By the end of 2018, about 960,000 foreign-invested enterprises had been set up in China, with the accumulated foreign direct investment (FDI) exceeding 2.1 trillion US dollars. These enterprises hope to benefit from the new foreign investment law that was passed in this year’s session of the National People’s Congress.
Topic of the week: National People's Congress
A newly challenging external political and economic backdrop, prominently including a trade dispute with the United States, overshadowed this year’s National People’s Congress in Beijing: Premier Li Keqiang used the traditional “government work report” to prepare the nearly 3,000 delegates for difficult times ahead.
The mood of non-complacency stands in sharp contrast with last year’s NPC at which momentous changes were implemented, including the abolition the presidential term limits and a far-reaching restructuring of state and party institutions. This year, in contrast, the focus was on fine-tuning policies and political targets. For the Chinese leadership realism and pragmatism seem to be the guiding principles of 2019.
A big challenge for the government is China’s transition from an export-oriented low-wage fast-growth model of the last decades to a more sustainable, consumption and innovation driven model. Should the international environment and political climate become even more complicated, an implementation of necessary reforms becomes increasingly unlikely.
As expected, the Chinese premier set a lower GDP growth target for 2019 than that of last year: to between six and 6.5 percent (down from 6.5 percent last year). It serves as a signal to officials on all levels that the economy is shifting from a model of quantitative to one of qualitative growth. To achieve this goal, and to keep unemployment as low as possible, Beijing plans to prioritize the creation of high-quality jobs that also maintain the country’s productivity given that rapid population ageing means both fewer workers and more pensioners to provide for.
The NPC also passed a law on foreign investments, seen as a conciliatory sign to the United States in the ongoing trade dispute. Passed with 2929 of 2948 votes in favor the law promises equal treatment of international and national investments. In addition, the law strengthens the protection of intellectual property rights and prohibits forced technology transfers by administrative rules.
Some representatives voiced their discontent with projects like the Belt and Road Initiative and the “Made in China 2025” industrial policy (which was not mentioned in the government’s report) in plenary discussions of the work report. Nobody went as far as calling the position of state and party leader Xi Jinping into question.
2019 is an important year for the Chinese leadership. It wants to use the 70th anniversary of the founding of the People’s Republic in October to look back at China’s great achievements under the CCP. The government also faces pressure from looming deadlines announced as targets by the CCP over recent decades. For example, for 2020 there is a goal of the full eradication of absolute poverty in China, which would mark the successful realization of a ‘moderately prosperous’ society.
China and the world
Reunification with Taiwan continues to be high on the agenda for Beijing. In his annual government work report Chinese premier Li Keqiang explicitly stated the government’s intention to “advance China’s peaceful reunification” as one of the tasks for 2019.
The report endorses president Xi Jinping’s line on Taiwan, which he promoted in a major speech on January 2, 2019. Xi had called for “peaceful reunification” with Taiwan and promised to respect its religious and legal freedoms under a “one country, two systems” model. Xi had also made clear that the use of force to achieve this goal remained an option. His speech raised expectations that reunification might be achieved during his tenure.
While the firm commitment to uphold the “one China principle” and to oppose Taiwan independence is nothing new, taking proactive steps towards reunification – be it by peaceful or aggressive means – is a product of Xi Jinping’s assertive foreign and military policy. As subtle changes to language in government documents often represent shifts in policy, the inclusion of reunification points to the government’s resolve to prioritize the subject.
Cross-strait ties have deteriorated since the independence-leaning Tsai Ing-wen was elected president of Taiwan in 2016. In recent months, Beijing has increased its military presence around Taiwan by conducting naval as well as air force exercises.
MERICS analysis on Chinese plans to militarily capture Taiwan by 2049: China Global Security Tracker by Helena Legarda.
In an apparent attempt to capture the attention of millennial audiences around the globe, this year’s ramp up of propaganda preceding the NPC included a rap music video and a fun facts quiz – all in English.
The videos, released on by Xinhua on social media, exploit the new formats to extoll China’s supposed virtues. In “‘Two Sessions’: To the World from China,” a Chinese rapper boasts about the country’s social and scientific achievements, while in the “Two Session fun facts quiz,” a young British woman is moved to describe the NPC press conferences as “a journalist’s dream.”
One of several forays into the world of social media by the CCP, the party claims its intention is to spread its voice further. In the past, similar videos have appeared only in Chinese with English subtitles. Yet it is unlikely the clips have any chance of going viral outside China. It is not just the awkward rhymes and incomprehensible lyrics that are off-putting, but the barely disguised attempt to push the party line. All of which prompts the question whether these videos were really intended to win over international audiences, or rather to convince the audience at home that the two sessions are an event of global significance.
News in brief
- Military ambitions: defense budget to grow 7.5% in 2019
- US-China relations: China’s Foreign Minister Wang Yi calls for cooperation despite Huawei row
- Court action: Huawei sues US government – ban as security threat “unfair and incorrect”
- Diplomatic outbursts: Some Chinese envoys offer very blunt criticisms of their host countries
Politics, Society and Media
On Friday, March 15, China’s NPC adopted the new Foreign Investment Law (FIL, 中华人民共和国外商投资法) of the PRC with 2929 of 2948 votes in favor. Presented by Chinese officials and state media as a testament to China’s commitment to reform and free trade, the new law is intended to improve the environment for foreign investors and businesses. Abroad, however, it has been met with scepticism.
By pre-establishing national treatment, the FIL, which replaces three older statutes, removes barriers to market access, scraps previous approval procedures, and gives foreign business equal access to the domestic capital raising avenues such as the IPO market. It also provides for equal treatment of foreign and local firms in terms of government procurement and guarantees that foreign businesses will be able to take part in standard setting work on an equal footing. A key element for foreign businesses is the new provision prohibiting forced technology transfer by administrative rules and the enhancement of intellectual property rights.
The extraordinarily quick adoption of the FIL has been seen as a reaction to the current trade dispute with the US. First published in 2015, the progress of the draft law stalled until late last year when it was selected for fast-tracking through the NPC’s legislative procedures.
While China says the new law will create a stable, transparent and predictable market environment for fair competition, the FIL is seen abroad as having significant shortcomings. Ambiguous wording and the limited scope of articles – only 42 compared to 170 in the 2015 draft – allows for extensive adjustments through judicial interpretation and implementation guidelines. The continued existence of negative lists defining areas where foreign investment or enterprises are restricted, and the new security review procedure and anti-trust review, all continue to act as entry barriers.
Katja Drinhausen, research associate at MERICS: “Despite improvements, the FIL is as much show as substance and still provides significant room for China to adjust market access in the future.”
The government-driven push for technological innovation in China has resulted in a mushrooming of successful enterprises and research projects. At the same time, insufficiently tested technologies sometimes hit the markets and pose serious risks to China’s tech-loving customers. The need for more regulation of emerging technologies was brought to the attention of delegates at this year’s NPC by China’s most famous internet bosses Robin Lee Yanhong, CEO of Baidu, and Pony Ma Huateng, founder of Tencent. Proposals submitted at the meeting by them and other renowned tech experts call for a tougher regulation of Artificial Intelligence and the ownership of Big Data. Alongside those voices, the President of the Chinese Academy of Sciences, Bai Chunli, proposed the creation of a “Biosafety Law”.
So far, the Chinese government’s push for tech leadership in emerging fields has resulted in a phenomenon that has been coined “develop first and regulate later” by observers. This tactic has proven to be risky: For example, in February, a Chinese company operating facial recognition systems leaked the personal information of 2.5 million people including ID card numbers, tracking location data, sex, ethnicity, address, passport photo, birthday, and even employer. In November 2018, a Chinese scientist announced that he had created the first genetically-edited babies, shocking the world.
Calls for more regulation in the field are also related to the broader debate at this year’s NPC on a necessary shift to more quality growth. That CEOs of IT companies are the ones who push for ethical standards and enhanced data protection is probably due to the fact that by now the enterprises themselves are solely held responsible when technical failures or data breaches occur.
Economy, Finance and Technology
In his speech at the National People’s Congress the Chinese premier Li Keqiang announced lower GDP growth targets and warned of a “tough struggle” amid a difficult external environment. In his government work report Li announced a target of 6.0 to 6.5 percent GDP growth. In 2018, the target was 6.5 percent.
The premier gave two priorities for the government’s economic work: the creation of sustainable jobs and support for the development of smaller companies. Confronted by a rapidly aging population and low birth rate leading to the workforce shrinking in both total size and share of population China needs to increase the quality (i.e. productivity) of newer jobs in order to maintain its productivity. This also connects to the prioritization of small and medium sized companies as they often offer higher quality jobs. Since these are typically privately owned the latter priority could also indicates a promotion of growth in the private sector.
Other announcement applied to changes of fiscal policy, including a cut in the value-added tax rate for the manufacturing sector – from 16% to 13% – as well as for construction and transportation from 10% to 9%. China is also fine-tuning its approach to deleveraging amid fears that high debt levels could lead to bigger systemic risks.
The concurrent trade war discussions between the United States and China introduced some uncertainty in China’s growth trajectory. Recent decline of traditional automobile sales and lower private investment have received particular attention.
A change in the Chinese government’s attitude toward private enterprise was apparent in statements made by key figures at the NPC. In his presentation of the government work report, Chinese Premier Li Keqiang stressed the need for a policy of competitive neutrality, treating state and private companies equally, while Chief Justice Zhou Qiang promised to bolster protections of legal rights.
The policies, which are backed by President Xi Jinping, are intended to provide a boost to the private sector, where business confidence has been falling of late. The NPC has adopted a number of measures intended to support the private sector including tax breaks and increased access to credit for SMEs.
The Chinese leadership is keen to draw on the innovative and entrepreneurial spirit of private enterprise to offset stalling growth. In principle, at least, these steps will be more than welcome, but it will be difficult for the government to strike a balance between its need for private enterprise and its desire to maintain a strong grip over the economy.
News in brief
- Goodwill advertising: Huawei opens cybersecurity transparency center in Brussels
- High-level bashing: China’s tech strategy all talk, no action and a waste, says former finance minister Lou Jiwei
- Budget deficit widening: Chinese authorities defend ratio increase to 2.8 percent
- Improving social services: China to prioritize elderly care sector
- Clean energy promotion: Hainan to ban petrol auto sales by 2030
- Pushing standardization: China to build industrial Internet system by 2020
Profile: Hu Haifeng
The son of former state and party leader Hu Jintao is poised to become the party secretary for Xi ‘an, capital of the Northwestern province Shaanxi. The 46-year old will also be promoted to the rank of vice minister. Only last summer, Hu Haifeng became party leader of the much smaller city of Lishui in the coastal province of Zhejiang after spending two years as the mayor of Jiaxing (also Zhejiang).
Xi’an, the biggest city in Northwestern China, is of special economic importance – not least for the Belt and Road Initiative, the most important project of state and party leader Xi Jinping. Lately, the home of the terracotta army has been plagued by cases of corruption. Several local government officials have been reviewed by the CCP’s disciplinary commission after defying orders of president Xi to destroy villas that had been constructed under their watch in the Qinling mountain nature reserve.
Observers see Xi’s decision to promote Hu Jintao’s son as an attempt to appease his predecessor. Slowing economic growth and the enduring trade conflict with the United States are increasing the domestic pressure Xi Jinping is facing.
As Hu Haifeng is still lacking political experience the promotion might prove a curse rather than a blessing. The IT engineer only entered politics in 2013. Before that he worked as a businessman, for example as the CEO of Nuctech, a state-owned producer of security scanners. The company was accused of corruption while operating in Namibia in 2009. A connection between Hu Haifeng and these corruption cases was not established.
Hu has previously not been publicly visible. He is known to advocate for a balance of economic development and environmental protection – an approach adopted lately by Xi Jinping as well. His promotion is also part of a countrywide drive to rejuvenate party structures at the local and provincial level.
In China, so called princelings – the children of former party and state leaders – regularly reach higher offices. Xi Jinping himself is the son of revolutionary hero and former politician Xi Zhongxun. Li Xiaopeng, son of former premier Li Peng, currently holds the office of minister of transportation and, previously, governor of Shanxi province.