate projects as paths to promotion, and focus on learning the local ground.
policy ticker highlights
gems from our feed of policy releases and domestic debate
global impact
China-Europe railway express bottleneck
21st Century Business Herald, Weixin | 3 July
context: Demand for the China-Europe Railway Express has been high amid the pandemic due to interrupted sea routes and cost surges in air freight. Commentators advocate a more sustainable development model, but the recent congestion points to capacity limits that place a ceiling on expansion.
Since late June, China Railway has asked China-Europe Railway operators to cut frequencies or halt trains beyond regular schedules, reports 21st Century Business Daily. The surge in outbound trains this year have exceeded refitting capacity at Xinjiang's land ports (CP note: trains refitted for different gauges in neighbouring countries). There are also fewer inbound trains as Chinese operators cannot subsidise returning empty trains operated by overseas firms.
Customs clearance efficiency is affected by problems encountered in transitioning towards a paperless system. But efficiency is expected to improve once the new system runs smoothly. The congestion may last until mid-July, according to an insider.
Problems in the network, according to Xu Mingying 许英明 MofCOM (Ministry of Commerce) Research Institute associate researcher and Li Xin 李鑫 Tianjin Normal University professor, include
low efficiency
multiple refitting required throughout the journey
poor infrastructure in central Asia and Eastern Europe
limited refitting capacity at land ports
inconsistency in regulations and customs clearance procedures in different countries requiring many documents
redundant routes
90 per cent of trains pass through Brest (Belarus) and Malaszewicze (Poland)
domestic routes are similar, even western cities detour via Manzhouli (land port with Russia in Inner Mongolia)
capacity at final destinations (e.g. Duisburg, Hamburg) and en route near saturation
heavy administrative burden
exchange of documentation not yet digitised
manual verification costs time
Xu and Li recommend
cooperating with the EU's 'Three Seas Initiative'
helping expand logistics networks in Slovakia, Hungary and Romania
pushing the integration of international railway regulations
building overseas warehouses in countries en route
developing a digital information management system
governance
State Council extols ‘clean and honest government’
People's Daily | 24 July
context: This meeting was held amidst rumours that recent events in Hefei might be the result of unchecked corruption, even after successive years of an anti-graft crusade across departments, agencies and other arms of power.
State Council held the third ‘Clean Government’ working conference on 23 July, with Politburo Standing Committee member and State Premier Li Keqiang 李克强 noting that while political construction and anti-corruption work has deepened, some problems and deficiencies remain. Li noted that in response to unprecedented risks and challenges, governments at all levels should
resolutely implement Central Committee and State Council directives and reinforce rectification of the atmosphere and of discipline
strengthen pursuit of truth and pragmatism
achieve governance for the people
do a solid job in ‘six stabilities’ work and implementing the ‘six protections’ as tests of the government's ability and work style
make it a disciplinary requirement to ensure smooth flow of government orders
Li also stressed the need to
bolster supervision and discipline
strengthen supervision over use of funds
improve relief policy implementation
strictly implement special transfer payment mechanism, to ensure new funds find their way to targets
remember that reform not only reduces corruption, but the risk thereof ensure governments at all levels are thrifty, and fully support employment, livelihood and market forces
Li stated that economic and social development work must be carried out honestly. Government functionaries at all levels should grow accustomed to performing their duties under supervision and restraint, being honest in those duties, and working diligently and conscientiously for the people.
State Council vice premiers Han Zheng 韩正, Sun Chunlan 孙春兰 and Hu Chunhua 胡春华, as well as State Councillors Wang Yong 王勇, Wang Yi 王毅 and Zhao Kezhi 赵克志 attended; State Councillor Xiao Jie 肖捷 presided. Ministry of Finance and Hunan government representatives spoke at the meeting.
macroeconomy
discussing financial risks
Caixin Finance, Yicai, CCTV, Economic Daily | 13 July
context: With increased confidence in economic growth returning, monetary easing is more targeted, opening the door for a flurry of financial de-risking actions. In addition to financial de-risking, capital market reform is a growing part of the conversation on ensuring financial stability, but overcoming institutional barriers that allow politically connected firms to use the system to their advantage and exclude smaller firms remains the main challenge.
Underscoring the importance of financial de-risking, CBIRC (China Banking and Insurance Regulatory Commission) released banking data through June 2020
banking industry assets were C¥301.5 tn, an increase of 9.8 percent y-o-y
balance of non-performing loans was C¥3.6 tn, an increase of C¥400.4 bn since January
non-performing loan rate was 2.10 percent, an increase of 0.08 percentage points from January
CBIRC spokesman noted the overall financial risk is controllable, but potential risks still loom large, noting
although the balance of non-performing loans has not increased significantly, it is expect NPLs (non-performing loans) will rise in H2
small and medium-sized financial institutions have serious problems
shadow banking risks are returning
we must be vigilant against violations
NPL disposals should 'increase appropriately' compared to 2019 and banks should not conceal them
banks should recapitalise
if market channels cannot be used then use government funding
Guo Shuqing 郭树清 CBIRC chair published an essay on 3 July discussing gaps in corporate governance
weak Party leadership
opaque and unstandardised shareholder relations
ineffective boards of directors and senior management
State Council Financial Development and Stability Committee chaired by Liu He 刘鹤 vice-premier held a meeting focusing on implementing their 'zero tolerance' policy for financial fraud through actions like class-action suits and improving the de-listing system. The meeting was not purely a reaction to recent market events, but rather a further step in long-term plans to improve capital markets, according to Cheng Shi 程实 ICBC International chief economist.
agriculture
Xi inspects agriculture in Jilin
Sina | 22 July
context: President Xi’s visit to northeastern China shows the state’s commitment to food security amid the pandemic and natural disasters. Black soil protection and farmers’ cooperative are highlighted.
President Xi Jinping 习近平 inspected Jilin Province on 22 July, where he visited one major corn production base and an ag machinery service cooperative.
One of the major food-producing provinces, Jilin harvested 39 million tonnes of grain in 2019, with the state's highest y-o-y growth, reported Ta Kung Pao. Xi's inspection delivered an important message as the state strives to ensure food security. He spoke highly of the local practices of 'returning straw to the field' and ‘no-tillage’ planting, which effectively protect black soil erosion and preserve soil moisture. He also encouraged farmers to participate in cooperatives, calling for more efforts on further developing specialised cooperatives.
Following its action plan on black soil conservation tillage, MARA (Ministry of Agriculture and Rural Affairs) issued 'Notice on northwestern black soil protection' in June 2020. Promoting black soil protection in 32 counties (9 in Jilin), the annual goals of the pilots include
improving farmland soil quality by over 0.5 grade
achieving over 25 cm in cultivated layer thickness
increasing the proportion of organic matter by over 3 percent
Technical solutions are suggested for regions with different natural conditions.
society
new programs in universities reflect national strategies
21st Century Business Herald, Yicai | 1 July
context: The rise of AI programs in 2020 has already been well noted. Higher education is increasingly becoming employment-oriented, adjusted to serve national development goals in technology. Central government is hoping to kill two birds with one stone, resolving unemployment issues while making up technological and industrial deficits compared to developed countries.
World Class 2.0 universities are increasingly offering programs in AI and big data, reports 21st Century Business Herald. But universities also integrate them with their existing strengths. For example, Xiamen University’s big data program is based on its economics and management programs, while the same program at Northwest Agriculture and Forestry Technology University focuses on digital agriculture. Renmin University of China’s AI program is set up under the AI research institute of Hillhouse Capital Group, collaborating with overseas universities and offering opportunities for training in well-known enterprises.
Network security is also popular. Ren Kui 任奎 Zhejiang University Research Centre for Network Security director says with the rise of ‘new infrastructure’, demand for professionals in network security is surging. Smart manufacturing is another focus for universities. Deng Yi 邓怡 Beihang University Office of Admission and Employment director says her university is launching a new program in smart manufacturing to help build strong high-end industries. Many universities are also offering interdisciplinary programs to assist students find their interests.
But Yao Kai 姚凯 Fudan University professor still criticises universities for not producing graduates the industry needs, reports Yicai. There are several reasons, including
homogeneity among universities is increasing
universities are expanding excessively beyond their capacity
universities are slow to adapt to changes in industries
He offers three suggestions, including
predicting industry demands using big data and adjusting programs accordingly
integrating new technology into programs and innovating education methods
setting up new programs according to national strategies and local development needs
energy and environment
oil and gas SOEs pipeline assets sold at a premium
Caixin | 24 July
context: Additional pipeline asset divestiture is being rolled out, after the announced sale of Sinopec Yuji Pipeline a few days ago. This latest development which dilutes SASAC's (State-owned Assets Supervision and Administration Commission) stake to a mere 4.46 percent appears to contradict the previous market speculation that Pipe China will be controlled by SASAC to ensure its independence.
CNPC (China National Petroleum Corporation) and Sinopec announced acquisition agreements with Pipe China (China Oil and Gas Piping Network Corporation) on 23 Jul 2020. The agreement entails sales of pipeline network assets such as oil and gas pipelines, gas storage, and LNG (liquefied natural gas) stations to Pipe China in equity and cash
CNPC will sell its assets for C¥268.7 bn, at a premium of 20.56 percent
in return, it will obtain a stake of 29.9 percent in Pipe China, worth C¥149.5, and receive the rest in cash (C¥119.2bn)
Sinopec will sell its pipeline infrastructure for C¥122.7 bn, at a premium of 41.89 percent
it will receive a 14-percent stake in Pipe China, worth C¥70bn and the remaining in cash (C¥52.65bn)
the agreements do not include pipelines from CNPC's Kunlun Energy Corporation
the transfers will be completed by 30 September
A subsidiary of China National Offshore Oil Corporation will also obtain a 2.9-percent stake, worth C¥14.5 bn, as well as cash payment of an undisclosed amount.
Taken together, these transactions will boost Pipe China's registered capital to C¥500bn. 46.8 percent of the company will be owned by the three oil and gas SOEs, with the remaining 53.2 percent to be held by state shareholders including investment companies, National Council for Social Security Fund, China Insurance Investment and SASAC (State-owned Assets Supervision and Administration Commission).
science and innovation
90 researchers quit Hefei Nuclear Safety Research Institute
Yicai, Science and Technology Daily, Weixin | 20 July
context: Hefei is a major hub for scientific labs, including quantum communication research. This event reveals deep-rooted issues in the state R&D environment: (basic) research funding is up but some subjects are neglected, researchers get more autonomy but also engage in unhealthy competition, research institutes hire university graduates to combat unemployment and yet talents are leaving the CAS system, and researchers get a larger share of on-the-job inventions but still earn not as much as the private sector counterparts.
90 researchers jointly left an unspecified department of CAS (Chinese Academy of Sciences) HIPS (Hefei Institute of Physical Science), announced CAS, confirming online rumours. HIPS is one of CAS' largest branches, reports Science and Technology Daily, with its 'comprehensive national science centre' gaining official recognition from NDRC (National Development and Reform Commission) and MoST (Ministry of Science and Technology) in 2017. The Party cell of CAS sent an inspection team on 19 July, led by Wang Keqiang 汪克强. Liu He 刘鹤 vice premier requested State Council, MoST and CAS to send a joint inspection team on 21 July.
Online reports suggest the unspecified department is the Nuclear Safety Technology Research Institute, says Science and Technology Daily. Rumours circulated on forums populated by researchers
the collective action suggests that the researchers, most of whom are early-career, have a plan, such as joining a company with one of their former superiors, speculate online commentaries cited by both Science and Technology Daily and Yicai
the institute was working on lead-bismuth cooling reactors, adds Yicai, noting it lacked the labs to develop a working model
the institute should have stuck to theoretical research, quipped an insider cited by Yicai, noting it failed to set up collaborations with state-owned nuclear energy firms
the institute was shedding researchers, another insider told Science and Technology Daily, as it failed to secure sufficient central government research funding, and arguing it was down to a hundred staff from its heyday of 400 employees.
the institute suffers from an apple polishing culture, insiders told Caijin, as the nuclear facility's director demands reverence from researchers
CAS institutions are cliquey, suggest former CAS institution employees
reforms spearheaded by the new HIPS director, which intend to create a flat organisational structure via the PI (principal investigator) institutions, discourages researchers from constructive collaboration
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