China's two sessions 2017

EVIDENCE-BASED COMMUNICATIONS

China’s Two Sessions 2017Policies and perspectives for deepening reform, restructuring the economy and improving people's well being

March 3 – March 15


Introduction

• The National People’s Congress (NPC), China’s legislative body, and the Chinese People’s Political Consultative Conference (CPPCC), a political advisory body with participation of various groups and individuals, held their annual sessions in Beijing from March 3 to 15, 2017. Referred to as the “lianghui” (Two Sessions), the events gathered thousands of delegates from around the country to discuss policy, review the government work plan and approve the national budget for the coming year. While major decisions and policies are largely guided by the Communist Party in China’s system of governance, the sessions provided important opportunities to gauge the political atmosphere and shape major policy discussions.

• This year’s sessions were significant as the final meetings before the upcoming leadership transitions. There was an emphasis on stability, continuity and a gradual adjustment of the growth model. In what may be his final work report, Premier Li Keqiang pledged to deepen reforms, restructure the economy and improve people’s well-being. This was again largely in line with the themes set out in the Third Plenum of the 18th Communist Party Congress in 2013. The significance of the upcoming leadership transition was highlighted by the focus of commentators on the potential meaning of remarks by the Premier at the conclusion of his annual work report: “See you again, if there’s a chance.”

• In addition, key minsters and delegates made remarks or held press conferences to share policy perspectives on a wide range of topics such as the economy, foreign policy, environment, health, and education.


Introduction

• Next year’s sessions will arguably be far more important in that by then there will be a clearer indication of how the governance and political landscape has altered following the leadership transition that will take place this Fall.

• We will see indications of how various factions and groups have fared in the jockeying for leadership positions and the corresponding balance of power among them. We will also see indications of what this means for the pace and scope of reform in China.

• Key questions:– Will President Xi have consolidated his power to the extent he feels confident to push forward reforms

more aggressively?

– Will more concrete steps be taken to realize the bold vision communicated at the Third Plenum of the 18th Party Congress?

– How will China address the tension between its ambition to become an innovation superpower and the continuous focus on political control and the involvement of the state in the economy?

– How will China calibrate its approach to utilizing foreign investment in view of its innovation agenda and evolving geopolitical considerations?

– Will China open further to foreign companies and play a more active role in championing global economic integration?

– How will China react to the moves by the U.S. and other international actors in this period of global transformation?

– Will China accept or seek a more assertive global leadership role?

– How will the situation for global companies in China - and for Chinese companies going global - be impacted by all of these factors?


Key TakeawaysKey discussion points from the sessions include:

• In 2016, China’s GDP reached 74.4 trillion yuan, representing 6.7% growth, outpacing most other economies, and indicating a robust opening for the 13th Five-Year Plan.

•China has adjusted its 2017 GDP growth target to "around 6.5 percent" , the lowest for more than 20 years.

•This is in line with the strategy to make structural adjustments that are aimed at enabling China to achieve its stated goal of becoming a “moderately prosperous society in all respects” – with a better balance of economic, environmental and societal progress – by 2020. This is with an eye to the more ambitious goal of becoming an advanced, innovation superpower by 2049 (the hundred year anniversary of the creation of “new China” under the Communist Party).

•China indicated it will do more to unleash the potential of domestic demand in 2017 and strengthen the role of domestic demand in sustaining growth, and supply-side structural reforms will be given higher priority.


Government Work Report 2017The 2017 Government Work Report sets out details of the government’s objectives in 2017 that focus on economic development, supply-side structural reform, environmental protection and China’s opening up to the world.

The main development targets for 2017 are as follows:

•GDP growth at around 6.5%

•CPI increase kept at around 3 percent

•Over 11 million new urban jobs, and a registered urban unemployment rate within 4.5%

•A steady rise in import and export volumes, and a basic balance in international payments

• Increases in personal income basically in step with economic growth

•A reduction of at least 3.4% in energy consumption per unit of GDP, and continued reductions in the release of major pollutants

GDP is projected to grow by 6.5 percent approximately, however in practice, we will strive for better.

World economic growth remains sluggish, and both the deglobalization trend and protectionism are growing. The difficulties we face are not to be underestimated, but we must remain confident that they will be overcome.

Premier Li Says


Government Work Report 2017


Highlights of Premier Li’s News Conference

Premier Li met reporters at a news conference at the end of the annual meeting of the National People’s Congress, answering questions on various topics such as the economy, financial reforms and diplomacy.


Government Work Report 2017New concepts and expressions

A series of new concepts were raised, including: housing is for people to live in; all-for-one tourism; artificial intelligence and 5G mobile communications; river chief (governance) system; the list-based management system; national parks system; and separating rural land ownership rights, contract rights, and management rights etc.

Catchphrases in 2017 Govt Work Report includes:

•Artificial Intelligence & 5G Mobile Communications: accelerate R&D on and commercialization of new materials, artificial intelligence, integrated circuits, bio-pharmacy, 5G mobile communications, and other technologies, and develop industrial clusters in these fields

•Digital Economy: Push forward with the Internet Plus action plan and speed up the development of the digital economy

− Increase broadband speed and lower rates for Internet services

− Cancel mobile rates for domestic roaming and long-distance calls

− Slash rates for broadband services for small and medium enterprises

− Lower rates for international calls

•Sponge Cities: A three-year initiative will be launched to remove the risk of flooding in highly vulnerable urban areas; and further progress will be made in the development of sponge cities. All these efforts will make our cities more attractive and function better.

Key challenges in 2017

• Internal forces driving economic growth need to be strengthened

•Overcapacity poses a serious challenges in some areas

•Economic prospects for some regions are divergent

•Environmental concerns remain grave: strengthening steps to combat pollution needed

•Room for improvement in government performance


Key Words in Government Work Report 2017According to the Government Work Report 2017, China’s economy has registered a slower but stable performance with good momentum for growth. Key words for the government in 2017 include:

• Give priority to improving supply-side structure. We should streamline administration, reduce taxes, further expand market access, and encourage innovation; and we should keep micro entities energized, reduce ineffective supply while expanding effective supply, and better adapt to and guide demand.

• Like the “struggle from Chrysalis to Butterfly”, the process of transformation and upgrading is filled with promise but also accompanied by great pain.

Supply-side Structural Reform

Poverty Elimination

Streamline Administration

• Effectively enforce the system for ensuring responsibility for poverty elimination• See that the results of poverty elimination earn the approval of the people and

stand the test of time

• Delegate powers, and improve regulation and services• Cut red tape and level the playing filed• Provide greater convenience and remove that last crucial hurdle



Opening up

Environment

• Actively expanding China’s opening-up to the world - further refine the strategic plan, work faster to build new systems for an open economy and drive China toward both deeper and higher level opening-up

• Make major moves to improve the environment for foreign investors - revise the catalog of industries open to foreign investment, and make service industries, manufacturing, and mining more open to foreign investment

• Treat foreign firms the same as domestic firms when it comes to license applications, standards-setting, and government procurement, with the same preferential policies under the Made in China 2025 initiative

• Promote the liberalization and facilitation of international trade and investment

• Address pollution caused by coal burning• Upgrade coal-fired power stations• Tackle sources of pollution• Control over exhaust emitted by vehicles; strengthen research on smog• Enforce environmental regulations strictly



• See greater numbers of Chinese workers exemplify workmanship• See more Chinese brands enjoy international recognition• Usher in an era of quality for economic development in China

Workmanship

Innovation Economy

Employment • Focus on facilitating employment • See that people can create wealth and realize their full potential• Create over 11 million new urban jobs in 2017

• Accelerate R&D on and commercialization of new materials, artificial intelligence, integrated circuits, bio-pharmacy, 5G mobile communications, and other technologies

• Develop industrial clusters in these fields• Collaborate with international players and integrate with global

innovation system • Leverage innovation as a driving force to move-up the value

chain and achieve various interlinking development objectives



• Complete the introduction of corporate systems into SOEs• Deepen reform to establish mixed ownership systems• Make substantive progress in industries including electric power,

petroleum, natural gas, railways, civil aviation, telecommunications, and defense

• Invest 800 billion yuan in railway construction and 1.8 trillion yuan in highway and waterway projects

• Help communities and rural areas have better access to e-commerce and express delivery services

• Produce more products sold domestically on the same production lines, meet the same standards, and be of the same quality as products for export in order to better satisfy the needs of upgrading consumption

Reform of SOEs

Consumption

Healthcare

Investment

• Accelerate the building of a nationwide information network for basic health insurance so that healthcare costs can be settled directly where incurred


Supply-Side Structural ReformAccording to the Government Work Report 2017, focusing on supply-side reform, China got the 13th Five-Year Plan off to a good start in 2016. In 2017, key policies related to supply-side structural reform elaborated by Premier Li and officials from relevant Ministries include:• Cut overcapacity

– Cut overcapacity in bloated sectors, with targets to slash steel production capacity by around 50 million tones and coal by at least 150 million tones this year.

• Zombie enterprises eradication

– Zombie enterprises refer to those loss-making, debt-laden state-owned enterprises. One key initiative in reducing excess capacity, as part of the deepening of the supply-side structural reform, is to shut downthose companies without productive operations that feast on government subsidies or bank loans.

• Neutral monetary policy

– China is carrying out a prudent and neutral monetary policy. A neutral policy stance will help China’s supply-side structural reform, according to Zhou Xiaochuan, governor of the People’s Bank of China (PBC). He said too much liquidity will be harmful for the economy due to possible high inflation and runaway asset prices.

• Agricultural supply-side structural reform

– On agricultural supply-side structural reform, China's Minister of Agriculture Han Changfu said more efforts will be made in 2017 to reduce the excess corn stocks, with the ministry setting a planting target of 40 million mu (2.7 million hectares).

– The ongoing reform will focus on the improvement of the supply-demand relationship and the industrial transformation of the agricultural sector, and ensuring the quality and efficiency of agricultural activities to increase farmers’ income.


Belt & Road InitiativeBelt and Road Initiative is one of the government's key topics discussed at the 2017 Two Sessions. According to Chinese Foreign Minister Wang Yi, under the circumstance of rising protectionism and unilateralism, China’s Belt and Road Initiative helps rebalance economic globalization by making it more universally beneficial and inclusive.

• Overview

– The Belt and Road Initiative was proposed by President Xi in 2013, consisting of The Silk Road Economic Belt and the 21st-century Maritime Silk Road. More than 30 countries along the routes have signed cooperative agreements with China. Last Year Chinese companies invested $14.5 billion in markets along them.

– Some commentators highlight China's reaching out through the initiative comes at a time when the United States is reportedly talking the language of isolationism and protectionism.

• High-level Belt & Road Initiative forum

– Leaders of more than 20 countries will attend a high-level Belt and Road Initiative forum in Beijing in May, joining more than 50 leaders of international organizations, 100 ministerial representatives and a total of 1,200 guests across the world, said Foreign Minister Wang Yi at a news conference during the two sessions.


Made in China 2025“Made in China 2025” has been stressed in the Government Work Report over the past 3 years. The 2017 Report states that China will intensify efforts to implement the Made in China 2025 initiative, promote accelerated application of big data, AI, cloud computing, and the Internet of Things, and use new technologies, new forms of business, and new models to bring about transformation in the production, management, and marketing models of traditional industries.

Overview

– “Made in China 2025” was first introduced by Premier Li in his government work report in 2015, as a roadmap to build China into a manufacturing power. Li encouraged the integration of “Made in China 2025” with initiatives such as Internet Plus, mass entrepreneurship and innovation, with an emphasis on craftsmanship spirit.

– Made in China 2025 is to enhance the quality of products, better meet consumers' demands, and constitutes an important part of the supply-side structural reform, said Premier Li at a news conference during the two sessions.

– Minister of Industry and Information Technology Miao Wei said in the press conference that the strategy and its related policies are applicable to all businesses in China, be they domestic or foreign.

Topics:− International awareness of Chinese

brands

− Cross-Strait industrial cooperation

− Development of industrial robots

− Cancellation of roaming charges

− Technological breakthrough of new materials

− Financial support for small and micro businesses


Medical Reform & Population PolicyChina’s National Health and Family Planning Commission officials detail bold plans for the country’s healthcare system for the next five years.

“Drug markup policy” in public hospitals

•Chinese public hospitals have long been criticized for their “drug markup policy,” which basically means increasing the revenue of a hospital through excessive sales of drugs. The authorities have taken measures to gradually reduce medicine markups. This year, China will fully abolish the policy in all public hospitals, according to Wang Hesheng, Vice Minister of China’s National Health and Family Planning Commission.

Second-child policy

•China started its second-child policy on January 1, 2016, allowing all married couples to have two children. This follows an earlier easing of the one-child policy in 2013 that allowed couples to have a second child if either parent was an only child. The one-child policy was implemented in the late 1970s. Officials from the ministry said that there were 18.46 million live-born infants in China in 2016, the highest annual number since 2000.

Demographic structure

•China had a working-age (15-64) population of over one billion as of 2015, accounting for 73 percent of the country’s total population. The ratio is 66 percent in the US, 61 percent in Japan, and 67 percent in Europe. Wang Pei’an, Vice Minister of China’s National Health and Family Planning Commission, said China must improve its labor productivity.

Critical illness insurance

•Authorities said they will take several measures to promote the insurance system, including reducing the minimum fee for patients, improving the service system to make it more convenient for patients and paying more attention to rural poor patients.


Taxes & Administrative FeesChina will cut taxes and administrative fees by 550 billion yuan ($79.7 billion) this year to further reduce the corporate burden and will roll out favorable tax policies to support small innovative and technology companies, Finance Minister Xiao Jie said during the two sessions

• Tax reduction and exemption

– Improve the pilot project to replace business tax with value-added tax

– Companies with annual taxable income lower than 500,000 yuan will have a 50 percent tax cut

– Reform of personal income tax

– More tax cuts concerning family livelihood

• Administrative fees cancellation or exemption

– Standardize and regulate government-managed funds

– Cancel or exempt a number of administrative fees


Civil Law Reform and Individual Rights“General Principles of Civil Law” was passed on March 15th, setting the stage for development of a unified civil code that would serve as an overarching law governing legal disputes beyond criminal cases.

• Initiative to develop a general code to govern increasingly complex legal cases was initiated in 2014, with a goal of finalizing by 2020. These general principles provide guidelines for developing the final code.

• An expansion of a 1986 code, it broadens scope to cover everything from individual rights and statute of limitations, to definitions of a corporation.

• States individuals have a right to privacy (previously mentioned in 2009 tort bill, but positioning in new Principles preamble gives it more authority).

• Defines a company as “a legal entity established for the purposes of making profits.”

"Civil law is the fundamental doctrine for a country's legal system, the source of its basic essence… A foundational civil (law) system is an important sign of whether a country's legal system is mature."

- Liang Ying, head of the NPC Legislative Affairs Research institute, speaking to state media.


Top 10 Prosperous Industries in 2017

• Sharing Economy

– Support and guide the development of the sharing economy to enable greater efficiency in the use of resources and bring greater convenience to our people

• Sports Industries

– Promote coordinated development of recreational and competitive sports and sports industries, and launch extensive Fitness-for-All initiatives

• Emerging Industries

– Accelerate R&D and commercialization of new materials, artificial intelligence, 5G mobile communications, and other technologies

• Intelligent Manufacturing

– Establish national innovation demonstration zones and R&D centers.

• Digital Homes

– Increase information consumption including digital homes and online learning


Top 10 Prosperous Industries in 2017

• Medical and Elderly Care Services Reform− Combine medical and elderly care services, cultural and creative services,

and other emerging forms of consumption

• Clean-Energy Cars− Encourage the use of clean-energy cars

• All-for-one Tourism− Make a big push to develop rural tourism, recreational tourism, and all-

for-one tourism

• E-commerce and Express Delivery − Help communities and rural areas have better access to e-commerce and

express delivery services

• Renewable Energy− Prioritize the integration of clean energy sources into the electric grid and

effectively address wasted hydro-, wind- and solar-power generation capacities


Conclusion

• As usual the key question is the extent to which the policy priorities outlined at the two sessions will be realized in practice.

• There is a consensus that over the past three years stability and control were prioritized over reform and market liberalization – leading to significant gaps between stated intentions and the ensuing reality in a range of areas.

• That said, despite myriad challenges, China has continued to make very visible progress in many areas and grow well above the rate at which other major countries are growing. China is continuing on a path which will see it become the world’s largest economy and potentially one of the most advanced.

• For global companies operating in China – there are grounds for cautious optimism given the messages being sent by China’s leaders about openness to their participation in China’s economy (partially a response to concerns voiced by the international business community about unfair treatment). Meanwhile, a rational calculation of China’s interests and needs will as always help in assessing how far China is likely to go in specific areas.

• We will have a clearer sense of China’s direction - following the leadership transition later in 2017 –which is in certain aspects much more important for the overall situation in China than the meeting of the two sessions.

• One thing is for certain - with the increasingly complex domestic and international environment –global companies in China and Chinese companies going global – have an ever-growing need for strategic public affairs and communications capabilities to help them understand, navigate and differentiate. In the following slides we outline a number of considerations for global companies in China in this period of transformation.


Key Considerations for Global Enterprises


8 Challenges for Global Enterprises In Current Period of Transformation

7.Reduced access to government stakeholders (in absence of compelling reasons and alignment with government agenda).

2.Greater stakeholder scrutiny in areas ranging from compliance to anti-trust and environmental protection.

1.More intensive competition from Chinese companies moving up value chain, in China and globally.

3.Potential for reciprocal or retaliatory actions if China's interests are perceived to have been negatively impacted in various aspects

4.Evolving governance system with simultaneous power centralization and distribution (e.g. to local governments).

6.Rising stakeholder expectations – e.g. for technology transfers and sharing and comprehensive commitment to China – and need to balance with expectations in other markets e.g. United States.

5.Diminished trust in global enterprises.

8.Navigating geopolitics related to China and potential impacts.


8 Challenges for Global Enterprises In Current Period of Transformation

Increasing demand for quality services and products.

China’s going-out strategy and opportunity to partner with China on global stage e.g. the Belt and Road Initiative.

Growing core needs e.g. energy, healthcare, food safety, development of interior.

China’s innovation agenda and increasing role in global innovation system –partnering with China - in China and globally.

Demand created by urbanization and growing share of GDP in form of wages.

Technology oriented policies / strategies e.g. Manufacturing 2020, Internet Plus.

Reduced role for government and state-owned companies, combined with expanded market access in specific areas.

China’s need to build international acceptance and gain market access globally.


8 Tips for Global Enterprises

Demonstrate continuous alignment with China’s evolving agenda – e.g. more emphasis on technology and innovation.

Increase capacity to understand China’s evolving agenda on an institutional level – e.g. develop local leaders e.g. stakeholder perception research e.g. China context education for global leaders.

Enhance public affairs capabilities to match increasingly sophisticated and complex public sphere and governance system.

Enhance crisis preparedness in view of new and evolving risks and vulnerabilities and changing operating context e.g. role of social media.


8 Tips for Global Enterprises

Engage government and other stakeholders through shared platforms and by contributing ideas and experience to inform public policy.

Emphasize partnerships and collaborations and shared value creation (as opposed to focusing only on company strengths).

Make arguments and business case in terms of “what’s in it for China” – while being cognizant of how international stakeholders will perceive China commitments.

Benchmark competitors in terms of China commitment to know how company measures up (e.g. stakeholder perceptions, investments in R&D).


Global Enterprises Addressing China’s Needs

The Chinese government is facing serious challenges in fields like health, education, care for the elderly, food and medicine safety, urban development and pollution control. Global enterprises can play a significant role in areas including the following:


Burson-Marsteller has a strong team helping clients in a wide range of industry sectors to manage the rapidly changing business environment in China. If you would like to know more about how those changes affect your company and your business and how you can address them, please contact:

Ruby Fu, CEO and Market Leader of Burson-Marsteller [email protected]

Douglas Dew, Managing Director, Corporate and Public Affairs, [email protected]

Burson-Marsteller China20th Floor, East Tower, Twin Towers, B-12 Jian Guo Men Wai AvenueChaoyang District, Beijing, 100022, PRC

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