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China’s Liang Hui 2021: ‘Doubling Down and Moving Ahead’

As is the case every year, this year’s Liang Hui – ‘Two Sessions’ – of the Chinese legislatures – serves as a vehicle for promoting the Government’s achievements and unveiling a range of new announcements. It provides an opportunity to analyse how the Government perceives its record, identifies what will be coming over the following year, and determine issues of concern.

 

What is the Liang Hui?

The Liang Hui refers to the yearly gathering of the two primary Chinese legislatures: the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC).

Formally, the NPC is China’s highest legislative body. Its 175-member Standing Committee scrutinises most legislation during the year, but the full assembly discusses the most important bills during the Liang Hui sessions.

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.

 

What is important to watch at the Liang Hui?

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

These announcements’ format follows a very similar pattern year-on-year, but the relative priority given to issues varies. The changes indicate the importance the Government places towards issues and are scrutinised carefully by Party members and China-watchers alike.

 

What is new this year?

This year’s Liang Hui coincides with the release of China’s new Five-Year Plan (2021-2025), which the Premier introduced formally in his address.

Nonetheless, this year’s Liang Hui sessions were actually shorter than usual, lasting six and a half as opposed to ten days. Officially, this change was due to some sessions being held online and being more condensed, but given the Five-Year Plan’s announcement, there ought to be more to discuss than usual. The shortened length may indicate a desire by the Government to control the agenda for discussion tightly.

The following sections outline highlights from the Premier, Liang Hui plenary sessions and associated ‘breakout sessions’.

 

Review

An immediate observation from Premier Li’s Work Report was his tone. This tone was much firmer and more confident, in contrast with a severe demeanour and a definite sense of urgency in 2020 when the Government remained faced with controlling the outbreak of Covid. By 2021, the Government’s success in managing the outbreak appears in stark contrast with the West’s continuing difficulties. Li’s comments reflect this, noting that China has had an:

‘Extraordinary year … responding with tremendous tenacity…Our achievements, which have won the approval of our people and global recognition, will be remembered in history.’

Li’s comments in 2020 noted how ‘China faced many difficulties and challenges’ with the international situation.

Li’s tone reinforces the strengthened feeling of confidence among many Chinese officials’ (and the people more broadly) about China’s governance system and unwillingness to back down in the face of challenges to its legitimacy by criticisms from the West. This issue can be seen in the Government’s fierce diplomatic response to sanctions over Xinjiang, which surprised many Western observers, generating further accusations that China is embarking on ‘wolf warrior’ diplomacy.

 

Economy

Li set a GDP growth target of 6 per cent for the coming year, seen by many analysts as a conservative figure given the rapid post-Covid economic recovery. For example, Wang Jingwen, a senior analyst at Pangoal Institution, expected ‘full-year growth … to average about 8.5 per cent.’. Furthermore, the Government’s return to setting GDP growth targets contrasts with the lack of one in 2020 due to fears of economic uncertainty caused by Covid.

Li announced the continuation of policies to support businesses, especially Medium, Small and Micro Enterprises (MSEMs). These policies included plans to:

  • Continue tax cuts, including the extension of VAT relief for small-scale companies
  • Raise VAT thresholds
  • Increase support for MSMEs financing, including ‘continuing the policy of providing subsidies to reduce financing guarantee fees’ and encouraging new models for supply chain financial services
  • Continue government direction of banks to support loans to business, government funding for local businesses, especially MSMEs
  • Increase loans to MSMEs by large commercial banks by 30%
  • Encourage governments in areas ‘hit hard by Covid’ to ‘lower or waive rentals for MSMEs’

These announcements reflect a continuation of China’s business-driven approach towards Covid support, contrasting with a more people-driven approach adopted by many western governments.

Nonetheless, by comparison with 2020, this year the Government plans a moderate cut in support measures and plans a slightly lower deficit to GDP ratio target than in 2020. This cut is illustrated, for example, by a small reduction in the local government special-purpose bond issuance quota and announcement that the Government was not planning to issue new ‘Covid-19’ bonds, as it did in 2020.

 

Work & Living Standards

The Government plans to create 11 million new urban jobs, up from 9 million the previous year, while maintaining the same urban unemployment rate.

Li commented in some detail on support for vocational skills training, illustrating the Government’s desire to deliver many lower-end jobs for migrant workers moving to urban areas.

Li also called for a ‘steady growth in personal income’, but this will not necessarily ‘match GDP growth’ as was called for last year. Furthermore, living standards featured much earlier in Li’s speech this year, illustrating how this is returning to a higher focus now that the threat of Covid recedes.

 

Innovation, research and development

The importance of innovation and R&D has increased still further this year, with greater reference in the Work Report, more discussion, and new announcements.  This includes:

  • Increased support to ‘Ensure success of projects to achieve breakthroughs in core technologies, implement Sci-Tech 2030 Agenda’
  • An increase in basic research expenditure by 10.6%
  • Continuing a 75% R&D tax deduction and expansion to 100% for manufacturing enterprises
  • Plans to ‘build platforms for technology R&D to enhance MSMEs to innovate.’

A key focus for R&D efforts is building ‘indigenous innovation’ to reduce dependence on international technology.

Qiao Biao, deputy head of the Beijing-based think tank China Center for Information Industry Development, noted how the Government’s plan to seek self-reliance in certain crucial technologies comes amid export restrictions abroad, stating:

“We have no choice but to work hard to crack hard nuts such as bottlenecks in technological advancement in semiconductors to meet our own demand.”

 

SOE reform

Although the Government reiterated its commitment to a market-driven economy, this year’s Liang Hui saw less discussion of State-Owned Enterprise (SOE) reform, which had attracted more attention in previous years.

SOE reform remains an issue, but this reference suggests that the Government might not push it quite as firmly in 2021-22 as in the past.

 

Foreign trade

Li commented on reform and opening up slightly less than in previous years, with similar promises to slowly reduce the ‘negative list’ for foreign investment while ‘protecting the legitimate rights of foreign companies’, much in the same vein as before.

 

Environment

Li announced a new target to drop energy consumption per unit of GDP by 3 per cent, while including plans to:

  • draw up an action plan for carbon emissions to peak by 2030
  • ‘promote the development of nuclear power on the premise of safety’
  • ‘make a major push to develop new energy sources’, ‘while promoting the clean and efficient use of coal’
  • ‘develop nuclear energy on the basis of ensuring its safe use’

China is continuing its drive to improve pollution while also addressing decarbonisation, which was entrenched into the Government’s agenda by Xi’s promise for China to become carbon-neutral by 2060.

The promise to re-vitalise China’s nuclear power drive is also noteworthy, which heralds new investment in this area. The investment drive in renewables will also continue.

 

Health

Unsurprisingly, health was a priority focus for the Liang Hui in 2020. In 2021, this issue has shifted back to its former position.

Covid remains a concern, with the Government promising to continue its efforts to promote COVID-19 vaccine development and free inoculation.

During the Liang Hui period, the Government launched a digital COVID-19 vaccination certificate to help facilitate cross-border travel. However, China is not expected to significantly relax border controls until 2022, with the head of the Chinese Centre for Disease Control and Prevention reportedly commenting that ‘herd immunity in China will not be achieved until the middle of next year at the earliest’.

 

Agriculture

Agriculture is rarely a key priority for the Liang Hui announcements, but this one did highlight gain output:

‘enhancing the protection of cropland, and resolutely stop any attempt to use it for purposes other than agriculture and specifically grain production.’, including new ‘Agricultural belts for national food security’

Furthermore, the Premier promised:

‘measures to expand the production of oil-bearing crops, develop livestock, poultry, and aquaculture farming, and promote stable hog production. Prevention and control of animal and plant diseases will be enhanced.’

Prices of agricultural produce, especially pork, have fluctuated considerably over the last year, while the ‘in passing’ mention of animal disease control is perhaps indicative of the Government’s confidence in its Covid management.

 

Major events

A few major exhibitions were mentioned at the Liang Hui, including the:

  • China International Import Expo (CIIE), China Import and Export Fair, and China International Fair for Trade in Services. Many attendees at last year’s CIIE saw substantial improvements and greater potential for business engagement. These events are likely to increase in importance as China’s interest in demonstrating openness and encouraging the ‘right’ foreign investment and trade increases.
  • ‘making meticulous preparations for Beijing Winter Olympics coming up in 2022’.

 

Corruption

Li commented on this slightly less fiercely than in 2020, noting that ‘instances still occur’ in contrast with the comment in 2020 that it was ‘still a common problem’.

However, he also mentioned the more passive problem of ‘pointless formalities and bureaucratism… [with a] small number of officials fail to fulfil their responsibilities and are unwilling or unable to carry out their duties’.

 

14th Five Year Plan

Premier Li reviewed the new 14th Five Year Plan as part of his Work Report address. Although it is not practical to study the Plan in detail here, a few highlights are outlined below.

The Plan included frequent mention of the ‘Long-Range Objectives through the year 2035’, often mentioned in the same context as the Plan. These references highlight the Objectives’ importance which could even supersede those of the Plans themselves. The Objectives deserve more detailed scrutiny to identify the Government’s goals.

Under the Plan, the Government will set annual targets for economic growth but has, perhaps surprisingly, not made a public FYP GDP target. This change may reflect increasingly fraught relations with the West, which could impact growth.

The Plan aims to ensure that labour productivity grows faster than GDP while maintaining urban unemployment at around 5.5 per cent and raising the retirement age.

Innovation-driven development will remain a key theme throughout the Plan, promising to increase R&D spending by more than 7 per cent per year, comprising a higher percentage of GDP than in under the 13th Five Year Plan.

The Government announced an intention to continue expanding domestic demand, i.e. domestic consumption and therefore consumer spending, as a long-term policy to rebalance the economy.

Regional development areas will now include ‘ecological protection and high-quality development in the Yellow River basin’, as well as the better-known Greater Bay, Yangtze River Delta, Beijing-Tianjin-Hebei, and Xiongan Areas.

Environmental policies occupy a much higher priority than in the 13th Five Year Plan. Environmental announcements in the Plan included:

  • A new emphasis on ‘safe nuclear power and renewable energy sources’
  • Expanding forest coverage of land area to 24.1 per cent (up from 23.0 per cent in 2019), quite apt given the unusually severe seasonal sandstorms that Beijing suffered following the Liang Hui this year
  • Reducing energy consumption per unit of GDP and carbon dioxide emissions per unit of GDP by 13.5 per cent and 18 per cent, respectively – in other words, making reductions in carbon use more important than that of energy consumption itself

The Plan includes several potential foreign investment treaties, including for China to:

  • ‘Quicken China-Japan-ROK FTA negotiations’
  • ‘Promote signing of China-EU investment treaty’ which now appears unlikely to be ratified by the European Parliament following a dispute over Xinjiang
  • ‘implement the Regional Comprehensive Economic Partnership Agreement’, the APAC agreement let by China
  • ‘actively consider joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)’. This proposition is more interesting, as CPTPP was the agreement formerly led by the US arguably designed to deliver a framework for trade and investment aligned to its (US) interests

 

Summary

Although the above items illustrate many new policy measures, from a macro-level, China is ‘doubling-down’ on many of its former plans.

One such trend is bolstering ‘indigenous innovation’ via technological research and development to develop its own companies, intellectual property and supply chains that reduce its dependency on the West.

The Party (and Government, for what the distinction is worth) has growing confidence in its system of governance. This shift will result in even less willingness to accept criticisms from the West e.g. around Xinjiang/human rights. Given the growing attention from Western public and politicians, China’s relations with the West are likely to suffer further, especially with European countries. European companies may begin to feel restrictions similar to those previously impacting US ones.

One upcoming event that these tensions could impact is the 2022 Winter Olympics (held in and near Beijing). Although a widespread boycott appears unlikely, companies may find commercial sensitivities, e.g., with sponsorship, balancing demands from both Chinese and Western public opinion.

Nonetheless, one notable new policy is the higher priority given to decarbonisation, together with the amalgamation of decarbonisation and pollution control measures. The Government’s previous decarbonisation measures were in practice the result of pollution control policies. The environment and climate change will be an area of cooperation where western observers and companies alike will find areas of alignment among policy decisions. Foreign investors should be ready to expand decarbonisation efforts and communication in their China operations.

Investors to China, whether large or small, companies and organisations, should follow the Chinese Government’s changing priorities and identify areas where they can support its aims. Doing so will maximise opportunities and minimise risks.

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