China: five key policy issues

Sunday, March 06, 2016 // Written by Enzio von Pfeil

What are the five key issues demanding discussion at the National People's Congress?

  1. Change in leadership style

    The South China Morning Post's (SCMP's) Cary Huang pens on 2nd March 2016 that Mao governed as an autocrat. Then,  "Mao's successor, Deng Xiaoping, had to share power with the "Eight Immortals" or party elders (who are not so immortal: most if not all of them are dead, after all!). But in the past three years, the pendulum has swung back the other way, with President Xi Jinping consolidating power through the creation of steering committees that oversee reform, the internet, legal affairs, national security and military reform.  Whereas Xi's predecessor, Hu Jintao, was 'first among equals', the current president wants to be the 'core of the party's leadership'. "
  2. Main purpose of the NPC

    The main purpose is to endorse the next five year plan, whose goal is to double China's GDP and per capita income over the next decade.  How so? How China handles the following five key issues will influence the outcome enormously.
  3. Key NPC issue one: state-owned enterprise (SOE) reform

    When we refer to SOE reform, we mean just how decisive the market's role in the economy should be.  As the SCMP's Wendy Wu points out on 5th March 2016, "The government claims to be serious about letting the market play a decisive role in the economy, it also says the party should strengthen its grip on state firms, thus confusing observers."  She puts some meat on the bones by noting that "There has been little progress in several key areas, including adoption market-based recruitment of senior executives rather than having them appointed by the party, matching their pay to private sector levels and ensuring that  remuneration is tied to performance." Another reform area has to do with mergers: "There have been mergers reported in competitive areas such as travel booking, shipping and railway equipment. But analysts say such tie-ups have yet to generate synergy."  Another unresolved issue in this tug of war between how far the state keeps its mitts in the operation of the market: "Local governments continue to subsidize loss-making state firms, underscoring the pain of laying off workers as over-capacity is reined-in."
  4. Key NPC issue two: tax regime

    "After years of sluggish progress in tax and fiscal reforms, a growing reliance on fiscal pro-growth policies may push Beijing to make breakthroughs in restructuring the value-added tax (VAT)  scheme as part of its drive to reallocate fiscal resources and responsibilities between central and local governments."  Since 2011, "restructuring" means shifting from the current  reliance on business taxes to greater dependence on VAT.  This shift already has occurred in the following sectors: transport, postal, and businesses operating in the cultural field.  Finance Minister Lou Jiwei wants to bring others into the fold this year: finance, construction and consumer services.  Another tax reform will be to cut the VAT in the manufacturing sector.  A third reform issue centres on the introduction of a property tax, which hitherto has been implemented only in Shanghai and Chongqing.  Wendy Wu goes on to write that "On the fiscal side, Beijing wants to seek a more balanced division of revenue between central and local governments, bolstering the independence of local governments."
  5. Key NPC issue three: currency

    On 11th August 2015, the Central Bank ended the RMB's "soft peg" against the US dollar, eliciting howls of protest particularly from that congress of vote-hungry baboons on Capitol Hill wailing ignorant Cassandras about "depreciation", thereby priding themselves on their arrogance of ignorance.   The Central Bank "...has since aimed to keep the yuan stable against a basket of currencies, deviating from the reform goal of allowing the currency to float more with market forces."  Central Bank Governor Zhou Xiaochuan prefers keeping this "managed basket peg" for the time being, even if the ultimate goal is to internationalize the RMB and let it float freely.
  6. Key NPC issue four: financial regulation

    "The stock market routs last summer and the unsuccessful government intervention  underscored the urgent need to improve financial regulation to better ward off systemic risks. Government economists said current talks between the Central Bank and regulators for banks, securities and insurers were more an exchange of information rather than an attempt to tackle big problems. There have been suggestions of merging the regulators and giving the Central Bank a greater supervisory role for the financial sector. But insiders say broad reforms will be difficult due to strong objections from vested interests."
  7. Key NPC issue five: trade networks

    Here, progress has been made: the "One Belt, One Road" initiative has taken-off, and the Asian Infrastructure  Investment Bank is a reality.  A third area, however, needs resolving: "China is also in talks to settle bilateral investment treaties with the United States and the European Union. But American business representatives have expressed concern that the negative list, which would restrict foreign companies' access to the mainland market, is too long."  This issue of "host country protectionism" is one key area that I warn of in my more recent book on how multinationals influence trade balances, Trade Myths.
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