November: more moves to 'self-reliance'
Xi Jinping Thought on the ‘Rule of Law’ was unveiled, consolidating a Xi-style approach to rules-based governance, stressing Party dominion as it calls for sounder legal process and offers more transparency to business. In a spate of moves to spur indigenous innovation and encourage self-reliance, the National People’s Congress Standing Committee passed the Copyright Law on 11 November. The Central Military Commission promulgated a new operational doctrine for the PLA, a first since 1999. An inter-ministerial mechanism to coordinate national military recruiting was also launched.
Tech self-reliance tops the 14th 5-year plan agenda and 2035 vision, but a series of high-profile failures have swept through strategic sectors, from automobile to semiconductors. Financial regulators went after fintech giants, releasing a preliminary draft of regulations on online microloans to force them to shoulder more of the risk. SOEs were also in focus, as several large ones defaulted sending shockwaves through the market; other firms postponed their own bond offerings. Economic officials still aspire to overcome long-term problems, as they are given another goal: double average incomes by 2035.
RCEP, the biggest deal since the US-China trade war truce in January, brought about a boost in morale. It is, however, much less ambitious than its rival CPTPP. Challenges like ag tariffs, SOEs, environment and labour issues were off the table. Aspiring to write the rules of global trade, Beijing sets great store by RCEP’s ‘inclusive’ model. More predictability is expected in US-China relations under Biden; as systemic pressure from US allies mounts.
To ensure supplies of staples in the face of a pull to higher value crops, and an uncertain global grain market, the state is designating farmland for their exclusive use and subsidies will keep farmers’ planting them. Ensuring food supply is implicit in the 14th 5-year plan, extending beyond grain and oil to cotton, sugar and meat, all facing domestic shortage and rising imports.
To ease pressure on Basic Medical Insurance, centralised procurement has moved to reduce the price of coronary stents, despite concerns over quality and doctors’ incomes. Localities are offering more coverage for their residents via supplementary commercial healthcare insurance.
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14th 5-year plan outlook: ecology-based growth
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november policy movers
policy professionals in and out of the establishment
Jiang Jinghao 蒋靖浩 | National Development and Reform Commission Department of Resource Conservation and Environmental Protection director
The steel sector now outrates coal-fired power as a source of air pollution, notes Jiang. Apart from the sector’s high emissions, steel capacity is concentrated in heavily polluted regions, not least Jing-Jin-Ji. Transporting steel causes over 20 percent of emissions from the sector. A large gap in pollution control persists between China’s and advanced nations’ steel sectors. Chinese firms are still reducing pollutants such as NOx and SO2, yet their peers in advanced nations, laments Jiang, have moved on to controlling CO2 and dioxin.
Dong Ximiao 董希淼 | China Merchants Union Finance chief researcher
Dong is a key advocate of amending the Central Bank Law. Improving institution building, it helps curb financial risk and maintain stability. It is also, he adds, a legal basis for PBoC’s digital currency, allowing it to regulate other digital currencies by law. It sticks to the approach of not allowing PBoC to monetise state debt, which Dong argues is the baseline requirement for financial discipline, preventing inflation and asset price bubbles.
Yin Zhi 尹稚 | Tsinghua University School of Architecture Department of Urban Planning professor
An outspoken veteran in urban policymaking, Yin heads the Tsinghua Planning and Design Institute. He lauded the role of tech in urban governance during COVID-19, but is skeptical about whether it is the solution for well-governed cities. The lesson from COVID-19 for urban development is that more power must be delegated to community officials so they can mobilise more resources, contends Yin. He is also critical of the ‘resilience’ of cities, pointing out that many once-popular destinations can fall into oblivion overnight.
policy ticker highlights
gems from our feed of policy releases and domestic debate
geopolitics
RCEP features ‘inclusiveness’
Weixin (1), Weixin (2) | 18 November
context: Beijing envisions the future global trading system to be ‘inclusive’ of all economic models. But signing low-standard trade agreements like RCEP does not help raise China’s voice in trade issues increasingly addressed in high-standard trade agreements rather than through the WTO.
Compared to regional trade agreements led by developed countries, the terms of RCEP are more inclusive, open and to be gradually implemented, as well as lacking SOE, environmental and labour standards, analyses He Xiaoyong 贺小勇 East China University of Political Science and Law professor
government procurement
only applies to central governments
mostly regulates transparency
the promised market access does not match WTO (CPTPP and USMCA exceeded WTO terms)
investment
includes regular investment protection measures: national treatment, most-favoured nations, restriction by 'negative list'
no dispute resolution mechanism yet for disputes between investor and investing countries (such discussion should take place within two years of RCEP coming into effect)
dispute resolution between countries does not cover rejections or conditions for foreign investment
trade in services
following GATS (General Agreement on Trade in Services) conditions
does not require 'negative list' management for mode I (commercial presence) (many regional trade agreements do so by considering commercial presence 'investment')
financial services
follows GATS, but adds rules for new forms of financial services and cross-border flow of financial information
e-commerce
requires members to allow cross-border flow of commercial information (a first for China)
EU–Japan EPA has not committed to cross-border flow of commercial information
subsidy
largely retaining WTO rules for goods and GATS rules for services (CPTPP and EU–Japan EPA have expanded upon Agreement on Subsidies and Countervailing Measures)
It is an inclusive developmental structure suited for ‘a new era’, says Liu Junhong 刘军红 CICIR (China Institutes of Contemporary International Relations) Centre for Globalisation and Global Governance director. It is flexible, thus more acceptable for members and has more potential for global promotion, says Xu Feibiao 徐飞彪 CICIR Centre for BRICS and G20 Studies vice director.
governance
poverty alleviation nears completion
Xinhua Net (1), Xinhua Net (2), People's Daily | 24 November
context: The stage is being set to declare a decisive victory over absolute poverty soon. Vice-minister of Civil Affairs declared on the same day that all registered impoverished households were now recipients of minimum social security, i.e. de facto lifted out of absolute poverty.
Xinhua reports that the nine remaining impoverished counties in Guizhou province were declared rid of absolute poverty on 23 Nov 2020. This brings to completion the alleviation efforts of the past years across 832 counties. The last ethnic groups considered to live under absolute poverty, in Yunnan, Xinjiang, and Guangxi, were declared lifted out of absolute poverty on 24 Nov 2011, it also notes. Localities are eligible for the new status once the occurrence rate of absolute poverty falls below 2 percent, 3 percent in western regions, Xinhua explains.
That all counties are now lifted out of poverty does not mean the poverty alleviation targets have been fully met just yet, Xia Gengsheng 夏更生 State Council Leading Group Office of Poverty Alleviation and Development vice-director told People Daily. Spot and regular inspections of the said localities first need to be conducted. The lingering shortcomings identified by the various inspection teams will then need to addressed, he continues. In time, it is the CCP Central Committee that will declare the final victory of the war against poverty.
macroeconomy
more on bond defaults
Caixin Finance | 22 November
context: Recent defaults have riled the bond market. Analysts see this as a move by financial regulators to strengthen the long-term positioning of the market by breaking implicit guarantees that SOEs are 'too big to fail'. This may help improve financing for smaller firms as SOEs will disrupt credit markets less, but tightened SOE access to cheap capital will force the latter to become more efficient.
As defaults of SOE bonds continue, SC-FSDC (State Council Financial Stability and Development Committee) held a meeting on 21 November to discuss the developments, namely
major SOEs that have defaulted include
Brilliance Group, an auto maker controlled by Liaoning SASAC, filed for bankruptcy after defaulting in late October
Shenyang Shengjing Energy Development Group defaulted due to bankruptcy
Qinghai State-owned Assets Investment Management Company temporarily cancelled a perpetual bond
Tsinghua Unigroup defaulted on a C¥1.3 bn bond
moving forward, SC-FSDC stressed
financial regulators and market players must adhere to law
zero tolerance policy towards financial crimes, particularly 'debt evasion'
strengthening supervision over market entities such as bond-issuing companies, their shareholders, financial institutions, and intermediary institutions
strengthening departmental coordination to improve risk prevention and maintain reasonable and sufficient liquidity
continuing financial reforms and improving SOE performance
The defaults have prompted investigations into the financial firms that gave the defaulters their credit rating and the bond underwriters such as Haitong Securities, Everbright Bank and Zhongyuan Bank. Investors argue that financial intermediaries helped firms evade debt by transferring assets without properly notifying authorities or investors. Connected to these investigations is the use of 'structural bonds', a financial product where the issuer purchases part of their own bond. The practice was temporarily banned by the National Association of Financial Market Institutional Investors on 18 November. The ban will hurt the issuance of some smaller companies as well because they also use the 'structural bonds', an anonymous bond underwriter told Economic Observer.
Another major issue revolves around the future credit rating of SOEs, previously the beneficiaries of implicit guarantees that the state would save them. This would impact their credit rating as the company may originally get a lower grade, but because they are state-owned they are boosted to higher credit ratings, reports Economic Observer. Breaking the implicit guarantee is a positive move towards marketisation in the long run, but will be painful for investors in the short-term.
agriculture
curbing the decline in grain planting
State Council, Sohu | 17 November
context: It is no easy feat balancing the state's strategic target of guaranteeing sufficient land for growing staple grains with farmers' pursuit of good returns by planting more profitable crops (like flowers). As part of efforts to protect staples' security amid farming diversification, the state has designated permanent farmland to be mainly dedicated to staple grains. Subsidies will continue to be in place to maintain farmers' confidence in planting staple grains.
State Council stressed the top priority of ensuring national food security amid uncertainties in the global grain market. Local governments must curb the trend of 'non-grain' use of farmland, meaning using land for purposes other than growing grains, not least the three staples. It requires
clarifying priorities of farmland usage
strictly controlling non-ag use of farmland
permanent farmland for rice, wheat and corn production
ordinary farmland for grain, cotton, oil, sugar, vegetable and feed crops production
non-edible crops ranking behind staples and other edible products
strengthening supervision of grain production functional areas
taking another look (huitoukan 回头看) and adjusting the use of areas in time
stabilising grain acreage outside the main grain-producing areas
attracting private investment to grain breeding, production, processing and distribution
curbing the trend of leasing farmland for non-staple uses
preventing illegal occupation of permanent farmland to develop aquaculture, forestry and orchards
Supportive measures include
giving greater weight to preventing 'non-staple use' of farmland in the provincial governor accountability system for food security
financially supporting major grain-producing counties and areas
promoting grain cultivation monitoring
The policy targets two factors that exacerbate the 'non-grain' trend, notes Gui Hua 桂华 Wuhan University Centre for China Rural Governance research fellow
farmers abandoning farmland or turning to economic crops due to low profits in grain production
private capital (like real estate developers) leasing farmland for other purposes
society
centralised coronary stent procurement results in massive price drop
Caixin, Jiemian (1), Jiemian (2), Yicai, Weixin (1), Weixin (2) | 5 November
context: Though price reductions were expected, the spectacular fall in coronary stent prices will have multiple repercussions for the medical equipment sector.
Bidding for centralised coronary stent procurement took place in Tianjin on 5 Nov 2020, reports Caixin. 26 products from 11 enterprises participated, says Jiemian.
All ten products in the final round are priced below C¥800, and seven will be selected, reports 8am Health Insight. Previously, stents were more expensive than in Europe and America, making them unaffordable for many patients, but now they are similar to prices in India. NHSA (National Healthcare Security Administration) says compared with the same products in 2019, price reductions reached 93 percent. Zhong Dongbo 钟东波 NHSA Department of Drug Price, Bidding and Procurement director says such price drops are beyond NHSA’s expectations. It will now spend C¥10.9 bn less on stents. Procurement results will be implemented in January 2021, says Sailing Health.
Such low prices raised quality concerns, but Zhang Tiejun 张铁军 Tianjin Healthcare Security Bureau vice director assures the public that quality standards have been strictly enforced.
The dramatic price reductions and the small market outside of the procurement left firms losing profits. Foreign firms were reluctant to take a large price hit; only three foreign products (from two firms, Boston Scientific and Medtronic) made it onto the final list of ten. Yicai notes the procurement will not affect the latest coronary devices in which foreign firms dominate. It might limit profits but will force firms to innovate. For example, drug-eluting balloons are expected to become a popular alternative to stents.
As centralised procurement is implemented, many doctors will lose the income they received through corrupt practices such as taking kickbacks, thought to be a major reason for high stent prices. Zhang says that with NHSA paying less to drug firms, funds can be used to reward medical services provided by doctors.
energy and environment
announcing draft national carbon market rules
Ministry of Ecology and Environment | 2 November
context: While the national carbon suffered numerous setbacks, the release of these two sets of rules indicates that the market is finally taking off. The signals sent by the top officialdom offer hopes of the market being developed into a robust scheme in future.
MEE (Ministry of Ecology and Environment) released two sets of draft rules on the national carbon market.
'National carbon market management measures (trial)', state
the measures are drafted for the purpose of fulfilling the Paris Agreement
MEE is in charge of building, managing and supervising the carbon market, and drafting relevant policies and standards
provincial environmental authorities are responsible for managing activities within their respective jurisdictions
municipal authorities will work with provincial counterparts on implementation
entities to be covered are those whose annual greenhouse gas emissions are above 26,000 tonnes carbon equivalent (or around 10,000 tonnes of standard coal)
entities covered by national market will be excluded from local pilots
carbon allowances will first be freely allocated; auctioning will be later introduced, with the auctioned portion to increase gradually
MEE may reserve allowances for market adjustment and major projects
provincial authorities will distribute allowances among entities within their jurisdiction
China Certified Emission Reduction and other supplementary carbon reduction mechanisms can be used to offset up to 5 percent of emissions
penalties
'National carbon market registry, trading and settlements measures (trial)' outlines
registry and settlements; trading to be managed by two separate institutions
details concerning registry, trading, settlements
responsibilities of registry, trading, settlements institutions
information disclosure and risk management
trading can proceed via open bidding, negotiation transfer and other methods approved by MEE
a single transaction via open bidding should not exceed 100,000 tonnes
a single transaction via negotiation should be over 100,000 tonnes
prices may fluctuate within range of
10 percent for trading via open bidding
30 percent for trading via negotiation transfer
science and innovation
2025 goals for NEVs scaled down, but still ambitious
State Council, Xinhua Net | 2 November
context: Officials refer to the forthcoming NEV industry plan (2021-35) for the past year whenever industry insiders and lobby organisations point out the need to increase policy support. However, the actual plan will not soothe investors. It will fuel the buzz around hydrogen vehicles.
NEVs (new energy vehicles) should make up 'about 20 percent' of car sales by 2025, states the NEV industry development plan (2021-35). (CP note: down 5 percentage points from the draft version but reiterating the 2017 automobile industry development plan.) Other targets include
80 percent rather than all new buses, taxis, lorries and other public area vehicles in national eco-civ pilot zones and key areas for air pollution prevention and control should be NEVs from 2021 onwards, a change already highlighted by State Council
the goals of reducing average power consumption of pure EVs to 12.0 kWh/100 kilometres by 2025 was maintained
the goal for smart and connected vehicles to make up 30 percent of sales by 2025 was dropped
FCVs (fuel cell vehicles) and battery recycling gained prominence, as the final version added calls for
supporting local FCV commercial demos
FCV application support tech
issuing battery recycling regulations
full life cycle tracing to enforce producer responsibility
a battery repurposing industry
optimising the layout and efficiency of the recycling industry
The final version expanded on deregulation by calling for industry consolidation and for the 'strong' to acquire the 'weak'. Remarks on a cross-regional corporate credit system were dropped, as well as a paragraph on international collaboration on NEV standards.
In line with the draft version, the plan supports R&D into
whole cars, under the ‘three horizontals’
pure electric vehicles
plug-in hybrid vehicles
fuel cell vehicles, including hydrogen
components, under the ‘three verticals’
battery systems
motors and power electronics
connectivity and smart tech
Support for infrastructure roll-out, especially charging infrastructure, battery swapping and smart road construction, was also maintained.
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