CHINA S 2018 TWO SESSIONS

Transcription

1 SPECIAL REPORT: CHINA S 2018 TWO SESSIONS Implications for MNCs Operating in China MARCH 2018

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3 TABLE OF CONTENTS Key Takeaways... Analysis... The New Era... Business Implications... Impact by Sectors... ICT... Health Care... Food & Retail... NGOs & Education... Manufacturing Investment... Appendix

4 KEY TAKEAWAYS 1. China will focus on maintaining steady growth under the leadership of an unchallengeable Xi Jinping, whose indefinite rule will provide short-term stability but also potential instability in the long run due to the scrapping of long-established presidential succession norms. 2. Streamlining of regulatory bureaucracy through reorganization of responsibilities will delay and disrupt stakeholder engagement for foreign companies in the short-term, but will likely have a positive impact over the long-term. 3. Curbing financial risks, reducing environmental pollution, and poverty alleviation will form the core of government work in the coming year as the shift to development based on improving quality of life continues. 4. The appointment of Liu He and Wang Qishan to key positions symbolizes the concentration of power under a small group of Xi allies, as well as a desire by Xi to have trusted barbarian handlers to manage issues with a global dimension, such as the U.S. and international trade. 5. Foreign companies will be faced with disruptions to their stakeholder relationships, more pressure to align to government development goals, and increased ideological control in all aspects of life in China. 4

5 ANALYSIS The 2018 meetings of the National People s Congress (NPC), and the Chinese People s Political Consultative Conference (CPPCC) was an important milestone for China s New Era under Xi Jinping. Even though the general direction of development had already been set during the National Congress of the Communist Party of China (NCCPC) in 2017, it is during the Two Sessions that these concepts were given the seal of approval from the party rank and file. THE GOVERNMENT WORK REPORT Pemier Minister Li Keqiang delivered the Government Work Report at the start of the 2018 Two Sessions in which he presented a glowing picture of the Chinese economy, and outlined the work ahead. With no real surprises, the general theme has been steady GDP growth (7.1%), increase in the service sector, and continued urbanization. Technological innovation was stressed, with internet access being highlighted. A target of 6.5% growth was set for The government report does not deviate from the NCCPC alignment on the need for quality over quantity, with the environment, poverty alleviation, and reducing excess industrial capacity being key focus areas in the year ahead. Quality of life is a core part of Xi s vision for the New Era that has been named after him, and is likely to be the main driver for policy decisions in the coming years. Curbing financial risks will also be a key point for government attention. 5

6 While the 2018 Two Sessions followed the standard process of confirming changes to the constitution, reorganizing government departments and announcing key appointments, some of the content did surprise many as to their scale and impact. While the expected removal of presidential term-limits and inclusion of Xi Jinping thought into the constitution did take place, the adoration of Xi Jinping as a leader went to new heights. The reorganization of government departments was also more drastic than previous post- NCCPC reshuffles. Finally, some key appointments provided clear indicators as to the political direction of the government, and to how China will interact with the outside world. 6 THE PEOPLE S LEADER Xi considers himself the only man up to the task of navigating China through the volatile waters ahead. In an earlier speech to delegates, Xi told them to stay steadfast and arm themselves with the four confidences in China s development path, ideology, political system and culture. He congratulated the country on solving so many issues that were left unsolved, [and achieving] so much that was previously thought impossible. Ironically the positioning of Xi as a potential president-forlife might improve stability in the short to medium term, as his ideologically-driven path to development will ensure predictability for the foreseeable future. International actors can be sure that the new rules to emerge from this New Era will remain relatively unchanged. Of course, this upsetting of the established presidential succession mechanism will increase long-term risks once Xi leaves. With the removal of the ten-year presidential term limit, the Two Sessions will enshrine into the constitution Xi Jinping s right to rule indefinitely. This should not be a surprise as Xi has spent much of his first term since 2013 consolidating his power and removing opponents. The unveiling of his vision for China s national rejuvenation during the 2017 NCCPC was a clear sign of what he was working towards. Although there was nothing to stop him from remaining the chairman of the party after his term, codifying his title of president will ensure his position as head of state and allow him to retain his ability to wield his influence as an international statesman.

7 Despite the pomp and confident rhetoric, Xi finds himself in a turbulent world. China is faced with geopolitical instability around the globe, a volatile relationship with a Trump-led United States and a slowing economy. Yet Xi has set himself targets that are more ambitious than ever before, combining a substantial increase in the quality of life domestically while taking China into the world internationally. Xi s approach of flying the flag for globalization while maintaining an iron grip at home will present a restrictive, yet somewhat predictable operating environment for foreign businesses in China. APCO has distilled and summarized the key implications of the changes coming out of the Two Sessions in this special report. While there were many day-by-day accounts of the proceedings available in both Chinese state and international media, APCO has focused directly on the implications these will have on multinational corporations (MNCs) with operations in China. This report is a guide for all public affairs professionals working with Chinese government stakeholders today. It lists the changes that are most relevant to areas APCO closely monitors: ICT, health care, NGOs & education, food & retail, manufacturing and investment promotion. The report also presents clear impact assessments, potential opportunities and likely risks to business operations. Included is also an appendix of useful data points for reference purposes. 7

8 THE NEW ERA POLITICAL ECONOMIC REGULATORY Xi Jinping cements his power as the people s leader with constitutional changes After the clear indicators given at the NCCPC, Xi Jinping completed the remaining formalities for ensuring his leadership in China. As expected, the ten-year term limit in the constitution was removed, paving the way for Xi Jinping to rule indefinitely. Xi Jinping thought was also formally added to the constitution. Xi was referred to as the people s leader and state helmsman in state media during the Two Sessions, echoing the Mao era. Key problems aimed to be addressed through reorganization of production and new incentives Reducing financial risk will be a key focus going forward, with many regulators reorganized for this purpose. Reducing outdated production, upgrading of manufacturing and attracting global talent are also important to the government s future objectives. Markets will likely be opened in telecoms, health care, education and new energy vehicles, offering investment potential in these sectors. Major ministry reorganization to have significant impact on certain sectors The most significant reorganization of government ministries and agencies in decades occurred during the 2018 Two Sessions. Several ministries were axed or merged with other departments. Changes focused largely around rationalization of responsibilities and streamlining of supervision. These will have knock-on effects to many sectors and cause disruptions to foreign MNC operations. 8

9 IDEOLOGICAL SOCIAL GEOPOLITICAL Party control extended to even more areas of government and economy Close Xi allies have been placed in key positions in finance and anti-corruption supervision, acting as indicators of Xi s determination in these areas. This is also a sign of the centralization of power under Xi and a close group of his trusted allies. Party control will continue to extend into the business arena in the coming years. Continued focus on quality of life, reduction of bureaucracy, and social welfare Poverty alleviation, food safety, education, health care and pollution prevention will continue to be the focus of the government. Extensive reorganization of government departments took place to meet these targets. This produced much needed consolidation to eliminate overlapping areas of responsibility. Liu He and Wang Qishan potentially positioned as barbarian handlers, especially in regards to Trump Trusted Xi associates Liu He and Wang Qishan were promoted to key posts. While Liu He was promoted to vice-premier and given the daunting task of managing China s vast economy, Wang Qishan was made vicepresident. Nominally a ceremonial role, Wang s appointment after his retirement as head of the much-feared Central Commission for Discipline Inspection (CCDI) is a way for Xi to keep his trusted advisor close for special responsibilities when needed. Both Wang and Liu have reputations for being charming and diplomatic, making them ideal for handling potentially volatile geopolitical issues, such as U.S.-China trade. 9

10 BUSINESS IMPLICATIONS MACRO IMPLICATIONS Streamlined Regulatory Environment The drastic reorganization of the ministries has produced at least on paper a much more streamlined regulatory environment for MNCs operating in China. The merger of personnel, responsibilities and physical office space will likely take some time however, making it unpredictable how soon companies can benefit from this rationalization process. Stakeholder Relationships Disrupted Due to the consolidation and reorganization of so many departments, many MNCs will find their existing stakeholder relationships severely disrupted. This is especially true in the case of the food and retail sector, with their key regulators of CFDA, AQSIQ and SAIC all merged under the new State Market Regulatory Administration. Quality over Quantity The strong focus on the need to improve the peoples quality of life will place pressures on MNCs from several angles including pollution, food safety and quality, as well as the safety of drugs and medical devices. Generating beneficial social impact will also influence positively on how the government views MNC behavior in China. 10

11 IMPACT BY SECTORS ICT HEALTH CARE FOOD & RETAIL NGOs & EDUCATION MANUFACTURING INVESTMENT Sectors selected according to APCO China s current service lines and not meant to cover the entire Chinese market. For analysis on continued financial reforms, and other sectors not covered in this report, please refer to APCO s online publications at: 11

12 IMPACT BY SECTORS: ICT Government Goals: Increase role of technology in supporting economic development, especially in AI and big data. Increase internet penetration by improving high-speed internet infrastructure and lowering costs. Integrate Internet+ into medicine, elderly care, education, culture and sports. Stakeholder Landscape: ICT is one of the least impacted sectors due to its main regulators MIIT and MOST remaining largely untouched after the stakeholder reorganization. The absorbing of The State Administration of Foreign Experts Affairs into MOST highlights the focus on the acquisition of foreign talent for Chinese technological innovation. Potential Impact: Foreign ICT companies should expect continued pressure from the government on technology transfers, especially in core areas such as 5G, semiconductors, aircraft engines and new energy vehicles (NEVs) Domestic competition will also increase as protected local ICT companies will likely receive preferential treatment by local governments Cybersecurity will continue to be a core issue for all foreign ICT companies operating in China, especially following institutional restructurings that have given Chinese cybersecurity stakeholders such as the ideology-oreinted Cyberspace Administration of China more formalized power The consolidation of antitrust functions under the new State Market Regulatory Administration will mean foreign ICT companies may face a more efficient and potentially aggressive antitrust regulator in the future 12

13 IMPACT BY SECTORS: HEALTH CARE Government Goals: Improve overall health care safeguards by increasing medical insurance coverage and market supervision. Clearly define responsibilities by removing overlapping supervision areas. Stakeholder Landscape: The newly formed National Health Commission is now streamlined to be the only regulator responsible for public hospitals and health care reforms. Responsibilities for the registration and approval of drugs, medical devices and cosmetic products now fall under the State Drug Administration under the new State Market Regulatory Administration. All medical insurance responsibilities have been consolidated under the new State Medical Insurance Bureau under the State Council. This includes pricing for drugs and services. Potential Impact: Stakeholder relationships for pharmaceutical and medical devices companies must be reassessed considering the reorganization of the CFDA under the new State Market Regulatory Administration The State Drug Administration, peeled away from the former CFDA but still under The State Market Regulatory Administration, will be an important stakeholder for foreign companies in terms of market entry for drugs and medical devices The State Medical Insurance Bureau is set to be a powerful new body, having taken on responsibilities for pricing and public tenders Market supervision at the local level will now fall to previous departments under the former AQSIQ and SAIC Disruptions to stakeholder engagement are likely due to the substantial changes taking place within these organizations 13

14 IMPACT BY SECTORS: FOOD & RETAIL Government Goals: Improve quality and safety of food in China through improved supervision, aided by technological innovation and traceability. Increase supervision of agricultural produce and promote consumption through e-commerce. Stakeholder Landscape: The merger of CFDA, AQSIQ and SAIC under The State Market Regulatory Administration will see regulatory responsibilities consolidated under one body. The new Ministry of Agriculture and Rural Affairs will also have responsibilities for food production and safety. Potential Impact: Government engagement activities will likely become difficult in the short-term as extensive reshuffling of personnel and downsizing of departments take place Once consolidated, the supervision of imported food products will likely become more efficient and stringent, potentially affecting foreign companies importing into China through e-commerce channels Supervision of retail products including inspections will become more comprehensive, linking the point of importation and production all the way to the store shelves Agricultural products will come under more scrutiny, especially in terms of chemical residues and cold chain logistics Utilization of innovative technology will be encouraged for operators as the government tries to leverage data-driven traceability as the main supervision mechanism 14

15 IMPACT BY SECTORS: NGOs & EDUCATION Government Goals: Encourage participation of social organizations and associations in shared governance. Improve education at all levels, and encourage job-creation for university graduates. Alleviate the talent bottleneck in high-tech manufacturing by focusing on specialized education. Stakeholder Landscape: No major changes with existing regulators, but the overall reorganization of government will disrupt stakeholder relationships for foreign NGOs. Potential Impact: Attracting international, and developing domestic talent will feature heavily on the government agenda, with many incentives likely to roll out at the national and local levels Technological talent including in manufacturing will be a key goal for government plans as it seeks to upgrade outdated methods of production, and to meet Made in China 2025 objectives Company partnerships with universities and research institutions will be encouraged as a way of improving domestic talent Foreign NGOs must align more with core government development goals such as health care and education, to maximize operational success and expansion Government reorganization will likely disrupt those that were listed as professional supervisory units (PSUs) for foreign NGO registration Delays are also likely for already registered NGOs awaiting approval from their PSUs for their 2018 activity reports Ideological control will increase for both education and NGO sectors, especially for content 15

16 IMPACT BY SECTORS: MANUFACTURING Government Goals: Encourage and expand smart manufacturing, reduce environmental impact and excess capacity. Stakeholder Landscape: The new Ministry of Ecological Environment will take over responsibilities of the former MEP, as well as those from many other axed industries relating to emissions and pollution. Potential Impact: Environmental oversight will become more centralized, with the new ministry having greatly increased enforcement powers than the previous MEP Pollution has now been upgraded to a political issue, making existing manufacturers vulnerable to reevaluation of their environmental impact assessment by both the new ministry and its local departments Green manufacturing will be heavily encouraged and incentivized, such as in new electric vehicles and new energy 16

17 IMPACT BY SECTORS: INVESTMENT Government Goals: Encourage more investment by opening markets, introduce negative list system and incentivize inflow of talent and products. Stakeholder Landscape: There were no major changes to the stakeholder landscape except for financial services, which will not impact foreign companies until China fully opens this sector. Potential Impact: Negative list management system can potentially speed up market entry U.S. firms seeking to invest in China are exposed to retaliation risks should a trade war erupt between the U.S. and China The government promise to grant a level playing field for foreign companies is unlikely to be fully enacted as local companies, especially in the ICT sector, will continue to enjoy protectionist policies Investments that include the transfer of key technologies, skills and talent will be looked on favorably by the government 17

18 APPENDIX Two Sessions Participants Breakdown The 2018 Two Sessions saw some changes in the composition of the people s deputies for the NPC, and committee members for the CPPCC. 2,980 75% 14.7% Total number of deputies Are new deputies making their debut Are from minority groups 24.9% 15.7% NPC Are female deputies, up 1.5% from 2017 Are workers and farmers, up 2.2% from % 33.9% Are professionals Are government officials, down 1% from 2017 Delegates by Electoral Units Monaco Taiwan Tibet Qinghai Ningxia Hainan Hong Kong Tianjin Gansu Beijing Innver Mongolia Shanghai Chongqing Xinjiang Jilin Shaanxi Fujian Shanxi Guizhou Jiangxi Guangxi Yunnan Heilongjian Zhejiang Liaoning Anhui Hubei Hunan Hebei Sichuan Jiangsu Guangdong Henan Shandong PLA

19 CPPCC Special Invitees CPPCC Composition % Changes in Composition Political Parties 24% 48% Sectors % People s Organizations Political Parties People s Organizations Sectors Special Invitees Changes in Society Sectors Literary & Art Science & Tech Social Science Economics Agriculture Education Sports Press & Publication Medicine & Health International Friendship Activitists Social Welfare & Social Security Ethnic Minorities Religion 19

20 APPENDIX GOVERNMENT RESTRUCTURING Official Positioning Below are 10 key changes that the government would like people to focus on. Published through the state media, these act as indicators of government positioning of the changes taking place. New Name of Body Ministry for Veteran Affairs State International Development Cooperation Agency State Immigration Administration State Medical Insurance Administration 1. Supervision of Natural Resources: establish Ministry of Natural Resources, realize the comprehensive protection of all natural environments 2. Pollution Prevention: establish Ministry of Ecological Environment, unify environmental protection management and enforcement 3. Rejuvenate Rural Areas: establish Ministry of Agriculture and Rural Affairs, comprehensively resolve all rural issues 4. Healthy China: establish National Health Commission, control diseases and address aging 5. Public Safety: establish Ministry of Emergency Management, prevent and resolve major safety risks 6. Technological Innovation: reorganize Ministry of Science and Technology to further encourage innovation 7. Market Supervision: establish State Market Regulatory Administration, promote comprehensive enforcement 8. Prevention of Financial Risks: establish Bank of China Insurance Supervision Commission, strengthen the bottom line 9. Public Service: establish Ministry of Veteran Affairs, State Immigration Bureau, State Medical Insurance Administration, improve targeted services for various demographics 10. Cultural Soft Power: establish Ministry of Culture and Tourism, State Radio and Television Administration, unify overall planning of cultural undertakings No Change Reorganized Ministry of Civil Affairs Ministry of Commerce Ministry of Education Ministry of Finance Ministry of Foreign Affairs Ministry of Housing and Urban-Rural Development Ministry of Human Resources and Social Security Ministry of Industry and Information Technology Ministry of National Defense Ministry of Public Security Ministry of State Security Ministry of Transport National Development and Reform Commission People s Bank of China State Ethnic Affairs Commission Ministry of Water Resources National Audit Office 20

21 New Body Reorganized from Previous Body New Body Replaced/Merged Bodies Ministry of Ecological Environment Ministry of Environmental Protection Ministry of Culture and Tourism Ministry of Culture National Tourism Administration Reorganized Ministry of Emergency Management State Grain and Reserves Administration Ministry of Justice Ministry of Science and Technology State Intellectual Property Office State Radio and Television Administration Ministry of Agriculture and Rural Affairs National Health Commission State Administration of Work Safety State Administration of Grain No change to name National Press and Publication Bureau of Radio, Film and Television Ministry of Agriculture National Health and Family Planning Commission Replaced/Merged Ministry of Natural Resources State Market Regulatory Administration National Supervisory Commission China Banking and Insurance Regulatory Commission State Administration of Forestry and Grassland State Bureau of Surveying and Mapping State Oceanic Administration Ministry of Land Resources Central Food and Drug Administration National Administration of Quality Supervision, Inspection and Quarantine State Administration for Industry and Commerce Ministry of Supervision National Bureau of Corruption Prevention China Banking Regulatory Commission China Insurance Regulatory Commission State Forestry Administration 21

22 APCO CHINA We are a global public affairs consulting firm with the local wisdom to advise businesses, governments, and non-profit organizations on issues critical to their success. We operate with one bottom line and provide one-stop solutions that integrate business intelligence, political insight and strategic communications. Lead Author: Gary Li GLi@apcoworldwide.com Research Assistance: Ivy Guo IGuo@apcoworldwide.com Contact: Beijing Anne Wang Suite 903, Tower C, Office Park, No.5 Jinghua South Street, Chaoyang District Beijing, Shanghai James Robinson Unit , Platinum Tower, 233 Tai Cang Road Shanghai, Hong Kong Christina Lai Unit 1102, Prosperity Millennia Plaza, 663 King s Road, Quarry Bay Hong Kong

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