5 things you need to know about… the Chinese Liang Hui

Mark Pinner, the head of our China practice, takes a look at the 5 things you need to know about the Chinese Liang Hui - the Chinese equivalent of the State of the Union Address in the US and the Queen's Speech in the UK. So why is it important for those working in China? Read on...

We all follow the State of the Union Address in the US, and the Queen’s Speech in the UK, but have you heard about the Chinese equivalent, at their ‘Two Sessions’ of parliament – the Liang Hui?

The head of our China practice, Mark Pinner, has posted an analysis on this which reveals the Chinese government’s plans. Check out some key developments to watch out for over the coming months:

  1. China switches gear to an economic era with more moderate growth, shifting away from low-cost manufacturing and heavy industry to a more advanced, consumer-focused and service-oriented economy.

  2. China goes global with the new ‘China2025 Strategy’ that encourages Chinese companies to expand abroad, and creates potential opportunities to partner with them.

  3. China goes local, decentralising power to local governments, and how foreign business need follow suit.

  4. China opens up parts of the economy allowing foreign investment in a host of new areas such as steel, ethylene, oil refining, paper making, electric transformation, alcoholic spirits, to name a few.

  5. China turns digital. With the ‘Internet Plus’ action plan, watch out for smart cities with more integrated services using e-networks, Internet Banking, online appointments, video lectures, doctors and telemedicine, and transport.

What is the Liang Hui?

The Liang Hui comprises the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference) which both sit with their full constituent members over a two-week period in March every year.

During this time the NPC and CPPCC discuss important issues, debate ideas and are a vehicle for achieving consensus. The NPC is China’s highest parliamentary body and, although most legislation is approved by its 175-member Standing Committee which meets throughout the year, the most important bills are put to the full body during the Liang Hui sessions.

What’s important to watch at the Liang Hui?

The centrepiece of the Liang Hui is the Government’s Work Report, delivered and broadcast live by the Premier (Prime Minister) in person. This not only reports on the government’s progress over the previous year, but also combines many new macro-level policy announcements.

In the two weeks of the Liang Hui’s sessions, the Work Report is followed by considerable debate from both the NPC and CPPCC, then wrapped up by the Premier giving an extended press conference to a large audience of journalists. This is one of the few opportunities that media (both foreign and domestic) have to ask unscripted questions directly to one of China’s top leaders.

Together, the Liang Hui events provide an opportunity to analyse how the government perceives its record over the last year, identify what will be coming over the following year, and determine issues of concern to China’s political representatives.

Why should I care about the Liang Hui?

While regulatory changes and suggestions of macroeconomic emphasis have a clear impact for business risk and opportunities, following the government’s policy leads is important too.

Domestic companies, especially SOEs, ignore the government’s priorities at their peril. With foreign companies, for whom the bar of corporate behaviour is often higher than their local equivalents, this is very important, especially given the Chinese government’s activist approach to promoting domestic industry.

All this makes it important for foreign companies in China to demonstrate how they act like a local company as much as possible. The Liang Hui is an important vehicle to follow these trends.

Below is a short analysis of the announcements and discussion at the Liang Hui, highlighting some of these trends.

New Normal & Economic Growth

The Government drew on their concept of ‘New Normal’ in detail. This provides a framework for the economy moving into a new era characterised by slower growth and including a ‘rebalancing’ from overcapacity in low-cost exports to a higher-end, more consumer and service-oriented economy.

With an expectation of 7% economic growth, this is lower than c.7.5% in 2014 and much less than in the boom years over the last decade.

Li emphasised the government’s confidence in maintaining the growth targets, noting that ‘in the past couple of years [they] did not resort to massive stimulus measures for economic growth … [and so have] ‘ample room to exercise macroeconomic regulation’. Measures to stimulate the economy include large-scale infrastructure projects such as social housing, more railways and roads.

There should be more opportunities for companies in higher-technology manufacturing and services. International companies should position themselves as contributing to the government’s shift.

Streamlining Administration & delegating government powers

A long-running programme of the Premier is his drive to withdraw from the market wherever possible. He has repeatedly emphasized that the Party wants to leave managing business to business, reduce bureaucracy for business, and delegating decision-making from central to local government. This was a core part of his announcements and is set to continue throughout 2015.

Li also noted his commitment to economic reform, especially in tackling vested interests which ‘will be upset as the government shatters its own powers’. He used a visceral metaphor officially translated into English as ‘Like taking a knife to its own flesh’ but is literally ‘cutting off one’s own hand’.

In addition, a new revision to the Legislation Law passed by the NPC at the Liang Hui, will increase in local government flexibility. This change significantly expands the potential number of cities in China that can exercise the right to make their own legislation, which will be able to cover rural/urban development and management, environmental protection, and preservation of history/culture.

This new reform could potentially see considerable change in investment environments at a local level. However these powers will be rolled out ‘step-by-step’ when provincial level legislatures deem their local levels are ready for it, so which may be slow.

This trend in delegation of power to a local level increases the importance for businesses of building links with local government. This will bring its own set of challenges; even though companies find central government difficult to understand, local governments are usually much less familiar with foreigners and foreign business.

Further opening up?

Market access changes announced around the Liang Hui period reduce the number of ‘restricted’ sectors for foreign investment from 79 to 38. This opens up manufacturing sectors in steel, ethylene, oil refining, paper making, electric transformation, white spirits (e.g. alcoholic drinks) sectors, as well as some areas of services, such as e-commerce, logistics, transport, finance and culture.

Although positive, this change needs to be considered in light of the overall investment climate. One area of substantial concern to some foreign investors at present is the new Foreign Investment Law under which foreign, but not domestic, companies would have potentially onerous reporting requirements to local governments. Taken as a whole, this change could even outweigh the positive gains from the increased market access changes.

China going global

In a new bid to build up Chinese industrial giants, the new ‘China 2025 Strategy’ is designed to encourage domestic companies, especially SOEs, to expand abroad, drawing on the large economies of scale available from China’s huge domestic markets.

The Strategy focuses on railways and nuclear power, but will also reach machinery and communications equipment, automobiles, aircraft and electronics.

This strategy is probably a formalisation of strategies already being employed by many companies, such as in the ITC where Lenovo and Huawei which have been following this model for years.

Although it is early days, there may be opportunities to come for international companies to partner with larger Chinese counterparts in this process.

Increasing mass entrepreneurship & innovation

Increasing entrepreneurship and innovation were another new theme from the Premier, which he noted would be crucial for job creation and increasing overall income.

He announced a range of measures to help new businesses, including combining the business licence and other various necessary certificates into one, to improve conditions for micro and small businesses, such as increased numbers of low-rent spaces, and use of national guidance funds for seed capital investment.

This change is likely to help international SMEs establish operations in China.

Companies should also note the emphasis on mass entrepreneurship and be ready to position themselves as encouraging innovation in China. Bringing this theme into CSR activities could be one way to do this.

Rule of Law & anti-corruption

The Government’s emphasis on anti-corruption continued, continuing the ‘Rule of Law’ campaign, promising to make government officials use power in a more transparent way.

It is easy for a Westerner to hear this and think that China will move to a system with an independent judiciary, but the campaign is more about moving the Party to a legal basis, and should not be interpreted as an indication that China will see a rapid move to a legal system independent of the Party. Rule of Law is therefore better understood as ‘Rule by Law’, or ‘Rule According to the Law’.

As part of the Government’s efficiency drive, the Premier announced a drive to increase Intellectual Property protection and food safety while reducing swindles and fake goods.

There is always a lot of talk about stricter enforcement of IP rights so it remains to be seen whether this will lead to any major changes.

Companies in the food sector should also note mention of increased food safety measures and be very well prepared ready to deal with problems when they arise. Having problematic issues in a sector where the government is preparing a crackdown is especially dangerous, especially for foreign companies which can make easy targets.

Environment & pollution control

The Liang Hui began with high levels of public expectation about the environment, as surveys of Chinese citizens in domestic media rated this as the most important topic for discussion.

The topic was highlighted by the release of a documentary ‘Under the Dome’ about air pollution in China by former CCTV journalist Cai Jing immediately before the Liang Hui. This gathered huge public attention and, after a few days web links to download it were blocked.

In contrast, discussion about the environment at the Liang Hui was relatively muted, although the Government promised more support to environmental departments, highlighted that energy conservation and emission reduction targets are now put together on same level of priority as economic and social targets, and promised that failure to enforce environmental targets/dereliction of duty handled would be punished harshly. A backhanded comment from the Premier about the environment called for ‘joint efforts of the whole of society’.

The relative lack of emphasis on environment is likely because there is no easy short-term solution to China’s environmental issues.

The Premier’s comment is noteworthy though, which may imply that government-led social behavior campaigns are under consideration.

The Cai Jing documentary also illustrates different priorities within the government. The fact that the documentary was not blocked at first suggests that it was initially seen as a possibly helpful way to raise awareness of pollution monitoring, but the huge interest later and subsequent blocking of web links may have deflected attention from the Government’s overall agenda and highlighted their inability to deal with the issue easily.

A Connected Society

The new Internet Plus action plan aims to integrate mobile Internet, cloud computing, big data and the Internet of Things with modern manufacturing, to encourage the healthy development of e-commerce, industrial networks, and Internet banking, and to help Internet companies increase their international presence.

Examples discussed around the Liang Hui include e-networks, Internet Banking or online appointments such as video lectures, taxi-sharing apps, doctors, telemedicine. Many of these could help solve social problems such as reducing car emissions, save time, or bring services to remote and/or poor areas.           

This is also likely to see integration with smart (digital) cities – traffic planning, street lights, and buildings.

The action plan suggests plenty of areas of opportunity for international businesses, but there are also areas for concern e.g. personal data security concerns, integration with services overseas.

Conclusion

This short analysis shows how major political events in China such as the Liang Hui can highlight upcoming opportunities and threats for foreign investors.

Companies are well advised to spend sufficient time and resources to analyse the impact of this and other political events on their business.

This also highlights the importance having an effective government affairs and monitoring function in China, in order to guide corporate strategy and position their company more effectively.