July: US-China, STAR board, zombie enterprises
As economic growth slows and the external environment becomes less certain, policy makers are seeking to push money into the economy while tightening control of risky creative financial products and real estate investment. The state moved to boost foreign investment by revising two negative lists for pilot free trade zones (FTZs) and for the rest of the country, and releasing a new ‘catalogue of encouraged industries for foreign investment’. The documents loosen restrictions on FDI across a wide range of industries and incentives for investment in high-end, intelligent and green manufacturing; and in China’s central and western regions. Premier Li Keqiang 李克强 underlined central support for FTZs as they experiment with reforms and refine incentives for cross-border e-commerce to encourage new trade models.
Shanghai Stock Exchange’s Sci-Tech Innovation Board (STAR) began trading on 22 July. Shares went up 160 percent on average and total transaction volume reached C¥38 bn by the end of the first morning. The board’s IPO registration basis, looser price limits, and strong delisting mechanisms will help improve capital market governance, says Feng Henian 冯鹤年 Minsheng Securities CEO.
Still under pressure from African swine fever, economic slowdown and trade tensions, the state is seeking new means to reduce pressure on the rural economy. Ministry of Agriculture and Rural Affairs pilots will see central and local governments directly procure financial products on behalf of ag operators. State Council hopes that new criteria for measuring value in the ag sector added by non-farming activities like agritourism will promote ag-adjacent investment.
NDRC has long-term plans to make more zombie enterprises exit the market. Central and local governments will be barred from propping them up with subsidies and loans. Meanwhile State-owned Assets Supervision and Administration Commission is speeding up SOE restructuring, aiming to improve post-merger integration as it consolidates firms in power, non-ferrous metals, steel and environmental protection.
State Council’s new Healthy China Initiative Steering Committee released a 15-point plan to improve public health as the Healthy China 2030 initiative rolls out. Focus shifts from treatment to prevention, addressing service undersupply by reducing demand.
China–US tensions have seesawed through July. While intense criticism of the US moderated following the China–US Osaka summit, rhetoric flared following pledged US arms sales to Taiwan. Trump’s 1 August announced return to punitive tariffs will do nothing to restore goodwill. China–US tensions in the South China Sea will continue and concerns over Hong Kong and Xinjiang have no soft landing in sight.
Party rhetoric has been escalating with major political anniversaries in view. A front-page People’s Daily editorial celebrating the Party’s 98th anniversary urged fortitude, stating that its ‘mission is more glorious, task more arduous, challenge more severe, and work greater’ than ever.
july policy movers
policy professionals in and out of the establishment
Zhong Shan 钟山 | Minister of Commerce
Vice governor of Zhejiang 2003-8, Zhong then joined MofCOM, and was appointed minister in 2017. His addition to the US-China trade negotiation team is somewhat mythologised as reinforcing Party control and balancing Vice Premier Liu He 刘鹤. The US-initiated trade war is a typical example of unilateralism and protectionism, he says. In a departure from previous trade truces, Zhong adds that Beijing will seek other trade partners and expand China-Russia trade in soybean and other agricultural products.
Wu Xiaolin 吴晓林 | Nankai University Zhou Enlai School of Government professor
Local governance expert Wu argues that Party-building in urban communities is needed to foster voluntary organisations, which can then mobilise resident participation. While urban residents have mostly moved into private communities, many local Party branches have yet to catch up. Too often, community party-building fails to impact the lives of residents, Wu believes, because it remains focused on slogans and supplanting local authorities, instead of leading and sharing responsibility for carrying out practical work.
Zeng Yande 曾衍德 | MARA rural industry development department director
Long a staunch advocate of ag-industry integration, Zeng supported the strategy during his tenure as MARA’s planting department director from 2013–18. Under him, the department aimed to integrate structural crop adjustments in corn and soybeans with developments in livestock feed processing. His current role (from July 2018) affords him a direct role in promoting rural industry development, which he says faces three fundamental problems: low added-value, high resource intensity and high costs. The key, he argues, is to ensure small farmers benefit from rural enterprises’ efforts to add value, whether by earning wage income as employees, or dividends as members of village collective economic organisations.
policy ticker highlights
gems from our feed of policy releases and domestic debate
geopolitics
Jun Sheng 钧声 on US arms sales to Taiwan
China Military Online | 12 July
context: The latest US arms sale to Taiwan was offensive to Beijing, not only because China–US relations continue deteriorating, but also because these weapons will increase Taiwan’s offensive, rather than defensive, capabilities.
PLA Daily published a fierce polemic over the 9 July US $2.22bn arms sale to Taiwan, under the pen-name Jun Sheng 钧声 meaning ‘voice of the military’. The sale includes 108 M1A2 tanks and 250 shoulder-launched Stinger anti-aircraft missiles.
The sale is unjust, Jun explains, because
Taiwan is part of China
it goes against the ‘One China Principle’ and ‘Three Communiques’
it worsens China–US relations and cross-strait relations
The US, complains Jun, has repeatedly broken international norms, while China has consistently maintained its opposition to arms sales to Taiwan.
The US had agreed, recalls Jun, to gradually reduce arms sales to Taiwan. However, the Trump administration has ignored this and instead seeks to ‘normalise’ arms sales to Taiwan. Such actions hurt the feelings of the Chinese people, writes Jun, and damage the US’s political credit.
Peaceful reunification is unstoppable, he insists, warning
China will not
trade its core interests
accept any harm to its sovereignty, security, and development interests
no attempt to split China will succeed
any action to interfere in the Taiwan issue is doomed to failure
to not underestimate the PLA, as it
is willing, confident, and capable of defeating any form of external interference and ‘Taiwan independence’ separatist acts
will take all necessary measures to defend China’s sovereignty, security, and territorial integrity
China is willing to strive for peaceful reunification, but it will never promise to renounce the use of force
the PLA will resolutely safeguard reunification at all costs
Jun also advises Taiwanese authorities not to jeopardise Taiwan’s development or the welfare of the Taiwanese people.
finance
infrastructure investment growth stagnates amid tightening financing
21st Century Business Herald | 10 July
context: Infrastructure growth has stagnated, even after fiscal expansion, which some believe signals macro-policies’ failure to stimulate the economy, and others say points to localities’ conflicting policy goals. The latest implementation reports indicate that strong regulations persist alongside the stimulus that aims to foster rational public investment.
In the past, money was more readily available than infrastructure projects, but now these projects have to wait for money, says Jia Zhongguo 贾仲国 senior manager at a local government financing vehicle (LGFV) in central China, using a pseudonym to speak with 21st Century Business Herald.
LGFVs used to enjoy limitless government credit financing, but now this is difficult even when projects are ready, following the May 2017 ‘Notice on further regulation of local government debt financing’, which prioritised regulation over relaxation, and austere Aug 2018 policy measures, Jia says. It is unrealistic to hope for business as usual, Jia adds, as the state tightens implicit debt control.
Even with downward pressure on the economy, the state has not loosened LGFV regulations and implicit debt, especially on the financing and project ends. Implicit debt-boosted construction remains prominent despite special purpose bond increases designed to support infrastructure investment. Local governments should specify project funding sources in proposals, and when public welfare-related, how much funding comes from public budget and a declaration not to add to implicit debt, the report notes. Local officials, bankers and Jia confirmed tightening trends, such as
since 2018, public investment projects have been modified, suspended or revoked on a massive scale, continuously dropping infrastructure investment growth
all projects with considerable repayment pressure are suspended, except for civil ones like water governance
traditional infrastructure building is declining
Jia notes new projects in his region focus on commercial value and key areas like railways
major investment is going toward polluted water disposal facilities
projects are redesigning to generate cashflow to get financing
agriculture
addressing capital, land and talent bottlenecks for rural industry revitalisation
Economic Information Daily | 2 July
context: The state has attached great significance to ‘rural industries integrated development’, viewing it as equally important as its three most prominent rural innovative practices since 1949. This document proposes a special statistical system that is under development, which would measure added value from rural industries integrated development. Rural industrial development is to be the internal power of rural revitalisation.
State Council released ‘Guiding opinions on rural industry revitalisation’, comprehensively planning rural industries development and clarifying the space’s characteristics and development approaches, said Yu Xinrong 余欣荣, Ministry of Agriculture and Rural Affairs (MARA) vice minister at a press conference.
The Guiding Opinions name six rural industries
modern farming and breeding
ag products processing and circulation
rural specialties
rural tourism
rural new services
rural information
The six industries almost cover all rural industries, and their interaction and integration are critical to revitalising the rural economy, says Zhu Qizhen 朱启臻 China Agricultural University professor.
The Opinions also offer a policy framework to address capital, land and talent bottlenecks for industrial development, consolidating, extending and further specifying existing policies, said Yu. Concerning capital input, the Guiding opinions call for
optimising fiscal input mechanisms
increasing the income share from ag and rural development land use right transactions
encouraging locals to set up rural industry development funds
supporting tech innovation
innovating rural financial services
guiding county-level financial organisations to deposit funds into local ag and rural projects
allowing rural contracted farmland rights, ag facilities and ag machinery with clear property rights to be used as collateral for loans
strengthening financing guarantees for rural industry projects
supporting local government bond issuing for public welfare projects
supporting qualified ag companies’ listing
encouraging private capital inflows to rural industries that prolong industry chains and boost farmer employment
Yu noted that rural industrial integrated development is the fourth major innovative practice for farmers, following
household contract responsibility system (HCRS)
village and township enterprises (VTE)
agricultural industrialisation
Yu indicated the state is working on a system that would measure added value from three industries’ integrated development, which will be a metric for evaluating ag high-quality development.
society
sino-foreign cooperative universities thriving
21st Century Business Herald | 5 July
context: Although some were originally concerned about their ability to adapt, sino-foreign cooperative universities have settled in well. Alternative ideas and methods from sino-foreign cooperative universities may serve as inspiration for reforms, since earlier debates about university admissions failed to make breakthroughs. But given that many of these universities were established for political considerations, their future influence may be limited.
Since University of Nottingham Ningbo China was set up in 2004, nine sino-foreign cooperative universities have appeared in China. They are increasingly attractive to top students in the country, observes 21st Century Business Herald.
In terms of gaokao scores, the Chinese University of Hong Kong, Shenzhen (CUHK Shenzhen) attracted top 0.5 percent humanities-track students and top 1.5 percent science-track students in 15 provinces in 2018. Student caliber improves every year, said Xu Yangshen 徐扬生 CUHK Shenzhen president, due to CUHK Shenzhen’s dedication to undergraduate education and outstanding graduate placements.
These universities are highly internationalised. CUHK Shenzhen offers many exchange programs to students, for example, and 30 percent of faculty at Xi’an Jiaotong-Liverpool University are foreigners, where 86 percent of the Class of 2018 graduates chose to study abroad and all courses are taught in English beginning in the second semester of freshman year.
Experts expect competition from sino-foreign universities to spill over to other higher education institutions. New ideas have been brought in from abroad, and in admissions, for example, most sino-foreign cooperative universities do not rely solely on gaokao scores. New York University Shanghai evaluates candidates’ performances in simulated classes and interviews, as well as their English writing skills and ability to work in a team.
Chu Zhaohui 储朝晖 National Institute of Education Science research fellow has consistently called for multi-dimensional admissions criteria. But Chu does not believe sino-foreign universities will change the larger landscape, given their small number. He is pessimistic about their future, arguing they are built more for political reasons rather than real market demand.
governance
commentary examines anti-corruption struggle’s gaining ground
People's Daily | 18 July
context: There are growing signs of a deepening debate over the next stage of the anti-corruption struggle—whether it should be relaxed, intensified, or shifted in focus. This unsigned commentary from the Beijing branch of the Xi Jinping Research Center of Socialist Thought with Chinese Characteristics in the New Era wades into the discussion, and hints that this topic may be a major one at the annual summer meetings.
A People’s Daily commentary asks: ‘why has the Chinese Communist Party of China achieved significant results in anti-corruption?’
First, the Party has always been firm in its determination to fight corruption, and is an advanced political party serving the people, armed with Marxist theory. The Party recognizes that the struggle against corruption is a major political task because corruption and its mission are antithetical.
Second, the Party adheres to a combination of relying on the masses and giving full play to the role of specialized organs. The broad masses hate lurking corruption and have a strong will to fight it in its various manifestations. In addition to relying on the people’s strength, anti-corruption organizations should also have special institutions supervise and inspect, and play a good role in early corruption detection and prevention, as well as accountability.
Third, anti-corruption is not a gust of wind. The Party has continuously improved its self-supervision system as well as national anti-corruption laws and regulations. The supervision law passed in March 2018 marks the formation of the Party’s unified command and comprehensive coverage via an authoritative and efficient supervision system.
Fourth, corruption is curbed ideologically. The majority of Party members and cadres are firm in their ideals and beliefs and adhere to the spiritual pursuit of Communists.
In the future, the commentary concludes, the Party will
continue to examine and employ its experience
promote the struggle against corruption in depth
further secure itself as a Marxist ruling party
trade
new negative list opens more sectors to foreign investment
Yicai | 30 June
ontext: The state vows to remove all restrictions on foreign investment for sectors not included on the negative list. FDI was critical for upgrading local industries and boosting economic growth in emerging sectors. The decrease of items on negative lists will certainly attract more FDI as well as facilitate the negotiation of bilateral investment treaties and trade cooperation.
The National Development and Reform Commission and the Ministry of Commerce released two negative lists on 30 Jun 2019, one for pilot free trade zones (FTZs) and one for the rest of the country. Pilot FTZs have 37 listed items, reduced from 45, while non-FTZ areas have 40 items, down from 48.
The new negative lists have opened for foreign investment in
transportation
lift the requirement that domestic shipping agencies be controlled by Chinese shareholders
infrastructure
lift the requirement that gas and heat pipelines in cities with a more than 500,000 in population be controlled by Chinese shareholders
culture
lift the requirement that theatres and performance brokerage institutions be controlled by Chinese shareholders
value-added telecommunications
lift restrictions on foreign investment in domestic multi-party communications, and store-and-forward and call centre services
The lists also eases market access for
agriculture
abolishes the ban on foreign investment in wildlife resources exploitation
mining
exploration and development of petroleum and natural gas no longer limited to Chinese-foreign equity or non-equity joint ventures
ends the ban on foreign investment in the exploration and exploitation of molybdenum, tin, antimony and fluorite
manufacturing
cancels the ban on foreign investment in Xuan paper and ink ingot production
The pilot FTZ negative list is open for foreign investment in
aquatic products fishing
publication printing
Lifting restrictions on foreign investment in areas such as shipping and value-added telecommunications will have major impact, notes Cui Fan 崔凡 University of International Business and Economics professor. This transformation, from the Foreign investment industrial guidance catalogue to negative lists and Catalogue of Encouraged Industries for Foreign Investment, is on the right track, says Cui.
The lists are not open to IDC as expected, because post-access supervisory management and market exit mechanisms are not matched for further opening-up, says Zhou Nianli 周念利 UIBE WTO Research Institute professor.
environment and industry
NDRC to improve market exit rules
Beijing Business Today | 17 July
context: Issues with zombie enterprises, or companies that make enough money to keep operating but not enough to pay off debts, re-emerged end 2018 as a top priority, with the state specifying its target to clear up zombies by 2020. This is also the first time that the state has proposed a bankruptcy system for individuals.
On 16 Jul 2019, National Development and Reform Commission and 12 other agencies issued a plan to create a more convenient pathway for entities to exit the market. While market entry rules have been significantly improved with the implementation of the negative list, contradictions and inconsistencies remain in current policies regulating market exits. Meng Wei 孟玮 NDRC spokesperson pointed out challenges, including
high withdrawal costs
lack of available channels
under-developed supporting measures
The new plan targets ‘zombie enterprises’ and prohibits any attempt to impede withdrawal of SOEs qualified for bankruptcy. It bars central and local governments from propping up zombies through subsidies and loans.
SOE debt levels remain high, making up around 60 percent of non-financial corporation debt. Corporate leverage level may drop by around 6 percent if bankruptcy or M&As can properly deal with zombies.
The plan also proposes setting up an individual bankruptcy system, with a special focus on addressing natural persons’ joint liabilities as a result of business bankruptcy. This may discharge certain qualified debts. The rules will
facilitate the exits of sole proprietorship enterprises and individual businesses
force financial institutions to be more prudent in consumer lending
Individual bankruptcy, however, does not mean that people can run away from their debts, says Xu Yangguan 徐阳光 Renmin University professor. In exchange for certain debt discharges, debtors will need to either clear part of their debts first or have their economic activities restricted for three to five years.
science and innovation
tech innovation board trades C¥38 bn by noon on debut
The Paper, Weixin (1), Weixin (2), Xinhua Net, National Business Daily, 21st Century Business Herald | 22 July
context: The tech innovation board is expected to push forward financial structure reforms, including improved information disclosure, and boost sci-tech innovation. Despite its tight timeframe since Nov 2018, the board has attracted more than 140 applications and triggered judicial reforms, with Supreme People’s Court issuing the first system-wide judicial document on capital market reform.
The high-tech stock board kicked off on the Shanghai Stock Exchange on 22 Jul 2019 with its first batch of 25 companies, including five SOEs. Shares went up 160 percent on average and total transaction volume reached C¥38 bn by the end of the morning, reports the Paper, noting that the turnover rate of each stock exceeded 50 percent.
China Securities Regulatory Commission (CSRC) divides the 25 companies on the board into seven industries
nine in computer, communications and other electronic devices manufacturing
eight in special purpose equipment manufacturing
three in railway, shipbuilding, space and aviation, and other transportation equipment manufacturing
two in software and IT services
one in non-ferrous metals (in particular, superconducting materials)
one in common equipment manufacturing
one in instrument manufacturing
Feng Henian 冯鹤年 Minsheng Securities CEO highlights institutional innovations that will change capital market governance
registration-based IPO regulation
facilitating interconnection and standardisation with other global leading capital markets
innovative rules
abolishing the 23-times price-earnings restrictions
directly impacting sci-tech start-up corporate value evaluations, according to National Business Daily
meaning growth indicators matter more than price-earnings ratios for sci-tech start-ups, according to Fang Xinghai 方星海 CSRC vice chairman
book-building only open to professional institutional investors
no price-limit for the first five days, and ±20 percent price fluctuation limit afterwards
minimum requirements for investment experience and amount will create a reliable investor pool, comments Que Bo 阙波 Shanghai Stock Exchange deputy general manager
off-market allotment accounting for 70-80 percent
stringent delisting mechanism
four clearly defined forced delisting scenarios
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