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China Public Affairs Update March 18, 2016

2016 NPC/CPPCC Session China Sets Prudent Target for Growth

The 2016 session of the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC), which was held from early to mid-March, drew great attention from all over the world as always. Overall, the Chinese leaders and government were transparent about the challenges and issues that China was facing , setting prudent targets for both 2016 and the next five years. At the same time, they also expressed confidence in the outlook for the world’s second-largest economy, assuring that there would be no hard landing as long as reforms continue.

2015 economic performance results confirmed that the Chinese economy was in the middle of transition: GDP growth dropped to 6.9%; consumer consumption contributed 66.4% of the growth; and the service industry accounted for more than half of the total GDP - a major shift in the Chinese economy structure. Foreign trade experienced a significant decline, with a growth rate of negative 8%.

China sets its 2016 GDP growth target at 6.5 -7%, the first time in two decades that the GDP growth target is set with a range, showing that the government takes a prudent approach to manage expectations from the outset. The target indicates the bottom-line growth rate that the government will ensure to delivery by activating all necessary policy measures.

China’s 13th Five-year (2016-2020) Plan envisions an annual GDP growth of 6.5%, a speed that will ensure China to achieve the goal of doubling its 2010 GDP and per capita income of urban and rural residents by 2020. The plan notably places emphasis on reforms, innovation-driven development, measures to address environmental and social imbalance, and improving access to education and healthcare. In 2016, which marks the beginning of the plan period, China targets to create 10 million jobs and implements more proactive fiscal policy and prudent monetary policy with flexibility to stimulate growth.

Supply-side Structural Reform to Drive Sustained Growth

President Xi said “Currently and in the coming years, the factors that restrict our economic development are on both sides of demand and supply, but the key factors are on the supply side.” The supply-side reform is a leading strategy for development in 2016 and the 13th Five-year Plan Period, with objectives to address both overcapacity and structural issues and to bring Chinese consumers back to China market.

In 2016, the focus to address the overcapacity issue will be on the industries including steel, coal and others facing difficulties. State-owned enterprises (SOEs) beleaguered by inefficiencies and overcapacity will be restructured, to be reorganized, merged or forced to exit the market. Pulling the plug on “Zombie companies” has been presented as a priority. The government will allocate 100 billion yuan to cushion the effect of job losses on families and society.

“We just have to get through this (transition) process, and we can, without question, reinvigorate the economy and ensure its dynamic growth.”

—Premier Li Keqiang

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The government vows to upgrade manufacturing, intensifying efforts to implement the “Made in China 2015” and “Internet Plus” strategies, which were launched at the 2015 NPC/CPPCC session.

The supply-side structural reform includes accelerating the development of modern service sector, driving initiatives such as promoting high-tech services, develop-ing digital creative industries, and setting up fiber-optic networks to benefit more urban and rural residents.

According to Ministry of Commerce, Chinese outbound tourists spent 1.2 trillion yuan on shopping in overseas markets in 2015 and per-person spending increased 21% over the amount in the previous year. The Chinese consumers chose to buy more from overseas markets because of better price, more varieties and choices of goods, and better quality. To attract them back to China , the government calls for working on improving quality of consumer products, developing more varieties of prod-ucts to meet evolving needs of consumers, and improving consumer services.

Fiscal and Monetary Policies to Stabilize Growth

The government will conduct a more proactive fiscal poli-cy with a planned deficit equivalent to 3 percent of GDP in 2016, an increase of 560 billion yuan over last year. The increase will cover tax and fee reductions for enterprises, to help reduce their burden.

Major government investment will include 1.65 trillion yuan on road construction, 800 billion yuan on new rail-ways, and 20 waterworks projects.

The M2, a broad measure of money supply that covers cash in circulation and all deposits, will grow at 13% to maintain sufficient liquidity. More support will be provided to the real economy, particularly small and micro businesses and agriculture sector.

Accelerating the Tax Reform

Business tax will be replaced with value-added tax (VAT) in all sectors. VAT deductions will cover all new fixed assets of enterprises. The government has made a commitment that tax burden on all industries will be reduced.

Market Access of Private Business

China’s private sector created more than 62 million jobs in the past two years. Despite their strong growth, many small companies face difficulties in getting equal market

access and financing. The government committed to cutting red tape to provide them with “reliable, effective and convenient” services. President Xi Jinping pledged to grant wider market access to the private sector. “We will significantly relax restrictions on entry into markets such as electricity, telecom, transportation, petroleum, and natural gas,” Premier Li Keqiang promised.

Foreign Investment

Foreign direct investment in China increased 6.4% year-on-year to $126.27 billion in 2015. FDI in the service industry rose

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Edelman China Public Affairs Cindy Tian Tel: +86 10 5676 8770 Email: cindy.tian@edelman.com

17.3%, accounting for 61.1% of the total. China plans to open up for inland and border areas and develop new overseas-oriented industrial clusters, and encourages more overseas investment in the central and western regions.

Urbanization

Urbanization presents the greatest potential for domestic demand and the most powerful force to sustaining economic development. From 2014 to 2020, 100 million rural residents will migrate to urban areas. The government will work on relaxing restrictions on eligibility for urban residency, promote the development of government-subsidized housing in urban areas and strengthen the efforts in improving urban planning, development and management.

The Belt and Road Initiative

It refers to the Silk Road Economic Belt and the 21st Century Maritime Silk Road initiatives, proposed by China in 2013 to improve cooperation with countries in Asia, Europe and Africa. Leveraging the initiative, China will promote greater use of Chinese equipment, technology, standards and services in overseas markets, and promote foreign trade.

Innovation-driven Development Strategy

The government is working on implementing a strategy of innovation-driven development, with science and technolo-gy deeply embedded in the economy including high-level R&D investments. Mechanisms and initiatives like Internet Plus will encourage the development of platforms for crowdsourcing and crowd funding and promote the extensive application of big data, cloud computing, and the Internet of Things. The Government will favor new type of business startups and models including the sharing econo-my, which was mentioned for the first time in the govern-ment report this year.

Ecology and Environment

The government will step up regarding environmental issues and green development with strong measures taken

against air and water pollution. They will also encourage the development of energy conservation and environmental protection industries. The government will work on improving compensation mechanisms for ecological conservation efforts. Commercial logging of natural forests will be banned and new-round subsidy and incentive policies for grassland conservation efforts will be implemented.

Education and Healthcare

Government work plan puts emphasis on improving access to education and healthcare, with greater share of funds for public education to the central and western regions and to remote and poor areas. The central government will allocate 16 billion yuan to be used in both rural and urban areas for medical assistance and subsidies, an increase of 9.6% over last year.