Burson-Marsteller - Striving for Progress While Maintaining Stability

承前启后稳中求进

Striving for Progress

While Maintaining Stability

2012 National People’s Congress

Prepared by Burson-Marsteller Government Relations & Public Policy Consulting Group


In the Government Work Report (hereafter as the “Report”), Premier Wen Jiabao concluded that 2011 was “a good start” to China’s 12th Five-Year Plan. He reviewed the government’s achievements in controlling the Consumer Price Index (CPI), transforming economic development patterns, developing social services, improving people’s well-being and deepening reform and opening up. This year, the final year of the current government, is “an important year linking the past and future,” a statement that repeats the message from the China Central Economic Conference held at the end of last year.

In 2012, the government’s primary goal is to further accelerate the transformation of China’s economic development model and adjust its economic structure. The fundamental theme is “making progress while maintaining stability.” The government’s objective is to keep social harmony and create a favorable environment for the convening of the 18th National Congress of the Communist Party of China (CPC) later this year. In reviewing the socio-economic situation, Premier Wen has pointed out that internationally, there exist challenges of slow global economic recovery and sovereign debt crisis, while domestically, there remain institutional and structural conflicts.

The Report sets the 2012 key macroeconomic targets as:

GDP 7.5 percent

CPI 4 percent

New Urban Jobs 9 million

Urban

Unemployment

4.6 percent

Exports & Imports 10 percent growth

Deficit RMB 800 billion (USD 127 billion)

To achieve this massive undertaking, Premier Wen outlines Four Focuses, Six Principles and Nine Tasks for 2012 government’s work.

Four Focuses: Increase domestic demand especially consumer

demand Enhance indigenous innovation, energy conservation

and emissions reduction Deepen reform and “opening up” Improve social services and people’s well-being

Six Principles: Stabilize growth Control prices Restructure the economy Improve people’s well-being

Implement reform Promote harmony

It is worth noting that this year’s economic restructuring will follow the principle of “controlled support” (有扶有控) by

being selective and targeted. All economic development will emphasize quality, efficiency, coordination and sustainability.

Nine Tasks: Promote stable and robust economic development

through expanding domestic demand, especially consumer demand

Keep overall price levels relatively stable Steadily develop agriculture and sustainably increase

farmers’ incomes Accelerate the transformation of the pattern of economic

development and strategic economic restructuring Implement the strategic policies for the development of

science, technology, education and talent Ensure and improve people’s well-being Promote cultural development and prosperity Deepen reforms in key areas of the economic and

political systems Improve the quality and standards of China’s “opening

up” With respect to macroeconomic policy, China will continue to implement a proactive fiscal policy and a prudent monetary policy in 2012. The Report further specifies that these

policies should be targeted, flexible and forward-looking. It underlines the importance of monitoring current developments and making timely and appropriate adjustments.

The National People’s Congress (NPC), China’s national legislature, is responsible for enacting laws, amending the constitution and

confirming the appointment of state leaders. It is also responsible for the examination and approval of national economic and social

development plans, the approval of related budgets and for providing reports on implementation. The annual meeting of the NPC, held in

March in Beijing, is attended by thousands of delegates from around the country and is the major milestone in the annual calendar of events

in China’s system of governance. The policies and initiatives approved by the NPC provide understanding and direction of the government’s

overall objectives and specific goals related to economic planning and promotion of key sectors, industries and regions.

Key Points of 2012 Government Work Report


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“Making progress while maintaining stability,” the theme first

put forward at last year’s China Central Economic

Conference, sets the tone for this year’s priorities and tasks.

Out of the nine major tasks listed in the Report,

Burson-Marsteller China believes the following areas

represent the most important policy developments and

trends for 2012. These are summarized in three consecutive

parts: make progress, maintain stability, and how to make

progress while maintaining stability.

I. Maintain stability

Lower GDP growth and control the CPI

One of the biggest “surprises” from this year’s Report is that

China cut its GDP growth target to just 7.5 percent. This is

the first time for China’s GDP target to fall below eight

percent since 2004. In 2011, China’s GDP increased 9.2

percent year-on-year, well exceeding the eight percent

target. Premier Wen stressed China’s progression towards

"higher-level, higher-quality and longer-term development"

and said that the country will move forward in line with the

seven percent annual growth target set forth in the 12th

Five-Year Plan period.

Given that China is still highly dependent on exports and

Europe is China’s largest trading partner, the weak global

economy and European debt crisis are the chief external

reasons behind China’s lowered growth target. The

European economy is visibly stressed; Greece is struggling

to get back on its feet, and even larger, sounder economies

like Italy and Spain are entangled in the crisis. The United

States’ economy maintains a slow recovery and has resorted

to protectionist measures via political and legal procedures.

Domestically, the real estate market, which was a major

economic driver, has experienced stringent policy restraints

in the past two years. This trend will continue, as the

government is determined to keep property prices at

reasonable levels. Increasing domestic consumption, though

a top priority in recent years, is still short of substantial

improvement. This is especially true considering that

fundamental barriers to increasing domestic consumption,

such as education, healthcare and tax reforms, remain

major issues in need of further improvement and reform.

In light of these challenges, analysts see the lowered target

as realistic and practical, and a decision that shows China’s

confidence. Premier Wen clearly stated in the Report that

this is a decision to focus on quality rather than speed, an

approach that requires the acceptance of a slower-growing

economy. Increased quality means gradually upgrading

industries, moving up the value chain from low-skilled

manufacturing to sectors that generate more value,

fostering indigenous innovation and increasing research and

development.

Premier Wen admitted in the Report that China missed its

2011 goal to keep CPI within four percent; it rose 5.4

percent year-on-year. For 2012, the target has again been

set at four percent.

This decision indicates the government’s determination to

control inflation while leaving room for pricing reforms and

responding to the overall objective of improving people’s

livelihood. Economists predict that the lowered growth

target will help stabilize price levels, making a CPI of four

percent possible. They are concerned, however, that rising

production costs could cause inflation to bounce back when

the government begins stimulating growth. Elaborating on

the government’s plans to control prices, Premier Wen

vowed to increase food production, improve distribution

networks, reduce distribution costs and tighten regulations.

The government’s goal to “seek a balance between

economic growth and inflation while keeping them both

stable" is one of the Chinese government’s most critical

long-term priorities and must be approached carefully. This

explains why, as China’s economy slows and the trade deficit

reaches its largest gap since 1989, the government persists

that it has no plans to introduce a stimulus package as it did

during the global financial crisis.

To control the CPI, China must be resolute in stabilizing

commodity prices. The country should concentrate on

expanding domestic demand, fostering the growth of

emerging industries like high-tech, environmental protection

and energy conservation, and equip these new industries to

meet growing domestic demand. Together, this will help

balance growth and inflation.

Adopt proactive fiscal policy and prudent monetary

policy

As a key measure to control prices and maintain economic

stability, the Report says that the government will continue

to implement a proactive fiscal policy and a prudent

monetary policy in 2012. The fiscal deficit in 2012 is

projected to be RMB 800 billion (about USD 127 billion),

consisting of RMB 550 billion in central government deficit

Burson-Marsteller Analysis of the 2012 National People’s Congress


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and RMB 250 billion in local government bonds. Regarded as

"an appropriate level" by the government, it is a decrease of

about RMB 100 billion from 2011 and around 1.5 percent of

GDP.

Through proactive fiscal policies, the government is set to

optimize spending by investing in and allocating resources to

areas that will improve people’s livelihood, including

education, culture, healthcare, employment, social welfare

and affordable housing. The government will also be more

committed to technology innovation, environmental

protection, energy conservation and rural development.

Short-term gains might be sacrificed in view of long-term

interests, and we expect adjustments will be made to make

strategic industries more sustainable. This lays the

foundation for more complex reforms that require bolder

changes in financial and tax policy restructuring.

To ensure that resources are allocated to prioritized areas,

China has decided to continue prudent monetary policies.

This is in part a reaction to criticism of the RMB four trillion

stimulus package meant to mitigate the impact of the global

financial crisis in 2008. Some critics claimed the stimulus

made matters worse by pumping excessive cash into an

already overheated economy. The government is attempting

to pave the way for healthy growth in key areas while

remaining cautious about where it provides financial

support.

II. Make Progress

Improve people’s well-being

In 2012, RMB 1.384 trillion (about USD 220 billion), will be

dedicated to areas like education, healthcare, social security,

employment, affordable housing, culture and agriculture.

This is an 11% increase from 2011.

The current government under President Hu and Premier

Wen has strived to build a “harmonious society,” and

continuously improving people’s everyday lives is the

cornerstone of that objective. Expanding employment is an

important part of this, and Premier Wen has tasked all levels

of government to create jobs, particularly in sectors such as

services, technology and innovation-driven small

businesses.

Healthcare reform remains a high priority. In 2012, China

will further improve the universal healthcare system and

expand basic medical insurance coverage. Medical insurance

subsidies will be raised by 20% from RMB 200 to RMB 240

per person, per year. The government will expand medical

insurance to cover more diseases and conditions.

Public hospital reform will be put into action at certain levels

of the medical system. The government has pledged to end

the much-criticized system of using profits from hospital

pharmacies to subsidize medical services by the end of 2015,

and three large hospitals in Beijing have been selected to

pilot a program that will combat this problem with

government subsidies. However, Mr. Chen Zhu, Minister of

Health, said the reform is now entering “deep water”,

complicated by the conflicting views and interests of various

stakeholders, from governments to hospitals to businesses.

The impact of healthcare reform on multinational players is

uncertain.

A good sign is the encouragement of “social capital” to

create a diversified medical services system open to foreign

investment. This is a significant message to multinational

healthcare companies in the medical services,

pharmaceutical and medical devices sectors. Though the

specific measures are still unclear, healthcare reform seems

to be moving forward in tangible steps.

Ensuring food safety is another important issue for

improving people’s well-being. Though this year’s Report

does not articulate food safety in detail, the government is

determined to intensify supervision of the industry, with

dairy products, drinks, meat products, food additives and

organic food on the top of the watch list. In China’s vast and

quickly developing consumer market, foreign food giants

can more easily fall victim to scandals due to their brand

penetration and market leadership. Foreign companies have

been criticized for applying a “double standard” to China by

lowering the quality of their products sold in the mainland.

Not only will foreign companies be more scrutinized by the

government, consumers and media, they are also required

to be the industry’s role model, holding themselves to the

same standards as in their home countries.

Increase domestic consumption

In this year’s Report, Premier Wen named "expanding

domestic demand, particularly consumer demand" the

fundamental driver of China's long-term, steady and healthy

economic development. Mr. Chen Deming, China’s Minister

of Commerce, announced that household appliance

subsidies for rural residents will continue and the Ministry

will introduce a series of policies making it easier and

cheaper for consumers to purchase environmentally friendly

products.

Because China faces shrinking external demand, an

uncertain global economic recovery and strong competition

in traditional manufacturing, expanding domestic demand


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and shifting to a consumption-led economy is an inevitable

transition. Currently, China’s consumption rate is about 35%

of GDP, significantly lower than even other emerging

economies, such as India (54%) and Brazil (63%).

To further boost China’s domestic consumption, the Chinese

government needs to address a range of issues, from

income distribution and the social safety net to education,

healthcare and food quality. The consistent and effective

implementation of the government policies will be a critical

part of making domestic consumption an engine for China’s

growth, both this year and in the years ahead.

This is still a work in progress, but the direction is clear: the

government will continue its consumption-stimulating

policies and flag new policies targeted at developing a green

economy and improving people’s well-being. The Report

announced specific work plans meant to increase individual

incomes; extend consumer credit; control rising food prices,

develop community services; boost the culture; tourism and

health sectors; and encourage green products and online

shopping as new consumption trends.

Transform development patterns and restructure

the economy

In this year’s Report, restructuring the economy is defined

as the country’s most urgent task for 2012; it is also a

long-term objective, symbolized by the reduction of the GDP

growth rate to 7.5 percent. The central government will

invest RMB 29.9 billion in boosting seven strategic emerging

industries, but with a more selective approach than years

past.

Special plans covering next-generation IT, high-end

equipment manufacturing, new materials and new energy

vehicles will be released in the first half of this year. But

Premier Wen singled out new energy - specifically solar

energy and wind power - as industries where overheated

expansion has caused disorder and friction with major

trading partners. It is interesting to note that the wording in

the Report has been revised from “stopping” to “preventing”

the blind expansion of these two sectors, which hints at a

tradeoff between the government and vested interest

groups, and also leaves room for further policy discussions.

Another pillar of economic restructuring relies on moving

industries up the value chain. The Report calls for the

optimization and reorganization of certain traditional

industries like automobile, steel, shipbuilding and cement to

tackle the side effects of the RMB four trillion stimulus

package.

The government will continue to restrict loans given to

industries that are considered energy-intensive, polluting or

overheated. Preferential policies and investment will be

given to stimulate innovation-based small businesses. As

China’s economic landscape continues to evolve, the shift of

traditional industries to the more economical western

regions is inevitable; the development of the eastern part of

the country will be increasingly dependent on technological

innovation.

Energy conservation, emission reduction and environmental

protection were priorities in the 2011 work review and are

named again as priorities in 2012. Their importance has

been further confirmed by the central budget’s allocation of

RMB 48.8 billion to these areas.

This is in line with the government’s objective to improve

people’s well-being and also a response to last year’s failure

to meet targets in these areas. Premier Wen declared that

“China will by no means sacrifice the environment and

people’s health for economic development.” Industries

related to environmental monitoring and governance are

expected to grow.

III. Deepen reform and “opening up”

Deepen economic reform in key areas

The Report emphasizes the critical role of the state-owned

economy, stating that it should be “unswervingly”

consolidated and further developed. But the Report also

states that the government should “unswervingly”

encourage, support and guide the development of a

non-state-owned economy.

This year’s debate seems to be in favor of the

non-state-owned economy. The Report stressed that

monopolies should be broken up and the private sector

should be given wider access to strategic sectors like

railroads, municipal administration, finance, energy, telecom,

education and healthcare, creating a level playing field for

all forms of ownership. It is said that the detailed measures

of “New 36 Articles,” which promote non-governmental

investment, will be published within the first half of 2012.

Top officials in the central government are realizing that

state-owned enterprises (SOEs), by taking advantage of

their privileged positions to strengthen their monopolies, are

negatively impacting China’s economy and making it difficult

for it to advance to the next level. When private and foreign

businesses are hampered by policy restraints, both visible

and invisible, and competition with SOEs, innovation and

industry development lack momentum.


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Another breakthrough can be seen in the repeated calls for

support of the real economy, especially small businesses.

The government pledged to put immediate measures in

place, including reducing tax burdens, launching pilot

programs to convert business tax to value-added tax,

enlarging funding for micro-businesses, setting up an RMB

15 billion fund for small- and medium-sized enterprises

(SMEs) and promoting small-scale financial institutions.

According to Mr. Miao Wei, Minister of Industry and

Information Technology, assistance will be particularly

directed to innovation-oriented and labor-intensive SMEs.

These measures will address the growing complaint that

SOEs achieve market leadership through exclusive and

preferential policies that prevent the private sector and

foreign companies from competing head-to-head with SOEs.

If the reforms are successful, it will help develop China’s

private companies and sustain the long-term and balanced

growth of the entire economy. In addition, as foreign

investment struggles in Europe and the United States, a

healthier China market is expected to draw high-quality

investment from abroad.

More opportunities may exist for multi-national companies

(MNCs) willing to explore ventures with businesses in the

aforementioned sectors. The software industry, for example,

will benefit significantly as will institutions that provide

financial services to SMEs.

Expedite political reform and transform government

functions

According to the Report, China will continue to press political

reform "with greater resolve and courage." At the

concluding press conference with Chinese and foreign

journalists, Premier Wen delivered a strong warning about

the ''urgent'' need for reforms, without which, he said,

tragedies like the Cultural Revolution could recur.

China’s top leadership is well aware of the importance of

political and government reform. In his last NPC press

conference as Premier, Wen Jiabao noted that, without

political reform, economic reform will not succeed and the

achievements China has already made will be lost. But, he

added that changes would have to come step-by-step and

under the leadership of the Communist Party of China (CPC).

Therefore, he explained that China’s political system should

be a socialist democratic one, with the CPC’s leadership at its

core. However, the CPC’s evolution over time and methods

to achieve improvement have become key issues, if not

obstacles, of China’s political reform.

As reform moves ahead, conflicts seem to be emerging

between the agendas of political elites in the central

government and the priorities of local leaders, who are more

inclined to focus on short-term economic and political

achievements. Though the Report uses general language to

describe reform, “transforming the functionality of the

government” seems to be a top priority. This concept can be

explained as sorting out the relationships between the

government and market, central and local governments, and

the government and social organizations, in an effort to let

market forces distribute resources and motivate

governments.

In the past decade, China’s political system and policy

making process have become more transparent. However,

there are a number of factors that need to be taken into

account when evaluating whether the progress will continue

and where it is heading.

First, the transition of China’s top leadership may not

change the overall course of development, yet to what

extent and how quickly reforms will be carried out

remains unknown.

Second, the question of how all Chinese people will

benefit from China’s growth needs to be answered.

The government’s management of China’s growth is

likely to impact whether reform is accelerated or

stalled.

Third, despite all the other priorities, economic

development remains the key. Given that the global

economy is struggling to recover from a recession, and

China is determined to sacrifice size for quality, China’s

growth should continue to slow down. It becomes a

question of whether the government is ready and

motivated to reform in a decelerating economy.

Improve the quality and standard of “opening up”

It is highlighted in the Report that China is entering a new

stage of opening up - China is now the world’s largest

exporter and second-largest importer. The Report sets the

goal of foreign trade growth at around 10% year-on-year in

2012, a sharp slowdown from previous years when China's

imports and exports rose over 20% annually.

This implies that, after 30 years of export-driven and

investment-led growth, China’s opening up is now exploring

a new path of transformation and restructuring, particularly

against the backdrop of diminishing external demand and a

global economic downturn. The severity of the global

environment also underscores the strategic role of exports in

boosting employment and economic growth. As pinpointed

by Premier Wen, “While expanding domestic demand is

crucial, we can never overlook the importance of external

demand in China's economic development.” This year,


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stabilizing exports will be more important than increasing

imports. A series of supportive policies, including export tax

rebates, financial incentives, and export market

diversification and trade facilitation measures are expected

to be announced and implemented shortly. China will adopt

new guidelines to encourage imports and promote trade

balance to alleviate unnecessary friction and tensions during

a handover year.

As explicitly stated in this year’s Report, China will continue

to welcome foreign direct investment (FDI), but with

increased emphasis on quality. Foreign investment will be

encouraged in advanced manufacturing, new and high

technologies, energy conservation, environmental

protection, modern service industries, and the central and

western regions.

FDI has already witnessed changing attitudes and views

from the Chinese government, businesses and the general

public in recent years. In line with the overall direction of

economic restructuring and moving industries up the value

chain, China enforced the newly revised “Industrial

Guidelines for Foreign Investment” early this year, focusing

more on quality, innovation and the movement of strategic

industries up the value chain. As China’s market becomes a

more level playing field with the roll-back of preferences for

SOEs, these new areas and sectors of focus will present

additional opportunities for foreign companies. Furthermore,

at home, foreign businesses will experience the challenges

and opportunities brought on by the Chinese government’s

“going global” strategy, which encourages Chinese

companies, both state-owned and private, to make overseas

investments and acquisitions.

Conclusions

This year’s NPC is the last session under the leadership of

President Hu Jintao and Premier Wen Jiabao. The

overarching theme of “making progress while maintaining

stability” reflects the willingness of Hu and Wen to stay the

course of pursing a “harmonious society” and quality growth

through gradual reform. The NPC was an opportunity to

reiterate the policies and priorities approved at last year’s

Central Economic Conference and ease the handover to the

next generation of leadership. Maintaining both economic

and social stability is the paramount objective – critical to

ensuring a steady leadership transition scheduled to happen

later this year at the 18th National Congress of the CPC.

Considering the macro-economic situation in China and

around the world, the government is determined to continue

transforming and restructuring China’s economic model.

This will require tolerance of a slower growing economy in

the short-term in return for more sustainable development

over the long run. With the CPI target still at four percent,

China is set to confront the enormous challenge of

combating inflation while growing the economy.

China now emphasizes balance and quality over speed and

quantity. By adopting a proactive fiscal policy and a prudent

monetary policy, the government encourages the allocation

of resources to innovation, technology advancement,

environmental protection, energy conservation, education,

social safety nets, affordable housing, employment and

other areas aimed at improving people’s livelihood. These

measures will help expand domestic consumption,

particularly in the context of shrinking investment and

external demand.

Upgrading and improving industries, particularly strategic

emerging industries, will remain a core priority for China for

years. China aspires to create internationally competitive

“national champions” in these sectors to realize its goal of

being an innovative country that can challenge foreign

businesses. However, thanks to the distinctive advantages

MNCs possess in knowledge, technology and experience,

foreign participation will be encouraged by the Chinese

government. So the question remains whether foreign

companies should re-evaluate their operating strategies in

China. Are Chinese companies their partners or their

competitors?

To accomplish all of this, top officials in the central

government realize that economic restructuring should

continue, and political and government reforms will be the

foundation for the continued success of the economic

reforms. Premier Wen said that without political reform,

economic reform will not succeed and the achievements

China has already made will be lost. One critical part of

political reform is to transform the way the government

functions and improve the market’s essential role in the

allocation of resources.

The Chinese government’s role and policy priorities have

evolved along with China’s opening up and reform over the

past 30 years. As China moves up the value chain and

develops indigenous innovation, it is becoming increasingly

selective in how it utilizes foreign investment, placing

greater emphasis on high-quality intangibles. Capital and

technology are no longer the strongest enticements for

China’s central government, and they cannot override the

priority of sustainable growth. That said, the government

welcomes foreign companies who help China’s local

businesses grow their technology, management, and

operation capabilities or expand into overseas markets.

However, energy-intensive and polluting companies,


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regardless of their current size or growth, are faced with a

bleaker future.

Recommendations for Foreign MNCs

Looking at the theme of the 2012 NPC, “making progress

while maintaining stability,” as well as the corresponding

policy dynamics and initiatives, foreign MNCs may not need

to overhaul their current business strategies and approaches

in China. However, they need to ensure their goals and

strategies align with the government’s latest agenda and

priorities. This includes first understanding the current

perceptions and agendas of their stakeholders and then

building a platform for consistent and effective

communication with them.

In addition to providing capital investment and sharing

advanced technologies, foreign MNCs should be prepared to

shoulder an expanding list of responsibilities attached to the

improvement of people’s livelihood. This cannot be done

through donations alone; it must include investment in areas

that will help the Chinese government do things like foster

innovation, develop local talent, protect the environment,

and improve supply chain management.

Therefore, foreign MNCs need to carefully evaluate in which

sectors they will invest in China, how to conduct business,

how to engage and influence central and local governments

and how to leverage and manage relations with key

stakeholders, such as local business partners, industry

organizations and think tanks.

It is also worth noting that because China’s policies have

become more inward-looking, adjustments in the allocation

of government-led investment and financial resources are

expected. As China moves further down the road of

rebalancing the economy, economic nationalism may grow.

In this context, foreign investors will be increasingly

required to contribute to China’s overall national objectives.

*****


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For further information on how Burson-Marsteller China can help you increase your understanding of China’s political and regulatory

environment and assist you with your specific policy analysis requests, please contact:

Ms. Jane Zhang

Director, Government Relations & Public Policy Consulting Group

Burson-Marsteller China

Tel: 86-10-5816-2584

Email: [email protected]

Mr. Weijia Wang

Senior Manager, Government Relations & Public Policy Consulting Group

Burson-Marsteller China

Tel: 86-10-5816-2559

Email: [email protected]

About Burson-Marsteller’s Government Relations and Public Policy Consulting Group

The Government Relations and Public Policy Consulting Group is composed of former senior government officials, public policy

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Burson-Marsteller - Striving for Progress While Maintaining Stability