CHINAS 2015 NATIONAL

PEOPLES CONGRESS:

The Xi-Li Administration Seeks Alignment to

Push Through Reforms
F R O M

A P C O S

E X P E R T S

I N

C H I N A

Executive Summary

While few new policies were announced, the NPC meetings were an important event for the leadership to
reaffirm existing policy priorities for 2015 and beyond.
Major initiatives for 2015 include SOE reform, legal reform, expanding the use of private investment, and
financial reform.
To carry out reforms, the central government has been increasing coordination with local governments as a first
step toward standardizing local rules.
Foreign investors should not expect any significant improvements in the business environment in the short
term, and might even see more difficulties in approvals and fewer investment incentives offered by local
governments.

Chinas political leaders concluded this years National Peoples Congress (NPC) this past weekend. The
administration of President Xi Jinping and Premier Li Keqiang pushed ahead with its reformist agenda of taking
on entrenched business interests and transforming China into a country governed by rules and regulations, not
the decisions of individual bureaucrats. During the second year of President Xis rule, the administration went from
consolidating power to implementing its own agenda. This year, the leadership is focused on aligning the party
with its reformist agenda, which includes state-owned enterprise (SOE) reform, legal reform, financial reform, and
encouraging private investment.
Major Central-Level Push For Soe Reform
In his March 5 speech, Premier Li pledged to deepen SOE reform in order to transform SOEs into lean and globally
competitive companies. The reform measures include transferring equity to state-owned holding companies and
encouraging mixed ownership of SOEs. The premiers statements confirm policy pronouncements made by
the State-owned Assets Supervision and Administration Commission (SASAC), the regulatory body that oversees
central-level SOEs.
The leadership has been pushing SOE reform since 2012 but has modified its tone over time. During last years NPC
meetings, Li stated that China would actively implement mixed ownership reform of SOEs; this year, he replaced
actively with in an orderly fashion. The change in tone seems to suggest a decelerated timetable, possibly due
to enforcement problems at the provincial level. By the end of 2014, more than 20 provinces had already announced
their own distinct SOE reform plans. After the policies were released, eight investigation teams from Beijing were
dispatched to the provinces to study the policies.
For the leadership, SOE reform is as much about stamping out corruption as it is about making SOEs globally
competitive. Li often speaks of eliminating rent-seeking opportunities, which are rife in heavily state-controlled
sectors. In this context, it is reasonable that the leadership has targeted the electricity, oil and gas industries for the
first round of reforms. To oversee reforms, the State Council established in late 2014 the Leading Group on Stateowned Enterprise Reform. Chaired by Vice Premier Ma Kai, the leading group highlights the State Councils desire
to keep SOE reform close to the chest.
Foreign Investment Still a Mixed Bag
Concurrent with NPC deliberations, the National Development and Reform Commission (NDRC) and the Ministry of
Commerce (MOFCOM) released on March 13 the revised 2015 Catalogue Guiding Foreign Investment in Industry,
which will go into effect on April 10. The catalogue is the guidebook for understanding which industries in China
are open to foreign investment and which are not. In the new catalogue, the number of restricted industries
was reduced from 78 to 39; however, as the catalogue continues to categorize foreign investment into three
classificationsencouraged, restricted, and prohibitedthe use of a negative list still has not fully materialized.
It is possible that the Chinese government is holding onto the negative list as a negotiating tool for the Bilateral
Investment Treaty (BIT) talks with the United States.

CHINAS 2015 NATIONAL

PEOPLES CONGRESS:

The Xi-Li Administration Seeks Alignment to

Push Through Reforms
F R O M

A P C O S

E X P E R T S

I N

C H I N A

Central Bank to Liberalize Interest Rates, Establish Credit Reporting System

Financial reform may have the greatest chance for success. In a March 12 press conference, Peoples Bank of China
Governor Zhou Xiaochuan expressed optimism that China will establish a deposit insurance system during the first
half of this year. Introducing deposit insurance is a necessary step toward liberalizing deposit interest rates, which is
also expected to occur sometime this year.
The PBOC is also leading an effort to create a unified national credit system. On January 5, the PBOC released
a list of eight credit reporting agencies, requiring them to be prepared for operations within six months. Most of
the ratings agencies are affiliated with either Alibaba or Tencent, two of Chinas Internet giants, as they have huge
databases of customer financial transactions. The rating agencies will use data analytics to formulate credit scores
for individuals and businesses. All of this is intended to lay the groundwork for Chinas anticipated Credit Law
(xinyong fa), which is due to be released in draft form in 2016.
China Touts New National High Tech Strategy
One of the central themes of this years NPC meetings was encouraging private investment, innovation and
entrepreneurship. The government unveiled Made in China 2025, a strategy that seeks to transform China
into a leading global technology producer within 10 years. The Internet Plus action plan, another high tech
program, seeks to integrate big data and cloud computing with modern manufacturing. As part of the strategy, the
government will guide investment into prioritized industries using policy incentives such as tax deductions for R&D
investment.
Li Pushes Rule of Law
At his March 15 press conference, Li likened reform to taking a knife to ones own flesh, noting that no matter
how painful the process becomes, reforms will continue. Echoing calls made during the Communist Partys Fourth
Plenum last November, the premier said he intends to use the rule of law to push through difficult reforms. In his
Work Report, he frequently used the words in accordance to the law (yifa), rule of law (fazhi), and governing
the country according to law (yifa zhiguo).
To support legal reform, the NPC ratified amendments on March 15 to the Law on Legislation (lifa fa), which governs
the actual process of lawmaking in China. The revisions seek to reduce the number of redundant regulations at the
local level. Moreover, they require local peoples congresses to formally approve any new local taxes to prevent
local governments from arbitrarily levying taxes and fees.
Leadership Seeks Alignment

Xi Jinpings Four Comprehensives

As a whole, the NPC meetings were really about alignment:

alignment in thought, alignment in image and alignment in
process. Prior to the NPC meetings, state media unveiled the
Four Comprehensives, which is the Partys official ideological
framework under Xi Jinping. The Four Comprehensives seek
to align the Party apparatus with Xis vision for the country and
the wants and needs of the Chinese people. Additionally, this
year, the State Council launched for the first time an Internet
campaign to encourage Chinese netizens to suggest themes and
issues for inclusion in the NPC Work Report. Lastly, with regard
to alignment in process, the central leadership has been exerting
greater control in areas such as SOE reform, national security,
and, to a lesser extent, foreign investment. From this perspective,
it is reasonable to expect more coordination between the central
and local governments in order to harmonize policies across
jurisdictions.

The Four Comprehensives is a slogan

that refers to President Xi Jinpings political
theory. They seek to guide the thinking
of Communist Party officials and provide
overall direction for policy under his
administration. The Four Comprehensives
are as follows:
Comprehensively build a moderately
prosperous society
Comprehensively deepen reform
Comprehensively govern the nation
according to law
Comprehensively and strictly govern the
Party

CHINAS 2015 NATIONAL

PEOPLES CONGRESS:

The Xi-Li Administration Seeks Alignment to

Push Through Reforms
F R O M

A P C O S

E X P E R T S

I N

C H I N A

Impact on Foreign Investors

Foreign investors should not expect to see any major improvements in the business environment in the short term.
Regarding administrative licensing, foreign companies might even encounter more difficulties as Xis anti-corruption
campaign has slowed the licensing process in some areas. Similarly, because of fiscal constraints, many local
governments can no longer afford to offer investment incentives, such as tax breaks, to companies who invest in
their localities.
The outlook is mixed for the medium to long term. If the leadership can effectively push through its legal reforms,
it should create a more transparent and regular business environment. Moreover, SOE reform could generate
acquisition opportunities for foreign investors. At the same time, there are uncertainties over how the bureaucracy
will implement the Made in China 2025 strategy. However, it is certain that this plan is designed to build powerful
domestic companies, and the needs of the foreign business community will take a back seat to domestic interests.
Background on the NPC Meetings
Each year, the National Peoples Congress (NPC) and the Chinese Peoples Political Consultative Congress (CPPCC),
Chinas two legislative bodies, convene in Beijing at what is referred to as the two meetings (liang hui). It is an
important event in Chinese politics. Policy initiatives deliberated during the previous years plenary meeting of the
Communist Party of China (CPC), which generally occurs in the preceding November, are ratified by delegates at
the two meetings. The NPC is designed to demonstrate consensus behind the governments agenda and to lay out
priorities for the year ahead.

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