Liang Hui 2017: ‘Stability and Progress?’

As is the case every year, this year’s Liang Hui - or ‘Two Sessions’ of the Chinese legislatures – have served as a vehicle for promoting the government’s achievements and unveiling a range of new announcements. These cover a range of topics important for foreign and domestic observers alike.

What is the Liang Hui?

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

Formally, the NPC is China’s highest parliamentary body. Most legislation is put to its 175-member Standing Committee throughout the year, but the most important bills are discussed by the full assembly during the Liang Hui sessions. It is largely dominated by members of the Chinese Communist Party (the Party).

The CPPCC is an advisory body with no formal powers. However, its members can make suggestions and highlight issues in an official forum. It serves as a vehicle for slightly broader debate than the NPC, although within the umbrella of what is considered politically appropriate.

CPPCC members come from a wider variety than those of the NPC, and include many representatives from outside the Communist Party, including from the minor parties which exist (although do not have power) in China. Furthermore, its members have official status and receive internal updates that are not widely available to outsiders.

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 debate at the NPC and CPPCC, then wrapped up again 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.

The Liang Hui provides 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.

What’s new this year?

The outstanding theme of this year’s Liang Hui is ‘stability’, or “making progress while maintaining stable performance”.

There will be a change of administration – or at least a change of some senior figures – at the 19th Party Congress in November. This is a turbulent time in Chinese politics and the government is looking to ensure stability in other areas as much as possible.

Although stability is hardly a radical theme, a detailed examination of the Premier’s Work Report and discussions surrounding the Liang Hui reveal important implications for enterprises and investors.

The following sections outline highlights of discussion, focusing on what is new for 2017.

Economics & finance

In his Work Report, Premier Li Keqiang announced new target of 6.5% GDP growth, or “higher if possible in practice”. This is only very slightly lower than last year’s target of 6.5-7% growth, and continues with the concept of the ‘new normal’ of lower growth than in previous years (although this phrase was not actually used by him this year).

Li’s move to support small and innovative businesses continues, which will include an increase in the upper limit of small companies’ taxable annual income for corporation tax, and an increase in proportion of tax deductible R&D expenses for small and medium-sized companies. Other moves include promises to reduce government-set operating fees and administrative charges.

He also continued his theme of cutting government administration, which he called on “at all levels … [to] tighten their belts”, requesting central government departments to cut at least 5% of general expenditure.

A notable omission in the Work Report was discussion of capital controls on Chinese businesses investing overseas, which were reintroduced in 2016. This is likely to be because it runs counter to a new policy theme from early this year, that of globalisation.

Globalisation, trade and foreign affairs

Following in the footsteps of President Xi’s support for globalisation announced Davos in January, the Premier in his Work Report this year also made significant mention of this concept for the first time at a Liang Hui. This policy is set to continue during 2017.

However, one notable omission from the Work Report was mention of bilateral trade agreements. Over the last few years the EU and U.S. have been negotiating possible bilateral investment agreements/free-trade agreements with China.

In his 2016 Work Report Li mentioned how China would “work to make progress in negotiations on investment agreements between China and the United States and … the European Union.”.

There was no such comment on this issue at all in the 2017 Work Report, and although Li mentioned the issue in response to a question in the NPC’s concluding press conference, it was only in general terms about how it would bring benefits to both sides, with little indication of whether it was moving ahead.

Although this is not surprising concerning the U.S., given the volatile state of its foreign and trade policy, it would be surprising for the EU, especially given the positive status of EU-Chinese relations and President Xi’s recent new position on globalization, which the EU has applauded. If China halts progress on the EU-China Comprehensive Agreement on Investment, it would prove to be disappointing news for many European businesses in China.

While there was no indication at the Liang Hui of that a bilateral trade agreement with the U.S. would go ahead, there was official confirmation from the Chinese government and the White House that both sides were looking towards a summit between the two countries’ Presidents.

Free Trade Zones

The Premier announced building of 11 free trade zones. In a panel discussion with Shanghai government officials during the Liang Hui period, President Xi also touched on this, urging the Shanghai government to expand its role as a testing ground for further reform and opening-up, calling on its free trade zone to ‘become a bridgehead for the country’s Belt and Road Initiative and help market entities go global’.

Equality for foreign firms?

The Premier made a clear commitment for equality between foreign and domestic firms, stating that “Foreign firms will be treated the same as domestic firms when it comes to licence applications, standards-setting and government procurement, and will enjoy the same preferential policies under the Made in China 2025 initiative.”

If implemented in full, this would be a major bonus for foreign firms. However, many foreign businesses in China are sceptical about ‘equal treatment’ in these areas. The European Chamber of Commerce – the largest foreign business group in China – is a case in point: during the period of this year’s Liang Hui it announced a major report criticising the Made in China 2025 initiative for being a state-directed plan that was very strongly biased in favour of Chinese SOEs, and encouraged/directed the use of licence applications, standards and government procurement as means to do this, amongst other such tools.[1]

Despite this prompting a reply from the Ministry of Industry and Information Technology, it remains to be seen whether there will be any significant move towards addressing the issues raised by the EU Chamber in practice.

Innovation and R&D

Although innovation is a frequent theme at the Liang Hui, the Premier attached slightly greater prominence to it in his Work Report this year. In previous years’ discussion, innovation was rolled into other topics, but this time he gave it its own section, indicating its rising importance to the top leadership.

The Premier made specific mention of efforts to improve information services including building a ‘sharing economy’, faster broadband speeds, lower rates for Internet services, an end to domestic mobile roaming charges and cutting international call fees.

Shanghai is being encouraged to lead this, with President Xi at the above-mentioned panel discussion calling on the city government to use “information technology, including the internet and big data, to enhance intelligent city management to make the city more orderly, safer and cleaner”.

In terms of research and development, Wan Gang, minister of science and technology, announced that China will launch all 15 of its major science innovation projects by the end of 2017. These focus on cutting-edge technologies such as quantum computers and advanced manufacturing.

Quality & counterfeits

The Premier made a call to punish sales of counterfeit and substandard goods. This is not new – what is new was his comment explicitly linking this to the key theme of stability by stating: “we need to ensure order in the market” – which suggests that this may be more than just a casual mention. Enterprises in this sector should expect increased attention from regulators.

A range of leading Chinese businessmen issued their own announcements echoing the need for action,[2] following which Minister of State Administration for Industry and Commerce Zhang Mao pledged to strengthen anti-counterfeiting laws and step up the country’s intellectual property protection efforts.

Li called on enterprises to “foster a culture of workmanship” as a means of improving product quality and thereby strengthen Chinese brands. Although his 2015 Work Report also discussed building Chinese brands, this year marked the first explicit mention at the Liang Hui that identifies a problem with workmanship and a recognition that it is damaging the reputation of Chinese products.

With (indirect) official acknowledgement that this is an issue blocking China’s development, businesses may find increased support from government for training to address the issue if portrayed in a positive light.

The Premier also highlighted how the government would “guide enterprises in raising …quality and building brands”, and calling for more products sold domestically to be ‘produced in the same way, meet the same standards and be of the same quality’ as those sold abroad. This issue is also not new, but the linkage with brand-building is stronger than before.

This may herald increased pressure on enterprises to deliver equivalent standards for export and domestic sales, and increased attention from the media where it does not. There is plenty of room for confusion: China likes having its own regulatory and standards regimes, and foreign standards may not be consistent or directly equivalent with China’s own ones.

Domestic demand and service sector consumption

As has been the case in recent years, the Premier called for increased service sector consumption as means to boost domestic demand.

Several examples highlighted related to ‘information consumption’, including e-commerce & express delivery (especially in rural areas), digital homes, online learning, integrated development of physical stores and online shopping. Other sectors noted this year included support for non-governmental participation in education, elderly care, healthcare, and tourism.

Overcapacity & real estate

Overcapacity, especially in the steel and coal industries, were a subject of discussion with the Premier making a commitment to reduce steel production by a further 50 million tons and coal by 150 million.

Chinese real-estate prices have been booming, about which the Premier called for better regulation of the supply of land including “targeted steps to regulate the real-estate market”, noting that there was still excess supply in third and fourth tier cities’ markets.

Another announcement from the Premier was that the State Council has asked for proposals on the protection of real estate, including the ability for owners to extend the current 70-year term of land use on residential buildings without applying.

State Owned Enterprise reform

A notable ‘breakout session’ was coverage of President Xi engaging in discussions with Liaoning provincial officials, urging them to “push forward supply-side structural reform to revitalize the region’s economic growth” – namely the development of Dongbei – China’s North East.

Liaoning, as part of China’s North-East ‘Dongbei’ region, is one of the slowest growing parts of China. Last year Liaoning was officially – and embarrassingly – found to have seriously over-reported economic data for years.

Xi’s singling out Liaoning in this way may not be entirely positive and may be a lesson that they and the rest of Dongbei are under the spotlight.

Environment

Environment had a slightly higher profile than last year, but most notable was a clear focus on air pollution and a promise to ‘make our skies blue again’.

Coal was singled out as a major problem, as were repeated mentions of how to reduce this via replacement with electricity and natural gas, upgrading power plants and shutting-down small coal-fired furnaces in cities.

That said, the Premier made no specific target for reductions in PM2.5 density, just that “in key areas… [it] falls markedly”, in contrast to clear reduction targets for nitrogen oxide and sulphur dioxide.

Aviation

The Civil Aviation Administration of China (CAAC) released a report over the Liang Hui period that outlined how China would have another 74 civil transport airports by 2020, and called on airlines to increase on-time arrivals to reduce customer complaints resulting from flight delay.

In a separate announcement, Wang Changshun, NPC deputy and the head of China Southern Airlines, took a different position. He called for reform to air traffic controls and airspace restrictions which “have held back development of the civil aviation industry and caused flight delays”.

These issues have been widely known amongst China aviation industry insiders for years, with the airspace restrictions arising in part due to China’s proportionately very large proportion of military airspace. It is interesting that the issue of aviation management reform is now being ‘lobbied’ by domestic industry competing for attention at the Liang Hui period.

Poverty alleviation

Poverty alleviation and rural issues are a frequently overlooked part of the government’s agenda. Li highlighted improving living standards for poor areas as an example where the government needs to “strengthen areas of weakness”, a rare admission that the government has not done enough in this area.

As was the case in 2016, he noted need to “support NGO participation in combating poverty”, indicating that in principle China still welcomes their support for poverty alleviation.[3]

Summary

As can be seen above, many of the issues discussed within the Liang Hui (or omitted) could have significant implications for many foreign enterprises.

Foreign enterprises should monitor carefully for news and alerts for forthcoming changes in their industry area, and plan for forthcoming changes in their industry area.

They should also consider adapting their business and communications plans to match China’s development priorities. Once China’s top leaders introduce a concept, it will filter down into state, private and even foreign companies. This is likely to herald issues that foreign enterprises – acting like a good domestic stakeholder – should adopt.

[1] See European Chamber report cautions against the negative aspects of China Manufacturing 2025  http://www.europeanchamber.com.cn/en/press-releases/2532 7 March 2017

[2] Including Jack Ma, Liu Chuanzhi, Lei Jun, the Chairmen/founders of Alibaba, Lenovo and Xiaomi, respectively.

Author

Mark Pinner

Managing Partner, China

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