China: five key policy issues
What are the five key issues demanding discussion at the National People's Congress?
Change in leadership styleThe 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'. "
Main purpose of the NPCThe 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.
Key NPC issue one: state-owned enterprise (SOE) reformWhen 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."
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."
Key NPC issue three: currencyOn 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.
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."
Key NPC issue five: trade networksHere, 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.
DISCLAIMER: THIS BLOG DOES NOT PROVIDE INVESTMENT ADVICE
The information, including but not limited to, text, graphics, images and other material contained on this blog are for informational purposes only and do not necessarily reflect the views or Enzio von Pfeil. The purpose of this blog is to promote broader understanding, knowledge and awareness of various financial and economic topics. It is not intended to be a substitute for regulated professional investment advice. Always seek the advice of your a regulated investment advisor with any questions you may have regarding your specific investment needs or concerns.
Enzio von Pfeil does not recommend or endorse any strategies or ideas mentioned in this blog. Reliance on any information appearing in this blog is solely at your own risk.
IT IS IMPORTANT THAT YOU READ, UNDERSTAND, AND AGREE TO BE BOUND BY THESE TERMS WHEN VIEWING, READING OR OBSERVING ANY INFORMATION, DATA OR ANY OTHER FORM OF COMMUNICATION ON THIS BLOG:
Any information provided to you by us, including any promotional material such as photographs, written descriptions, any plans or models, any income estimates or projections (“Information”) have been provided to us by other sources and although we aim to perform due diligence on all information we provide to our Blog subscribers, the Information is provided for general purposes only, we cannot guarantee the accuracy of the Information and we do not make any representations, either express or implied, as to the accuracy as to the Information. We recommend that our Blog subscribers undertake their own due diligence in relation to the asset they are considering purchasing, including seeking independent legal and financial advice in relation to their own financial objectives and personal circumstances, prior to signing any agreement or contract with any third parties.
No representation or warranty is given as to the accuracy, likelihood of achievement or reasonableness of any figures, forecasts, prospects or returns (if any) contained in the message. Such figures, forecasts, prospects or returns are by their nature subject to significant uncertainties and contingencies. The assumptions and parameters used by www.enziovonpfeil.com (evp.com) are not the only ones that might reasonably have been selected and therefore evp.com does not guarantee the sequence, accuracy, completeness or timeliness of the information provided herein. None of evp.com, its members or any of their employees or directors shall be held liable, in any way, for any claims, mistakes, errors or otherwise arising out of or in connection with the content of any form of communication, documentation included in the Blog, via e-mail or any other form of communication.
You are reminded that the content is for personal use and general information only. Under no circumstances is the content intended for and hence the content should not be regarded as an offer or solicitation or recommendation to dispose/sell, an offer or solicitation or recommendation to subscribe in, nor an offer or solicitation or recommendation to buy/acquire and under no circumstances should the content be constituted as provision of any recommendation or investment advice on any securities, investment products, investment arrangements and any other form of investments or legal, tax or other professional advice and therefore should not be relied upon in that regard for making any decision. Unless specifically stated, neither the information nor any opinion contained herein constitutes as an advertisement, an invitation, a solicitation, a recommendation or advice to buy or sell any products, services, securities, futures, options, other financial instruments or provide any investment advice or service by evp.com.
Unless stated otherwise, any opinions or views expressed in this communication may not represent those of evp.com. Opinions or views expressed in this communication may differ from those of other departments or third parties, including any opinions or views expressed in any research issued by evp.com.
Any e-mail and any accompanying attachments are not encrypted and cannot be guaranteed to be secure, complete or error-free as electronic communications may be intercepted, corrupted, lost, destroyed, delayed or incomplete, and/or may contain viruses. EvP.com, therefore, does not accept any liability for any interception, corruption, loss, destruction, incompleteness, viruses, errors, omissions or delays in relation to this electronic communication. If verification is required please request a hard-copy version. Electronic communications carried within the evp.com system may be monitored. Any communication or message in email form or otherwise may contain confidential information. Any use, dissemination, distribution or reproduction of the relevant information outside the original recipients of any messages is strictly prohibited. If you receive a message by mistake, please notify the sender by reply email immediately and permanently delete the emails and its contents. Unless otherwise stated, any communication provided is solely for information purposes only.