What to Expect at China’s ‘Two Sessions’ Political Conference
By Alexander Chipman Koty
China’s political, economic, and social elite are converging in Beijing this weekend for the country’s annual landmark political event, the ‘Two Sessions’. The Two Sessions refers to the two meetings of the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC).
Little genuine debate will take place in public at the Two Sessions, as the NPC will reiterate top leadership’s policies and resolutions, and the CPPCC is merely a consultative body. Both will likely approve what has already been decided by the Politburo Standing Committee, and all messages and resolutions will follow the direction set by the Chinese Communist Party (CCP).
However, the statements that do emerge offer insights into the Chinese government’s political and economic priorities for the coming year, and therefore the overall policy direction the country will take going forward.
GDP growth targets
Coming off the slowest annual GDP growth in 26 years, the phrasing used by Premier Li Keqiang to describe China’s 2017 growth targets will be highly scrutinized. It is expected that he will use the words “about 6.5 percent”, which may signal that the government actually forecasts growth to be slightly below that number. This would fall in line with the rating agency Moody’s, which recently released its Chinese growth projections at 6.3 percent.
Although most expect China’s growth to continue to slow, some are more optimistic. Earlier this week, China International Capital Corp revised its 2017 projections from 6.7 percent to 6.8 percent. Similarly, Liu Shijin, a former deputy chief of the Development Research Center of the State Council, stated that 2017 could mark the beginning of a decade of medium-rate expansion.
While some observers are more optimistic, Li and the rest of the CCP leadership seem poised to take a conservative view of the economy’s prospects. In 2015, the phrasing “about seven percent” was given for the economy’s growth targets, and the final figure clocked in at 6.9 percent. Last year, China’s 6.7 percent growth fell in line with the government’s target of 6.5-7 percent, a broad but more concrete range than a general approximation.
Budget deficit forecast
As China’s growth continues to decline, many economists expect the government to reach into its pockets to boost economic growth through increased deficit spending. In 2016, China’s actual fiscal deficit was 3.8 percent of GDP – significantly higher than the original three percent target.
Leading up to the Two Sessions, however, the government has signaled that it may opt to retain the status-quo three percent target rather than expand it. Li Pumin, secretary-general of the National Development and Reform Commission, remarked this week that China does not need a large “flood irrigation” type of stimulus. Some economists, such as Zhu Haibin of JPMorgan, expect the fiscal deficit target to be raised to 3.5 percent, however.
Concern has arisen in recent years over China’s rapidly ballooning debt, and a tendency to spend in order to reach short-term growth targets in the place of long-term economic restructuring. By the end of 2016, China’s debt-to-GDP ratio reached 277 percent, up from 254 percent at the end of 2015. Although the government may try to rein in its spending, strong stimulus measures will surely be on the table if the economy struggles.
State-owned enterprise (SOE) reform has long been a concern for China’s economic restructuring, particularly so-called ‘zombie companies’ reliant on government subsidies and riddled with corruption and inefficiencies. Vested political interests and fear over the effects of tens of thousands of employees suddenly losing their jobs have hampered reform efforts in the past.
Another area of SOE reform looks to reduce the capacity of bloated sectors such as coal, steel, aluminum, cement, and glass producers. SOEs in these industries out-produce real demand, and are also heavy polluters at a time when air quality and health concerns are at the top of people’s minds.
In 2016, an RMB 100 billion fund for laid-off workers was established as part of a plan to eliminate 1.8 million coal and steel jobs. The government appears committed to this goal, as China’s labor minister announced last week that 500,000 jobs in steel and coal would be slashed in 2017.
In contrast to these embattled SOEs, the heads of several of China’s prominent private companies will attend the Two Sessions as models for the economy’s new direction. Pony Ma, founder of internet giant Tencent, and Lei Jun, founder of the tech company Xiaomi, are two of the most prominent figures from the private sector attending the meetings. These leaders will lobby for their respective industries, offer insights from their experience, and be held as standards for China’s emergent high-tech sector.
Xiaomi recently joined the ranks of Apple, Samsung, and fellow Chinese tech company Huawei as the only smartphone manufacturers to have designed their own chips. The Chinese government envisions its domestic tech giants, which also include Alibaba and Baidu, becoming world-class companies able to innovate and compete beyond the Chinese market as the country moves past imitation and low-cost manufacturing.
Setting the stage for the 19th Party Congress
In most years, the Two Sessions is the biggest political event. This year, it is second to the 19th National Party Congress of the Chinese Communist Party, which will be held in the fall. The congress will mark the end of President Xi’s first five year term and the beginning of his second, and, theoretically, final term.
However, Xi has consolidated power more quickly and aggressively than his predecessors Jiang Zemin and Hu Jintao, and many expect that he will try to extend his stint as head of the CCP beyond 10 years. The upcoming congress will see older party officials retire and others fall from grace, while the next generation of the country’s leadership will take shape.
Accordingly, there will be considerable political jockeying at the Two Sessions and throughout the year, as officials compete for promotions and influence. Any movement of rising and falling political stars, down to minutiae such as who they shake hands with and where they sit, will be closely examined by observers.
The ability of officials to carry out what is resolved at the Two Sessions is therefore crucial to their ultimate political fates. As the country struggles with domestic concerns such as slowing economic growth, swelling property prices, and continual environmental and corruption issues, not to mention uncertainty vis-à-vis the US under the Trump administration, regional and state-level officials face a variety of challenges over the coming year.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email firstname.lastname@example.org or visit www.dezshira.com.
Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.
Dezan Shira & Associates Brochure
Dezan Shira & Associates is a pan-Asia, multi-disciplinary professional services firm, providing legal, tax and operational advisory to international corporate investors. Operational throughout China, ASEAN and India, our mission is to guide foreign companies through Asia’s complex regulatory environment and assist them with all aspects of establishing, maintaining and growing their business operations in the region. This brochure provides an overview of the services and expertise Dezan Shira & Associates can provide.
An Introduction to Doing Business in China 2017
Doing Business in China 2017 is designed to introduce the fundamentals of investing in China. Compiled by the professionals at Dezan Shira & Associates in January 2017, this comprehensive guide is ideal not only for businesses looking to enter the Chinese market, but also for companies who already have a presence here and want to keep up-to-date with the most recent and relevant policy changes.
New Considerations when Establishing a China WFOE in 2017
In this edition of China Briefing, we guide readers through a range of topics, from the reasons behind foreign investors’ preference for the WFOE as an investment model, to managing China’s new regulations. We discuss how economic transformations have favored the WFOE, as well as the investment model’s utility, and detail key requirements that businesspeople need to examine before initiating the WFOE setup process. We then walk investors through the WFOE establishment process, and, finally, explain the new and idiosyncratic “Actual Controlling Person” regulation.