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in March 2014, the Economist Intelligence Unit put on a webinar entitled “Reviewing China’s National People’s Congress: A reform landmark?”   It was presented by Duncan Innes-Ker, Regional Editor (Asia).   I am putting the raw notes summarizing the webinar onto my blog today, and will edit them during the next week so that they are more organized.

Assessing the impact on the economy and discussing whether the government’s targets are realistic.

EIU website on China is a good source for news, but also the Forecast

Reviewing the NPC

Last few days have seen some new information coming out on what the government policies are going to be.

Everything you need to know about the NPC

The work reports

–The budget

–The premier’s report

Power to the Party

-NPC China’s legislature

Meets once a year, passes legislation, supervises appointments & work

Not as feisty as it once was, sometimes has the reputation of being a “snooze fest”, a “rubber stamp” operation

There was speculation on whether the NPC would be a check on the government’s power.  It is not as feisty as the Vietnamese NPC.  Nevertheless it is still important in China.  But can still stock important policies—e.g. property rights law in 2006.  The property rights guaranteeing private property rights was blocked by conservative members in the NPC.

In 2013, over a third of delegates failed to vote for the environmental and conservation committee because of rising concern over pollution in China.  The environment was a big theme in this year’s session.  It was a smooth Congress.

Key moments are premier’s report on overall government’s policy and targets.  And also the budget

The budget

Defense budget up 12.2% to US$ 132 bn

The first year that the defense budget has increased faster than the overall growth rate in the budget.

The public numbers may be understated, they may be 40%.

US budget is $673bn.  Even if China’s budget were twice as large, it would less than half the size of the US.

It’s difficult to see what the government’s spending will ACTUALLY be, because 2/3 of the spending is what’s going on at the local level, and the central government is not saying what is going on at the local level.  However, you can get a picture of what the different priorities are.

Health up 15.1%, fastest growth

Transport & environment spending increase by less than average.  On the one side, spending on health, education, and anti-poverty measures are still the priorities for the administration.  On the transport & environment side, when you hear that the government is spending a lot on combating pollution, the money isn’t really there, and rhetoric is stronger than action in achieving these goals.

Faster move towards environmental protection tax and real estate tax.  At least in terms of rhetoric.  EIU is dubious about how fast they will go.

Thrift & oversight to be strengthened.  Reining in expenditure and increasing oversight of the budget.  The budget is being put forward in a more explicit and straightforward manner.

Fiscal strains are mounting.  Central government revenue shrank for the first time in many years.  There is a period where civil servant’s wages are rising, but revenue growth is slowing in real estate investments.

The premier’s report

Growth target of around 7.5%–so little progress on rebalancing. We’re already lower than 7.5%.  The reason that the government is putting on an ambitious target is that there will probably be stimulus measures.  EIU thinks it will end up 7.3%

Inflation around 3.5%

Higher priority to fiscal and tax reform:  local government bonds

The government is moving to be more flexible in terms of the spending.   2/3 of government goes towards to the center, but 2/3 of the spending is done by the local level.

We aren’t seeing a lot of indications that thinks are changing with regards to tax reform.

Financial reforms & deposit insurance.   More aggressive reforms year,.

SOEs contribute more to central budget—mixed ownrership models..  Part privitzation

Premier is associated with push to urbanization.  The 3 Rs:  residency (100,000,000 migrants given), 100,000,000 have their houses renovated, relocation (100,000,000 from countryside to city).

Urbanization:  3 X 100 M

PUSH TO ADDRESS POLLUTION—but tough to achieve

The premier used very tough language “war against pollution”, fierce tone of attack but it is a very tough target to achieve.  Actually meeting targets will be very difficult.  For every factory they close down, another tends to pop up.

POWER TO THE PARTY

The party advances, the state retreats?
The government is a little disengaged from the legislative mood.  It was a relatively quiet session as contrast to what’s going on in the party.  Two power structures, the party and the government.  There is competition between them.  The party has always been dominant.  The party seems to be emphasized at the moment as compared to the state structure.

 

Little in way of structural change at NPC

–contrast to big shifts in CCP organization

–running corruption & mass line campaigns

–and to changes made at NPC in 2013

Bureaucracy emasculated

–200+ approvals decentralized from State Council

–Slimming down the number of government officials

No new government buildings being built or refurbished.

Power is pushed up to higher-level vehicles in the party, pushed down to lower levels in the government.

Focus on Party as channel for reform

–Is it enough?

 

What does it mean for the reform agenda?
Financial reforms moving forward swiftly

–exchange rate liberalization

–interest rate liberalization

–Capital account opening

Outlook for fiscal reform less clear

National housing database won’t be in place until 2020, the tax may be lost in action

–Property tax lost in action

–Resource & Pollution taxes may see more progress

SOE restructuring to be done mostly indirectly

It is done indirectly by adding competition to the sector

–More opportunities for private sector players

Changes there will be quite gradual, and will open the playing field to privatization.

We may be seeing public—private partnerships.

 

What does it mean for business?

New opportunities

–Private sector involvement in previous SOE turf

–Shanghai FTZ

–Investment & growth to remain elevated in short term

Bureaucracies seek a purpose

–NDRC focus on anti-monopoly & pricing

–Approvals confusion to continue?

–Lost contacts as officials leave

Monetary conditions will be slightly looser.  The interbank lending rate has come down a bit this year.  These slightly looser liquidity conditions will continue for the next few months.

The government is trying to reduce the ability of ministries to interfere in the economy.

The national development reform commission (NDRC) is looking to focus on new areas, such as the ani-monopoly law and pricing policy.

We could see continued confusion among lower-level bureaucrats.  As we are seeing officials moving out of government sector into public sector, there is a great churn among government officials.  They were considered very stable jobs.  People that serve as gateways as clarifiers of regulations, as these people leave, companies become uncertain about how to approach the various ministries.

China’s growth—we don’t believe in the “hard-landing” scenario.  The overall picture remains optimistc.

Q&A

1.  Might be seeing public-private partnerships.  What will be the main opportunities for businesses any particular sectors

Government is mentioning railways an awful lot.  Especially given restrained spending ability. In terms of other areas.  A lot of effort to bring private sector investments in education,

Big concern will be how to engage in a venture that is very strong, very well connected politically, in ending trouble waters.  In terms of protecting IP, and seeing that contracts are well-constructed.

2.  More information on environmental protection?

It is very tame terms that the government has talked about this.  There are environmental standards, but the actual hard detail of these policies has yet to be worked out.  Just be cautious on that front and don’t necessarily , enforcement is skewed against foreign companies.

3.  What kind of stimulus wil be expect to see in the coming year?

The currency has weakened in the past month or so.  But the policy may be reversed pretty quickly.  The government is effectively loosening monetary policy.  Targets on monetary policy in terms of growth of money supply, aiming to bring it down from it was in 2013.  That suggests that they will be trying to rein in the leverage factors.

Likely to see a lot of fiscal investments, direct government investments in expressways, railways.  To connect every city that has over 200,000 population with railways, and every city over 500,000 with high speed rail.

4.  Urbanization in china and government’s plans to investAre problems that can be easily resolved?

Ghost cities and the urbanization policy are in many ways key sides of anargument. There is a widespread perception that if they build it, they will come.  In many cities, especially in central china, there is a low level of urbanization.

There are a number of other parts of china, partticulatly in the northeast where urganization is already advanced.
This is a big concern, ghost cities are related to property markets, which have their problems.The big challenge will be a fiscal once.

5.  Will government be less supportive to foreign enterprsie?
The environment has been deteriorating since 2008.  There is a lot more frustrated.  Many people are looking at the government, about investment liberalization equal treatment of foreign and local investotrs in the foreign free trade zone.

The opening aspect of the agenda is one that the government supports in terms of competition.  But over all this is not considered a proper government concern.  Things won’t improve in china in this area.  Foreign companies are finding a lot of problems, enforcement regulatory arbitrariness.

With the opening of the financial sector, what do you see the richest portential emergin?

This is definitely one of the big concerns.  It is not debt as its stands.  Public debt is a manageable level.  There is an argument that central government believes that its reform agenda will boost productively growth and that will lift the GDP growth in and of it self.  If you look at growth and the structure of the econojy, it is reliant on investment and credit more than ever before.  Redressing the balance will take a lot of effort.

That issue is being pushed into the medium-term by decisions that have come out.  Setting a high growth target indicates that it is not a high priority for the government this year.

Why is health care spending increasing?
Government is increasing its payments into the healthcare system.

It is a shallow insurance scheme, you are left on your own after an initial payout.  The government contribution is being increased.  There is a lot of money going to hospitals, and health care reform of various types.  In terms of the budget, the money is going essentially into insurance.

The central government is handing over a lot of the power of spending to local governments.  This is the nature of why they keep so much money coming into the center.  The center wants to keep control over the pursestrings to dictate to local governments what they need to do.  They are moving to more general allocations giving more leeway to the local government.  They want to hold the whip over the local tgovenrmens through allocation of money.

There are some local  governments in china that have poor record of spending wildly.  There is a question about whether these will be receiving more central government help to alleviate their problems.

4G mobile broadband structure,rollout will it have effect on economy?

Thy are going to spend more money on 4G rollout.  From an investment sense, that should help support growth.  The telecom infrastructure side won’t need private capital, maybe from the service sector.  But mostly it iwill be coming from the highly profitable telecom companies.  The online economy will do tremendous growth in online retail.  Exciting developments in online finance.

Report on judicial reforms?  Do you see this?
Yes, one of the most exciting aspects of this government.  One of the reforms that was talked about in November was making lower-tier elements of the party more responsible to higher tiers of the system.
If you are talking about improving business law and contract enforcement, it is much more organic.  In Shanghai and Beijing it has happened, in other areas more quality decisions will be coming out.

Do you see restrictions of the shadow banking system?

On shadow banking side, we are seeing the central bank wanting to bring out, they are lightly regulated banks, those elements have to fit into the regulatory system.  IT is trying to do two things simultaneously, reducing systemic risk by transparency.  It is trying to encourage innovation and creativity.  Where things serve to support the economy without creating risk, they will be allowed to continue.  It covers a wide range of activities.

 

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