PROTECTING YESTERDAY WHILE BUILDING TOMORROW

Transcription

1 PROTECTING YESTERDAY WHILE BUILDING TOMORROW The China Dream of the most ambitious reformers in the Communist Party of China has hit the cold light of day. That is abundantly clear in this 13th Five-Year Plan (FYP) that seeks to march China into the future while digging in its heels to hold on to much of the past in politics, policy and the shape of the economy. On March 5, 2016, over 3,000 government officials, business leaders and luminaries descended upon Beijing for China s annual Two Sessions, a joint gathering of the National People s Congress (NPC) and the Chinese People s Political Consultative Conference (CPPCC). Delegates spent two weeks applauding the achievements of the past year, reviewing the government s upcoming priorities and approving central guidelines for future policy development and implementation. This year, the NPC ratified China s 13th Five-Year Plan (FYP), a blueprint that enumerates China s social, economic and political goals for the period from 2016 to Three years ago when the Party issued the groundbreaking Third Plenum document, economic reformers and business people were almost giddy over the laundry list of game-changing reforms. The market was to take a decisive role in the economy, state-owned enterprise behemoths were to be disciplined and somewhat dethroned, the iron-grip of central government planners was to be relaxed as they morphed from all-powerful deciders to service oriented regulators, and China was to become even more open to foreign business. That was then. This is now. Since those heady days of the Third Plenum pronouncements, Chinese President and Party Chairman Xi Jinping has emerged as a muscular leader who is employing tools of the Party s past to advance his agenda of the great revitalization of the Chinese nation. His focus has centered on solidifying political control and social stability through an aggressive anti-corruption campaign and a wide-ranging clampdown on journalists, attorneys, academics and activists. At the same time, the leadership has been backtracking on its economic and financial reform plans while taking small steps forward along paths of least resistance. With the 13th FYP, the Party under Chairman Xi is seeking to clean up a pile of distortions left over from three decades of growth-at-all-costs with a collection of compromises aimed at preserving stability-at-all-costs. That is not to say that the 13th FYP is mired in yesterday. There is a vision of a different future. The plan outlines a blueprint for a significantly upgraded and modernized manufacturing and technological base, a cleaned up environment and greener way of life, a more consumption-oriented economy with increased support and room for entrepreneurs, and improved healthcare and social security systems. The plan also outlines a tremendous amount of infrastructure spending for airports, sea ports, bullet trains, subways and expressways to tie the country together as regional municipalities are merged into megacity clusters of 100 million people or more. The question is how smoothly and successfully the country can move forward while continuing to goose growth through government financing of state-owned enterprises (SOEs) and infrastructure. Premier Li Keqiang has promised to eliminate SOE zombies that live on state loans and lose money just to keep people employed. But instead of highlighting the Third Plenum initiative to reform central SOEs by treating them as investments instead of assets, the 13th FYP mostly puts forth past prescriptions (see section below for more detail). This is due to the Party s focus on having strong political control of the economy and economic actors. Furthermore, it also reflects anxiety about social unrest if unprofitable industrials were to launch mass layoffs. When Zhu Rongji laid off some 50 million SOE workers between 1993 and 2003, workers did not have social media to organize themselves. What they did have was a booming economy primed to absorb them, and fewer expectations than today s workers. This is just one example of the tensions in China s yesterday-tomorrow dilemma. Such pressure points abound in the 13th FYP, from the push for innovation, to efforts in financial reforms, to attempts at green development, and the expansion of social services. We take a closer look at these issues in the sections below. Winding down yesterday, while winding up tomorrow is the challenge at the heart of China s 13th FYP.

2 For foreign companies, a China with slowing but still world leading growth means the world s second largest economy will remain a place that few companies can afford to avoid. To tap into China s tomorrow, foreign companies need to examine the government s development targets and align with its plans. But they also need to remain focused on protecting their global business and core intellectual property. As China struggles to pull itself out of yesterday s quagmire, companies should be prepared for this New Normal of policy inconsistencies and increasingly assertive demands as price of entry into the Chinese market. Entrepreneurship and Innovation: Tomorrow s Growth Engines? Both entrepreneurship and innovation, though not new concepts in Chinese policy, have taken on new meaning as they are increasingly touted as fundamental pieces to the puzzle of China s development. This is especially clear in the 13th FYP, in which innovation-driven development is repeatedly referred to as a new driver for China s economic growth, a tool for economic restructuring, and a way to meet employment goals. Over the years, various Chinese government projects have attempted to spur domestic R&D and indigenous innovation. From projects laid out in the Medium- and Long- Term Plan on the Development of Science and Technology to the Strategic Emerging Industries to the more recent Made in China 2025, the Chinese government has a consistent history of technological aspirations. The most recent iteration, first outlined in a State Council opinion released in June 2015, is captured in the slogan Mass Entrepreneurship and Innovation, which features prominently in the 13th FYP. Indeed, the 13th FYP maintains the goal of having scientific and technological advances contribute to 60 percent of economic growth. Today, however, the stakes are much higher. The Chinese government is now relying on innovation-led development to propel China up the manufacturing value chain and promote industrial upgrading. Additionally, an environment more conducive to entrepreneurship has been posited as a means of addressing the increasing number of college graduates looking for jobs each year a potential source of instability. The 13th FYP presents a neat package of approaches: from the longstanding goal of reforming China s science and technology management system, to the simplification of government procedures for companies and individuals which first appeared in the Third Plenum concept of administrative streamlining, to more recent initiatives such as Internet Plus, which aims to apply Internet technologies across traditional industry, and Made in China 2025, which lays out a roadmap for indigenous technology advancement. 2

3 Though the government s intent is clear, it is unclear how successful it will be in unleashing domestic innovation and entrepreneurship as a significant force in the country s economic development. Regardless, these efforts are sure to impact multinational companies operating higher up on the manufacturing value chain, as the government ramps up efforts to wean itself off foreign technology products. SOE Reform: Hard to Cut Ties with Yesterday The Chinese government has repeatedly acknowledged that in order to achieve more sustainable economic growth, it must significantly reduce overcapacity in SOE-dominated industries such as steel, aluminum, cement, chemical, shipbuilding and heavy equipment. As the European Union Chamber of Commerce recently noted in a study, though demand and prices have plunged globally, Chinese steel production is now more than double the combined production of the US, Japan, India and Russia. In 2011 and 2012, China produced as much cement as the US did during the entire 20th century. Although the 13th FYP pays lip service to this problem by calling for proactive, prudent resolution of excess capacity, its moderate language pales in comparison to Li Keqiang s statement at the end of NPC 2015 when he declared, This is not nail clipping; this is wrist cutting. No matter how painful, we must bring down the knife. Coming on the heels of a year fraught with stock market volatility and steep declines in exports, this linguistic retreat reflects official ambivalence over how to carry out difficult structural reforms while preserving social stability. The 13th FYP itself is short on details concerning SOE reform and lacks a specific timeline for implementation. Nevertheless, prior to this year s NPC, the Chinese government announced its intention to transfer or replace about 1.8 million workers in the steel and coal industries, as well as cut million tons of steel capacity. While opening these industries to market competition and facilitating the exit of debt-ridden SOEs would be the most efficient way of making these cuts, Li Keqiang s Government Work Report characterized bankruptcy as a last resort, instead favoring mergers, mixed-ownership reforms, reorganizations and debt restructuring. Given China s track record, it is unlikely that these reforms will wean SOE executives from their tendency to prioritize old loyalties and short-term political gain over market fundamentals. As a result, the government will encounter considerable difficulty as it attempts to reduce excess capacity across traditional industries. 3

4 Financial Reform: A Prerequisite for Tomorrow Even though Chinese officials have expressed disapproval of massive stimulus on many occasions, Premier Li Keqiang s Government Work Report repeatedly signals that Beijing is determined to keep the economic growth rate above 6.5 percent in Financial reform is vital to achieving this goal. This year, China will focus on monetary and fiscal easing, moving to increase its M2 money supply and aggregate social financing to 13 percent (possibly creating RMB 17.9 trillion in new finance); expand its fiscal deficit to RMB 2.18 trillion; increase general payments by 12.2 percent (some of which usually subsidizes local enterprises); and make upward adjustments to debt ceilings for certain local governments. Liquidity unleashed from monetary and fiscal easing is expected to provide a boost to China s recently sluggish real economy, which has troubled local governments and enterprises alike. Regardless, the key to rebalancing the Chinese economy lies in incentivizing local governments and businesses to grow sustainably. Currently, local governments and SOEs in particular are more than happy to embrace monetary easing without considering whether they are actually drinking poison to quench thirst. For example, local governments are now issuing bonds to replace old debts while enterprises, including those in excessive sectors, are receiving an influx of loans from more diversified channels, including commercial banks, the margin trading market, peer-to-peer (P2P) and private lending. However, uncertainties prevail: the danger of capital bubbles persists, and overcapacity has been exacerbated by a steady stream of capital input. Furthermore, recent government actions to handle financial volatility have provided fresh cause for concern. In early January this year, domestic bank lending volume hit a historic high, which quickly caused overheating in the real estate market. Even more worryingly, most of these loans were believed to have gone towards rolling over old, unsustainable debts. The 13th FYP focuses on reforms to ensure efficient budget expenditure, a healthy financial system and strong supervision over market players. Even so, the extent to which these reform measures will become reality remains unclear; in fact, most measures in this year s plan have been proposed before. For example, reform of registration-based stock issuance was brought up in 2014 in order to relieve debt and increasing direct financing for enterprises. Although the 13th FYP still prioritizes this as a top reform over the next five years, Premier Li omitted registration-based reform from his Government Work Report this year, possibly to avoid further destabilizing China s volatile financial market. One Belt One Road: Geo-Strategy with a Commercial Twist China s One Belt One Road (OBOR) initiative, alongside the Beijing-Tianjin-Hebei Coordinated Development Plan and the Yangtze River Economic Belt Development Plan, is a key regional development priority in this year s Government Work Report. On paper, these regional plans are a testament to the sharing principle of the 13th FYP, promoting integrated, mutually beneficial development among regions. A more hard-nosed motivation behind these initiatives is to increase investment and stimulate the economy. In early 2015, local government investment in OBOR infrastructure exceeded RMB 1 trillion. The potential for heavy investment to boost GDP has propelled local governments to compete in building ports and industry parks, as well as in attracting investment a competitive model of development that may contradict the central government s coordinated development strategy. This rings of China s old investment-reliant growth model. Perhaps China s newly-raised concept of capacity cooperation, which urges Chinese companies to promote their equipment, technologies, standards and services abroad, may be a differentiator. Vowing to establish various funds to support capacity cooperation, the government plans to align the OBOR initiative with efforts to reduce overcapacity by linking domestic manufacturers to overseas markets. Green Development: Cleaning up the Consequences of the Focus on Growth As one of the five principles set to underpin China s development over the next five years, green development 4

5 features heavily in the Two Sessions and the 13th FYP. Dubbed as China s greenest Five-Year Plan to date, 10 out of 25 priority targets set in the 13th FYP are related to the environment, all of which fall under a group of 13 binding targets that must be achieved by Notably, this is the first time in China s history that a specific PM2.5 target has been included in a FYP. While the 13th FYP targets confirm the government s intent to combat pollution and deepen China s clean energy transition over the next five years (which will offer opportunities for companies involved in renewable energy or energy efficiency technology), as usual, environmental objectives will have to be balanced against economic growth. Full realization of environmental targets will require the government to address stubborn, politically sensitive issues, including overcapacity. Poverty Alleviation and Healthcare: Key to the Party s Legitimacy The 13th FYP places special emphasis on poverty alleviation, a key element of Xi Jinping s goal of building China into a moderately prosperous society by In order to achieve this moderate prosperity, the government has promised to lift 50 million Chinese out of poverty and to bring Internet access to 90 percent of villages across the country. Calls to modernize the countryside might translate into infrastructure projects and measures to increase rural spending power, both of which will contribute to China s economic course. This proposal also includes new language of targeted measures in poverty alleviation, which encourage innovation while calling for a more robust management system. Healthcare reforms also remain a core government priority as part of ongoing efforts to help China develop into a well-off society. In the coming years, demand for medical services is expected to grow exponentially in response to China s rapidly aging population. In addition, the rising prevalence of chronic diseases will require more advanced, costly treatments. This predicament has driven government efforts to expand healthcare coverage while containing ever-growing costs. To deal with these challenges, Li Keqiang committed to continue increasing public funding for healthcare by 9.6 percent in 2016 year-on-year. However, rising public healthcare spending, which only accounts for 5.6 percent of the country s GDP, will not be enough to deal with these mounting challenges and deliver on the government s promises to improve and expand healthcare services across the country. The 13th FYP aims to improve healthcare services in rural areas as a way to bring Xi s promise of poverty alleviation to fruition. Effectively encouraging private investment in the healthcare sector will be key to realizing this goal. However, difficulties on the ground, including countless administrative and regulatory hurdles, stand in stark contrast to government rhetoric. For example, the 13th FYP s calls to rationalize the price of medical services signal that the government will continue taking measures to decrease the prices of drugs and medical devices; however, these signals directly contradict the government s announced intention to decrease intervention in price formation. About APCO Worldwide Founded in 1984, APCO Worldwide is an independent global communication, stakeholder engagement and business strategy firm with offices in more than 30 major cities throughout the world, including in Beijing, Shanghai and Hong Kong. To find out how APCO s integrated services can help your company, visit apcoworldwide.com. For more information about APCO Worldwide in China, please contact: James McGregor chairman, Greater China Suite 903, Tower C, Office Park No.5 Jinghua South Street Chaoyang District Beijing Phone jmcgregor@apcoworldwide.com Anne Wang director Suite 903, Tower C, Office Park No.5 Jinghua South Street Chaoyang District Beijing Phone: qwang@apcoworldwide.com Linda Du managing director Unit , Platinum Tower 233 Tai Cang Road Shanghai Phone ldu@apcoworldwide.com Amy Wendholt managing director 1102 Prosperity Millennia Plaza, 663 King s Road, Quarry Bay, Hong Kong Phone awendholt@apcoworldwide.com APCO Worldwide. All rights reserved. Design: StudioAPCO