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CWA # 103, 29 March 2019

China
Two Sessions in 2019: Four Takeaways

  Sourina Bej

Two Session highlights the importance that China has given to foreign investments and also to create a level playing field inside the country. Economy, investment and exports seem to be the larger focus.

Research Associate,
National Institute of Advanced Studies, Bengaluru

 

Early March, China concluded the largest political event in Beijing since President Xi Jinping extended his term beyond the second five-year. It was a ten-day plenary meeting of nearly 3,000 delegates of the National People’s Congress (NPC), and the Chinese People’s Political Consultative Conference (CPPCC).

This analysis looks at the immediate context of the Two Sessions, four major takeaways, and what the outcome conveys about China’s immediate road map.

 

Two Sessions: The Immediate Context

The “Two Sessions” is an annual affair but this year’s meeting holds a special significance. It is the first session of any legislative bodies ever since the 19th Congress installed the new Communist Party in October last year.

More importantly, the Two Sessions happened at a time when Xi is facing public and global scrutiny for the following: first, a slow economy which is recorded between 6 percent and 6.5 percent; second, a trade conflict with the US that has incurred negative growth rate; third, heightened international attention to China’s tech firm Huawei over intellectual property theft; and finally, the growing global criticism over Chinese policies in Xinjiang.

So, it was not surprising when special efforts were taken by the government to make the Two Sessions be in news by inviting popular face like Jackie Chan, allowing a large coverage in the Chinese newspapers as well as an equal broadcast in English in several Western media.

Economics dominated the agenda of the Two Sessions. What’s more striking are the important outcomes of the meeting. The major takeaways from the Two Sessions are the new foreign investment law, tax reliefs for certain sectors which will be a value-added reduction, equal opportunity for trade and business to government and private players and an increased investment in modernising the military.

The following four in particular needs additional attention as major outcomes of the Two Sessions.

 

1. The Foreign Investment Law: Liberalising the economy further 

China drafted a new foreign investment law which has now been submitted to the NPC. The law aims to provide more protection and create an environment for investment for foreign companies. There have been multiple complaints from foreign companies on the existing environment on investments in China.

The new law would replace the three laws that already in place - the Law on Sino-Foreign Equity Joint Ventures, the Law on Sino-Foreign Contractual Joint Ventures and the Law on Foreign-Capital Enterprises. The new law will not only replace the laws and address the problem holistically, but will also fine-tune its economy to create an environment where foreign companies get easy license to invest in the country.

The new law could be seen as China’s way to addressing the details of the trade conflict with the US especially Trump’s contentions that Beijing has repeatedly forced foreign companies to hand over technological secrets as a condition of doing business in China. Not only the US companies but even the others have also made a similar complaint on the same issue.

There have also been allegations of frequent stealing of company secrets and products counterfeiting which has hampered the copyrights of the companies and also the cost of the product sold worldwide. The new law is expected to address the above concerns.

The report announced by the Premier Li Keqiang said, “China will further relax controls over market access, shorten the negative list for foreign investment, and permit wholly foreign-funded enterprises to operate in more sectors” But there exist scepticism among the US and European countries. The main concern has been over the rule where only the local officers are restricted from demanding company secrets and not the national governments.

 

2. Value Added Tax reliefs for more sectors

In order to boost the Chinese economy, Li Keqiang announced large cuts to the value-added tax (VAT) rates. The tax reliefs are aiming sectors which got badly hit by the economic slowdown.

The Chinese government hopes that tax cuts will provide an immediate boost to corporate confidence and export more. However, the exporters have raised a concern that they will need help from the government to offset their lack of access to credit which has been currently stalled from the effects of the US-China trade war. The sectors where tax cuts are applied are in construction, transport and manufacturing. Manufacturing saw the largest cut from 16 per cent VAT to 13 per cent. This means China is struggling to pull back its manufacturing hub with ease in large and timely exports. 

 

3. Equal opportunities for private and public enterprises

One of the important outcomes of the Two Sessions is the acknowledgement and need to create a level playing field for the market players.

As a result, the foreign investment law will contain certain regulations to ensure that foreign-invested enterprises participate in a market competition on an equal basis with the Chinese companies. The law will subsequently prohibit forced technology transfers through administrative means and extend the protection of intellectual property rights. Forces technology transfers have been one of the primary complaints of foreign companies.

The Foreign Investment law is set to become operational in early 2020. Even though the administration has taken note of the unequal market access in China, the law doesn’t clearly entail who will be restricted from investing, what kind of investments are allowed and what other checks and balances will be put in place. This ambiguity has led the private players to become weary of the changing market environment in Beijing. 

 

4. Strengthen the military, protect borders

The annual sessions are known to focus on the issue of uplifting the livelihood of the people especially ensuring economic reforms that would help the expanding Chinese middle class. But along with it this years’ report focussed on the country’s aim to continue expanding its air and naval defence capabilities because “China’s national security is undergoing deep changes”, Li said.

Along with the session reports, the annual budget was also released at the meeting. This budget has projected that China will be increasing its military spending by, bringing the total to nearly 1.2 trillion yuan (about $178 billion). The aim would be to modernise technology in the military.

 

Two Sessions, One Conclusion

In conclusion, the Two Session highlights the importance that China has given to foreign investments and also to create a level playing field inside the country. Economy, investment and exports seem to be the larger focuses of the Two Sessions.

What would the above mean? Two things: first, that China is worried about the economic slowdown and the cost it has to bear. Second, it looks at its economy (than military) as the primary power component to its rise as a global player. Its emphasis on the Belt and Road Initiative (BRI) and its new interest in Europe (Xi Jinping has just finished his high profile visit to Italy and France) has to be seen in this context.

By agreement with the Rising Kashmir

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