China’s Annual Political Gathering 2016

©Brunswick | 2016 | 32 | 2016 | ©Brunswick
The Authors
Fourth Session of the
12th National
People’s
Congress
in review
March 2016
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A rocky
road to
the China
Dream
For any business operating in China, whether Chinese or foreign, the annual meetings of the
National People’s Congress (NPC) and the Chinese People’s Political Consultative Congress
(CPPCC) are a crucial moment to understand the direction China is heading and how to operate in
this ever complex market. These two meetings, held in March and collectively known as the lianghui,
are among the most important events in the Chinese political calendar.
This year’s meetings built on the foundation set by President Xi Jinping and Premier Li Keqiang
over the last three years. While there were no significant changes in policy direction, the most
important outcome was the release of the 13th Five-Year Plan for Economic and Social Develop-
ment (2016-2020).
The meetings, which spanned 12 days, focused on how to maintain growth while continuing with
the reform agenda. With the release of its first Five-Year Plan this leadership team has shown
its vision of how the country should develop in order to realize the “China Dream” Xi Jinping has
advocated since he came into office.
Yet the path towards that Dream will be challenging. The authorities spelled out a desire to achieve
growth and reform—including drastically reducing overcapacity—while ensuring stability and en-
during minimal pain. Achieving this holy trinity of growth, reform and stability simultaneously is
unlikely. Reform is at once critical to ensuring long-term growth while also most likely to suffer
as the government tries to balance its three goals. Reform inevitably brings pain and volatility. If
there is none, the reform agenda is not working.
There are no groundbreaking new policy directives in the 13th Five-Year Plan. Instead this latest
Plan builds on previous Plans while incorporating the policies and directives put forward by Xi
Jinping and the leadership team over the last three years, such as supply-side reform, the Four
Comprehensives*, institutional reform, and the role of market forces. The Plan targets challeng-
es facing the country such as the economy, innovation, overcapacity, pollution, urbanization, and
poverty. The measures and goals laid out seek to move the needle on each of these issues while
building a “moderately prosperous society” that realizes the “Chinese Dream” and avoids falling
into the middle-income trap.
The Chinese authorities’ determination to move ahead with structural changes, the operating en-
vironment for business, whether foreign or local, will continue to be complex. There are a mix
of positive signals and challenges at play. We remain cautiously optimistic about the long-term
benefits of the policies laid out in the 13th Five-Year Plan, but realistic about the challenges that
lie ahead for China as well as for any foreign business operating in the country.
The Four Comprehensives is a political theory unveiled in early 2015 by Xi Jinping that includes: (1) comprehensively building a
moderately prosperous society; (2) comprehensively deepening reform; (3) comprehensively governing the nation according to law;
and (4) comprehensively strictly governing the Party.
*

Slower but steady
growth
The state of the economy was one of
the most critical issues discussed this
year. The government introduced
a growth range for this year of 6.5%
to 7% and a floor of 6.5% per annum
through the 13th Five-Year Plan.
Achieving the targets will be difficult.
Commitment and focus
For all the challenges, the new leadership is
consistent in its assessment of and the ap-
proaches to the issues that China faces. The
13th Five-Year Plan demonstrates a strong
sense of urgency to execute structural re-
forms—from SOE reform and increasing the
role of market forces to shifting the growth
drivers away from infrastructure investment
and manufacturing.
Balance reform, growth and
stability
Achieving the trinity of reform, growth and stability
simultaneously with minimal pain will be tough. At
the conclusion of the lianghui during a meeting with
the media, Premier Li noted “there will be small and
short-term volatility down the road.
Restoring confidence
Through the lianghui (and the China Devel-
opment Forum that followed) the authorities
tried to restore confidence in their ability to
manage the economy after the financial tur-
moil of last year. As part of the confidence
rebuilding, ahead of the lianghui the head of
the China Securities Regulatory Commission
was replaced.
Five guiding principles
To achieve balanced growth the government
is promoting “innovative, coordinated, green,
open, and shared development”. These prin-
ciples underpin many of the policy initiatives
laid out in the latest Plan. Companies op-
erating in China, regardless of background,
must consider their operations in relation to
the principles and ensure they articulate how
they contribute to China’s development ob-
jectives.
The power of Xi
Unlike previous lianghui that serve as the platform for
the premier, this year’s lianghui diverged from proto-
col to include significant focus on President Xi Jinping
and his own statements. This is not just a signal of Xi’s
position at the helm of the Party, but importantly the
increasingly visible role of the Party in the government
process.
Anti-corruption
The anti-corruption drive will con-
tinue. This stopped being a cam-
paign long ago and is now part of
the broader new normal envi-
ronment. Past behavior that was
regarded as the status quo is no
longer tolerated, regardless of po-
sition or background.
Urbanization
At the end of last year 56% of citizens were
living in urban areas. By the end of the next
Five-Year Plan this is projected to increase to
more than 60%. Urbanization is where China
“will find the greatest potential for domes-
tic demand and the most powerful force for
sustaining economic development” stated
Premier Li at the lianghui. Yet the scale of ur-
banization is daunting with some 100 million
people expected to move to cities in the next
five-years producing strains on cities and on
the communities the newly urbanized have
left.
Poverty alleviation
The authorities vowed to move the remain-
ing 60 million citizens currently in poverty to
above the official poverty line by 2020. Tack-
ling these vast discrepancies in economic
development is a priority. Senior provincial
officials will now be evaluated and held ac-
countable for poverty alleviation under newly
issued performance measures.
Key takeaways
from this year’s
lianghui
Domestic priorities
Domestic objectives continue to trump for-
eign investors’ interests and as a result the
leadership team will remain strong advocates
of domestic industry interests and protect-
ing national security interests. This may lead
them to support policies that weaken overar-
ching reform goals.

Ever since the opening up and reform policies at the end of the 1970s, China has developed pol-
icy via experimentation that is akin to “crossing the river by feeling the stones”. At the Third
Plenum in November 2013 the leadership noted that the country must be prepared to pass through
an area of deep water – a period that will challenge the tested method of crossing areas of water
by feeling the stones.
The transition the country is going through is critical. It is important for the global economy that
China makes the journey to the other side because in this interconnected global environment a
failure to get there will have broader implications.
Foreign companies operating in China will not be immune from the changes. If the country suc-
ceeds in growing at 6.5% per annum through the 13th Five-Year Plan period this will add more than
the current economy of Germany to the global stage. Opportunities remain. Yet challenges are
very real. Past success will not guarantee future success.
There is no special manual or ‘one size fits all’ strategy that companies can adopt that will ensure
success over the next five years. Beyond ensuring that there is a viable customer base, there are
some general principles to consider.
• Pay close attention to the real intent of the leadership team’s policies and the changing
environment and be ready to adapt.
• Ensure that your business in China is working ‘with the grain’ of the Chinese political en-
vironment and that your business is thoughfully aligned with China’s objectives.
• Be clear what your business is contributing to China—and have a plan to communicate that
contribution.
• Proactive engagement with key stakeholders and influencers in China should be in place.
Companies must pay close attention to the intent of the leadership team’s policies and the chang-
ing environment and adapt accordingly.
This note aims to set out in more detail what the outcome of the lianghui means for businesses
operating here.
Overcapacity
The steel and coal sectors will be the first to
be tackled. Zombie enterprises will be shut or
restructured. Observers’ estimate as many as
five or six million workers will be impacted as
overcapacity is cut. While far less than the 28
million impacted in restructurings in the late
1990s, redeploying these workers into new
industries will not be simple.
Supply-side reform
The latest economic principle of supply-side
reform calls for the scaling back the role
of government in business to allow market
forces to flourish. But, the concept remains
vague. Lianghui delegates referenced a varie-
ty of activities they felt delivered on Xi’s new
economic model. There is a risk that without
clarification local authorities will continue to
drive investment in the name of supply-side
reform.
Managing inequality
The development of China over the last 30
years has left significant social and economic
disparities. Ultimately the Party cannot sus-
tain the popular mandate if the majority has
failed to benefit from the reform agenda. As a
result language used by Xi Jinping focuses on
poverty reduction and addressing the masses.
Mounting debt
The authorities have avoided the significant
stimulus used during the 2008 financial cri-
sis, but to meet growth targets in the current
climate may still require some level of stim-
ulus. This risks more wasteful projects and
rising debt. At the corporate level, People’s
Bank of China governor Zhou Xiaochuan not-
ed over the weekend that corporate lending as
a ratio to GDP had become too high with some
estimating it now stands at 160% of GDP.
Devolve power to local
authorities
As the central authorities reduce red tape
more powers are being passed to local au-
thorities. The success of the reform agenda
will require uniform execution down to the
local levels. History has shown a risk that lo-
cal authorities do not execute with uniform
conviction when times get tough.
Vision to reality
Real action needs to be taken before the
authorities can really make a change to the
course of China’s development. More than
70 policies have been promulgated since the
Third Plenary of the Party’s Central Com-
mittee in 2013, and more will follow with the
13th Five-Year Plan on reform programs in
specific areas. In addition to the political
will, there needs to be a mechanism to make
sure that words on the paper are faithfully
implemented.
Issues to be
addressed
during the 13th
Five-Year Plan

The 13th
Five-Year Plan:
Achieving the
2020 vision
In 2012 at the 18th Party Congress, the authorities unveiled a vision that by 2020
China will have become a “moderately prosperous society in all respects” and
doubled 2010 GDP and per capita income. The recently approved 13th Five-Year
Plan is intended to get us to the 2020 vision and is
• centered on “finishing building a moderately prosperous society in all
respects”
• “designed to address serious issues such as unbalanced, uncoordinated,
and unsustainable development”
• structured “to promote innovative, coordinated, green, open, and shared
development”.
The 13th Five-Year Plan (2016-2020) was approved on March 16th, 2016 with 2,778
delegates voting in favor, 53 against, and 25 abstentions (by coincidence 2,778 vot-
ed in favor of the 12th Five-Year Plan). The full text of the plan is now available
in Chinese.
The Five-Year Plan system defines China’s social and economic development ob-
jectives and is a core pillar of the state planning system that has guided the coun-
try’s development since the first Five-Year Plan in 1953. In the 12 months leading
up to the issue of each plan a significant amount of behind the scene work is un-
dertaken across the Party and government at central and local levels.
Ahead of the submission of the 13th Five-Year Plan, Premier Li stressed that this
latest Plan should provide “reasonable targets and feasible implementation meth-
ods” while highlighting the need to promote “innovative, coordinated, green,
open, and shared development” as well as structural reforms.
The goals
Some of the key goals for the
next five-years outlined in the
plan include:
Economy: Grow the economy
at an average annual rate of at
least 6.5%. By 2020, the coun-
try’s GDP will exceed RMB 90
trillion doubling the 2010 GDP
and per capita income.
Innovation: Innovation-driven
development is highlighted as a
priority and investment in R&D
will increase from a targeted
2.2% in the 12th Five-Year Plan
to 2.5% over the next five-years
(the achieved increase during
the 12th Five-Year Plan was
2.1%). The contribution of sci-
entific and technological ad-
vances toward economic growth
should reach 60%.
Role of the Market: The mar-
ket must play a decisive role in
resource allocation, while the
government will play a bet-
ter role to facilitate the market
and to be prepared to intervene
when there is a potential crisis.
Employment: Create 50 million
new urban jobs.
Urbanization: By 2020 around
60% of China’s citizens should
be living in urban areas and 45%
of citizens should be registered
as permanent urban residents.
To support this, urban residen-
cy should be granted to around
100 million people with rural
household registration living in
urban areas.
Poverty: Move all citizens out of
poverty (approx. 60 million) hav-
ing reduced the number of rural
residents living in poverty over
the last five-years by 100 mil-
lion. Highlighting the diversity
of challenges facing the country,
over the last five-years over 300
million rural residents gained ac-
cess to safe drinking water.
Health: Build a “healthy China”
and increase average life expec-
tancy by one-year from 75.8 in
2015.
Infrastructure: Increase the
length of high-speed railways
in service to 30,000 kilome-
ters and link more than 80% of
large cities in China with high-
speed railways. Build or up-
grade around 30,000 kilometers
of expressways, and achieve full
broadband coverage in both ur-
ban and rural areas.
Environment: Prevent and con-
trol air, water, and soil pollution
while intensifying ecological
conservation and restoration.
The air quality of cities at and
above the prefectural level
should be good or excellent for
80% of the year and the days
with severe pollution should re-
duce by 25%. Energy consump-
tion, CO2 emissions, and water
consumption per unit of GDP
should reduce by 15%, 18% and
23%, respectively. Li Keqiang
stated all must work to build “a
Beautiful China where the sky is
blue, the land is green, and the
water runs clear”.

The role of
market forces
The 13th Five-Year Plan contin-
ues to build on the role of the
market in furthering econom-
ic transformation. Li Keqiang
stressed that “development re-
lies on reform and opening up”
and that “it should be ensured
that the market plays the de-
cisive role and the government
improves its role in the mar-
ket”.
The premier noted at the start
of the meetings that business
start-ups had increased signifi-
cantly and that last year approx-
imately 12,000 new businesses
were started each day—repre-
senting a 21.6% year-on-year
increase—driving employment
and innovation. He highlighted
that last year the government
cut the number of items which
require government approval
for new business registration by
85%. Li also stressed the impor-
tance of empowering graduates
to create their own businesses.
In another sign of the role of
market forces—this year the
premier noted the importance
of the role of remuneration to
improve the performance of key
sectors. He stressed the need to
“deepen the reform of the en-
terprise personnel management
system and explore the possi-
bility of establishing remuner-
ation systems for senior rank-
ing personnel and corporate
executives that are compatible
with competitive selection and
recruitment”. This was drawn
out later in the Premier’s Work
Report when he noted that they
“will establish human resource
and remuneration systems suit-
ed to the medical sector to mo-
tivate medical practitioners and
protect their enthusiasm”.
To boost innovation greater au-
tonomy will be given to univer-
sities and research institutes
and red tape will be cut in the
management of research pro-
jects—thus allowing the market
to play a stronger role in influ-
encing the direction of innova-
tion. In parallel, new policies
will be put in place to financially
reward innovators by allowing
them to benefit from the com-
mercial success of their innova-
tions.
SOE reform and
the role of private
business
SOEs a cornerstone of the
economy
China’s state owned enterprises
(SOEs) employ approximately 37
million citizens and the 156,000
SOEs (106 at central level) ac-
count for roughly 40% of Chi-
na’s gross domestic product.
Reform of SOEs remains impor-
tant. Yet the role of the public
sector will continue to be crit-
ical and there is no step back
from the position that the ba-
sic economic system depends
on public ownership as a cor-
nerstone of its long-term suc-
cess. As such, the language Li
Keqiang used to describe the
reform drive was cautious and
focused on the need “to pro-
mote [SOEs’] development”,
“upgrade” them and “improve
their performance”.
Li noted that in the year ahead
the government will encourage
SOEs—especially those at the
central level—to make struc-
tural adjustments so that some
will be developed through inno-
vation, others will be reorgan-
ized or merged, and others will
exit the market. To improve the
caliber of staff they will make
recruitment competitive, seek
professional managers, adopt
mixed ownership, and introduce
employee equity.
In addition, to improve the
competitive capabilities of the
SOEs the authorities will move
to quickly relieve them of their
obligations to operate social
programs and enable them to
become leaner and more com-
petitive.
China’s State Council an-
nounced in September last year
that by 2020 it will implement a
new SOE environment that will
allow foreign companies to own
minority stakes in government-
Achieving reform
and growth
The current administration
enters the 13th Five Year Plan
period knowing that the years
between now and 2020 will be
pivotal for the future of China’s
economy and its development.
But, as ever in China, they are
faced with juxtaposed impera-
tives: maintaining an acceptably
high level of growth and contin-
uing to reform an imbalanced
economic model while main-
taining stability and minimizing
any pain.
A key question observers were
asking leading into this year’s
lianghui was whether critical re-
forms would be delayed as the
government sought to reinvig-
orate the economy.
One of the most watched data
points is the economic growth
target. This year they broke
with tradition. This has his-
torically been a rough target—
for example the 12th Five-Year
Plan targeted “about 7%”. For
the 13th Five-Year Plan a floor
has been introduced with a tar-
geted annual growth rate of “at
least 6.5%” during the five-year
period. For the coming year a
growth range of 6.5% to 7% has
been set.
The new floor—6.5%—is the
lowest target for 25 years and
marks the second consecutive
Five-Year Plan in which China
has lowered its target by half a
percentage point. In addition,
the decision to provide a range—
even if it is an extremely narrow
range—for this year’s national
growth has been interpreted as
a signal to local governments
not to focus on top-line growth
at the expense of other key pri-
orities—e.g. restructuring or
the environment.
Ontheotherhand,scepticsargue
that growth of anywhere north
of 6.5% implies foot-dragging
on crucial reforms or, worse, an
entrenchment of structural is-
sues such as rampant indebted-
ness and inefficient use of cap-
ital. The fact that Beijing has
set itself such a target shows it
doesn’t have the stomach for
genuine reform, they claim.
A more balanced view is that the
government, while committed
to (economic) reform in the long
run, is wary of the impact too
sharp a slowdown could have
on unemployment—currently
at what is considered an accept-
able level—and on the ability of
business and local governments
to finance their operations. For
that reason, while radical mon-
etary policy such as that which
ultimately loaded the system
with debt post-2008 is out of
the question, Beijing will allow
itself a certain degree of fiscal
flexibility.
Nonetheless, the obstacles lying
in the way of fundamental eco-
nomic transformation are still
there. China’s highly indebted
local governments will contin-
ue to find it hard to generate
cash and growth— even at more
modest levels—without rely-
ing disproportionality on land
and property sales. SOEs, many
(although not all) of which are
highly inefficient and actively
stifle economic progress, will
remain largely untouched (and
may be asked to absorb unem-
ployed workers from declining
sectors of the economy). Levels
of government and corporate
debt will likely get worse before
they get better.
Still, when steady growth in ser-
vices, consumption and high-
end manufacturing are taken
into account, the Five-Year Plan
growth target seems achievable
and a hard landing seems un-
likely if the words in the plan
can be faithfully translated into
actions. Beijing will continue to
give the economy an addition-
al fiscal or monetary kick when
needed, and the overall reform
trend should continue. Sooner
or later, though, there needs to
be a sign that the toughest ele-
ments of reform are being tack-
led. This could start during this
Five-Year Plan but it may not be
able to complete before 2020.
The question is whether Chi-
na can keep the wheels straight
long enough to step on the ac-
celerator.
Much has been written about
China’s slowing growth. The
authorities are cognizant of the
concern and have pointed out
that “every percentage point of
GDP growth today is equivalent
to 1.5% of growth five-years ago
or 2.5% growth 10 years ago”
and that “the larger the econo-
my grows, the greater the diffi-
culty of achieving growth”.
Growth in the
slowing economy
Some observers have spo-
ken with alarm at the slow-
ing growth of China—yet
this has been a long planned
and anticipated trajecto-
ry. In the mid-2000s when
talking with officials, many
would lament at the chal-
lenge of shifting the econ-
omy to a new growth mod-
el that had more diversity
and was equipped for the
eventuality that the coun-
try would not need as much
infrastructure investment.
Impact to the global economy
Much has been written about China’s slowing growth. The
authorities are cognizant of the concern and have pointed out
that “every percentage point of GDP growth today is equivalent
to 1.5% of growth five-years ago or 2.5% growth 10 years ago”
and that “the larger the economy grows, the greater the diffi-
culty of achieving growth”.
If China achieves its goal of growing at least 6.5% per annum
over the next five-years it will add more than the total 2014
GDP of Germany, the world’s fourth largest economy, to the
global economy.

owned companies, classify SOEs
into two separate baskets—one
for-profit entities and the other
focused on public welfare, and
that supervision over State-
owned assets will be improved.
Although SOEs will now be open
for more foreign and domestic
equity investments under the
reform, their impact on gov-
ernance will be limited since the
Chinese government will retain
at least 51% ownership.
When Xi Jinping came to office
many opined he would intro-
duce an aggressive SOE reform
drive while promoting the role
of private business. In the years
since some have expressed dis-
appointment at the speed of the
reform drive. However, there
is no single action that will re-
form the system, and as this
year’s meetings showed, we are
witnessing reform via multiple
strategic (even if sometimes
small) steps.
The slow progress is due large-
ly to political entrenchment.
Overcoming vested local inter-
ests who rely on SOEs for the
majority of their income, tax
revenues, and local employ-
ment is often a step the central
government finds it difficult
to make. A deep seated belief
that any loss of control over the
economy could introduce eco-
nomic or political unpredicta-
bility is resulting in SOE reform
inertia.
Supporting private
business
During the lianghui, the author-
ities reaffirmed the importance
of the private sector. Xi Jinping
joined a group discussion on
March 4th with CPPCC delegates
where he stressed that the pri-
vate sector and the state sector
both have an integral role. He
noted in a lengthy speech the
importance of protecting private
property rights and that gov-
ernment maintains a “close”
and “clean” relationship with
business. He also criticized of-
ficials who do not address the
needs of private business for
fear of being considered corrupt,
and at the same time, urged pri-
vate businessmen not to engage
in illegal activities for its near-
term benefits.
He also admitted difficulties
that the private sector has been
suffering because of the insuf-
ficient and inconsistent imple-
mentation of policies.
In an unusual move that reit-
erates the critical importance
of resetting the role of private
business, the full script of his
speech was released on official
media the next day.
In the following days Li Keqiang
also emphasized that the gov-
ernment would protect property
rights regardless of the origin of
the ownership. In his working
report, he also called for severe
punishment to activities that
infringe the legitimate rights of
private companies and private
businessmen so as to establish
a fair, just, transparent and sta-
ble legal environment in which
companies of any ownership
will be able to develop.
Though the authorities have al-
ways claimed that the private
sector is an indispensable part of
China’s economic environment,
it is rare for the top leadership
to have given a speech dedicat-
ed to reassure the private sector
businesses of their rights.
12th Five-Year Plan:
How did China do?
As we focus on the next five-years, it is worth reflecting on how the country feels it did with the goals
set out in the 12th Five-Year Plan. The goals in each Five-Year Plan typically build on the goals of
the past—in many ways building on the foundation of the past.
Perhaps not surprisingly, officials gave themselves a pat on the back in relation to achieving the goals
laid out in the 12th Five-Year Plan. At the start of March the State Council noted that most goals set at
the beginning of 2011 had been accomplished with many accomplished ahead of schedule and exceeding
their targets. Regardless of whether one believes the measurement of each accomplishment, it is clear
that the system focuses extremely diligently on achieving the overarching goals laid out in the Plan.
Some of the big goals over the last five years included:
• To grow the economy over the 12th Five-Year Plan by about 7% (down from about 7.5% dur-
ing the 11th Five-Year Plan). The official position—the country grew 7.8% over the Five-Year
Plan period.
• To increase the proportion of the service sector as a proportion of GDP to 47%. At the start of
this year’s meeting Li Keqiang noted the service sector now represented 50.5% of the econo-
my.
• To increase urbanization from 47.5% to 51.5%. At the end of last year 56.1% of citizens were
living in urban areas.
• To increase investment in R&D to 2.2% of GDP. The final increase was 2.1%.
• To expand healthcare access and expand basic medical insurance to cover all urban and rural
residents. Basic health insurance has now been expanded to achieve complete coverage.
• To increase the proportion of non-fossil fuels in primary energy consumption to 11.4% while
reducing energy consumption and CO2 emissions per unit of GDP by 16% and 17%, respective-
ly. At the end of last year non-fossil fuels represented 12% while energy consumption and
CO2 emissions per unit of GDP were reduced by 19.7% and 18.2%.
• To create 45 million new urban jobs. In the end 64.3 million new jobs were created.
• To increase the per capita disposable income of urban residents and the per capita net income
of rural residents by an annual average of over 7% in real terms. Urban residents’ income
increased 7.7% while those in rural communities increased 9.6%.
• And, to continue the commitment to make “institutional changes to end the excessive con-
centration of power and lack of checks on power, and resolutely prevent and punish corrup-
tion”.

What topics
dominated
public
discussion?
To find out what topics mattered most to the public our Brunswick Insights team reviewed news re-
ports, social media conversations on China-specific channels such as Weibo and international social
networks Twitter and Facebook, and news websites and blogs.
In total more than 330,000 reports, conversations, and blogs were reviewed that were published or posted
between February 22nd and March 16th.
Perhaps not surprisingly, the most significant topic in China and internationally was the state of the Chi-
nese economy. Beyond economics, international media focused on foreign policy while Chinese media
promoted topics related to social wellbeing.
On Chinese social media, which is more indicative of general public opinion, wellbeing and social issues
were discussed almost as much as the economy. Within this, education was the topic of almost half of all
discussion. The environment and corruption were among the topics that featured more in social media
discussion than in official Chinese news coverage.

The context:
drivers
influencing
the 13th
Five-Year
Plan
Provincial
diversity
A country the size of China is
home to many markets—and as a
result differing levels of growth.
Each province has already dis-
closed its own growth targets
for the 13th Five-Year Plan. Six
provinces followed the national
model and chose to adopt a range
in their own 13th Five-Year Plan
growth targets. Only three prov-
inces (Heilongjiang and Liaon-
ing in the northeast and Shanxi
in north China chose to target
growth below the new nation-
al goal with the vast majority of
provinces still targeting growth
at 7% or higher.
China’s changing
demographics
Declining birth rates, a peaking
of the working population last
year, and an aging population are
critical demographic challenges
facing China that risk it getting
old before it gets rich.
The relaxation in the one-child
policy over the last few years has
been designed to tackle the de-
clining birth rate which dropped
from 2.5 children in 1990 to 1.7
in 2010. Even with the relaxa-
tion of the policy, forecasts show
that it will have little impact on
demographic structure, as fertil-
ity rates are more fundamentally
shaped by economic and cultur-
al factors (EIU, 2014). According
to the forecast, the lifting of all
birth restrictions would increase
the total population by only
around 25 million against the
base forecasts by 2030.
Many of the goals laid out in the
13th Five-Year Plan attempt to
tackle the middle income trap
challenge—a situation where
a country loses its competitive
manufacturing ability due to ris-
ing costs (e.g. wages) before it
has transitioned to a developed
market economic model.
China’s working age (15-65 years
old) population is expected to
shrink from 2015, after peaking
at approximately one billion. In
the meantime, the population
of those aged 65 years or older
will expand rapidly, more than
doubling in size to 257 million in
2030, from 119 million in 2010.
Li Keqiang emphasized the im-
portance of raising basic pension
benefits for retirees and launch-
ing pilot comprehensive reform
of the elderly care service indus-
try. There are also plans to delay
the retirement age, from 60 for
men and 55 for women to 65 for
both.
Moreover as rural-to-urban
migration continues in China
the urban population is fore-
cast to reach nearly 940 million
by 2030. This bodes well for the
government’s plan to rebalance
the economy towards private

consumption but is tempered by
the need for training for millions
of migrant workers moving into
the service sector and jobs oppor-
tunities for the 7.65 million new
university graduates each year,
not to mention the environmen-
tal impact on urban centers.
Seeking job
opportunities
China has shifted from a pre-
dominantly agrarian society to
a manufacturing powerhouse in
the last three decades. As the
country moves forward with its
latest transformation and “in-
dustrial upgrading” there is an
important shift to the service
sector along with a drive towards
“intelligent manufacturing”. Li
Keqiang’s Work Report acknowl-
edged the “painful adjustment”
process of replacing old drivers
of growth with new ones, which
requires relevant and adequate
training opportunities and jobs.
The structural transformation
the country is going through
combined with the changing de-
mographics of the country pres-
ent significant challenges.
Over the next five-years the
government aims to create 50
million urban jobs—roughly the
population of South Korea. The
creation of new employment
opportunities is critical to ab-
sorbing the approximately seven
million new university graduates
who enter the job market each
year and the increasing numbers
of citizens moving into urban ar-
eas.
At the same time the authori-
ties are grappling with a slowing
economy and overcapacity that
must be reduced. In this envi-
ronment a significant number of
people will lose their jobs. Some
will have the right skills to find
new employment, while a large
number of others will need sup-
port and training. Yin Weimin,
Minister for Human Resources
and Social Security, said Chi-
na expects to lay off 1.8 million
workers in the coal and steel in-
dustries, sectors that have been
earmarked as the first sectors
that must address overcapacity.
Third party estimates are as high
as five or six million, and RMB
100 billion has been set aside for
restructuring costs. Meanwhile,
in September last year Xi Jinping
announced that 300,000 military
personnel will be demobilized
by the end of 2017. In a reflec-
tion of the contradictions in the
reform agenda, the government
announced at the end of Decem-
ber that state-owned companies
must help absorb soldiers laid off
due to military reforms.
Changing
behavior - part of
the new normal
The authorities’ efforts to tackle
corruption continue—last year
more than 54,000 officials were
investigated for bribery, dere-
liction of duty or other related
crimes and investigations were
conducted into 90 central gov-
ernment officials with 42 trans-
ferred to the judiciary for crimi-
nal investigations.
Throughout the meetings of-
ficials continued to stress that
there will be no let-up in the
work being taken to reduce, if not
eliminate, corruption.
The crackdown on graft is part of
the ‘new normal’ and in the case
of anti-corruption has been too
sustained and wide-ranging to be
considered a fleeting campaign
or purge. It is aimed at improving
the system of governance and
weakening the power of vest-
ed interests that are blocking or
changing the course of reform—
and addressing a genuine public
grievance. However, some criti-
cal decision-making in govern-
ment has been slowed as officials
seek to ensure consensus and as
the anti-corruption drive has an
impact on the bureaucracy.
New self-discipline rules intro-
duced last year, which apply to
everyone from government of-
ficials to SOE managers and uni-
versity chancellors, include pro-
visions for disciplinary penalties,
while the Central Commission
for Discipline and Inspection now
publishes the names of senior
offenders on a monthly basis (in
February 3,180 officials, includ-
ing three at provincial and min-
isterial level, were disciplined
for violating thrift and integri-
ty rules). The result has been a
gradual realization among cadres
that graft is an increasingly risky
thing to indulge in.
Beyond the moral case, the ad-
ministration’s stance on corrup-
tion serves two very pragmatic
purposes. First, Beijing under-
stands that graft is perhaps the
biggest potential source of public
discontent and therefore under-
mining the Party’s rule. Second,
as the central authorities see it,
collective and individual disci-
pline within the Party are funda-
mental to the long-term success
of reforms.
The authorities are being une-
quivocal that behaviors that were
once tolerated will no longer.
Both foreign and domestic com-
panies operating in China must
consider this the new norm and
take it as a clear directive from
the authorities regarding what is
expected of companies and indi-
viduals.

Cleaning up the
environment
Environmental issues have shot
up the agenda under the Xi ad-
ministration, driven by growing
public discontent at the state of
the nation’s air, water and food
supplies and by a recognition
that environmental degradation
is a serious threat to long-term
economic development.
After a year in which China sur-
prised the world by promising
a peak in carbon emissions by
2030, air pollution was front
and center in the 13th Five Year
Plan’s environmental pledges.
Calling for air quality in large
cities to be “good or excellent
for 80% of the year,” Premier
Li set the aim of reducing water
consumption, energy consump-
tion, and carbon dioxide emis-
sions per unit of GDP by 23%,
15%, and 18%, respectively over
the next five years. Other prom-
ises included further reductions
in the density of harmful fine
particulate matter and an out-
right ban on commercial logging
in natural forests.
Perhaps one of the more nota-
ble shifts in tone in Premier Li’s
speech was a relative emphasis
on personal and collective re-
sponsibility. Having talked of
the need to “encourage green
ways of working and living,” Li
made a direct call to the public
with his statement that “Every
one of us has an obligation to
protect the environment-we
call on every member of soci-
ety to act and contribute to the
building of a Beautiful China.”
As a resonance to the premier’s
call, the Supreme Procuratorate
will support public interest ac-
tions against violation of envi-
ronmental laws.
While growing environmental
consciousness within both gov-
ernment and society is encour-
aging, China’s plethora of en-
vironmental challenges will be
tough to solve within the next
several decades, let alone during
this Five-Year Plan. Residents of
first- and second-tier cities can
hope to see improvements in air
quality and noise pollution, but
it is difficult to see how less de-
veloped areas (which also tend
to be less well-governed) can
reconcile better environmental
stewardship with growth.
The geo-
political
environment

While China’s position on
major regional issues
makes big news abroad, as ever
it featured some way down the
list of priorities at this year’s
meeting. At its routine press
conference, the Ministry of For-
eign Affairs delivered its stand-
ard lines on peaceful develop-
ment, while Li Keqiang work
report strayed just briefly from
domestic and economic con-
cerns to stress China’s com-
mitment to “participating con-
structively in solving global and
sensitive issues”.
Beyond the platitudes, though,
the current administration be-
gins 2016 facing an increasing-
ly complex array of geopolitical
issues. Relations with the U.S.
and regional neighbors over is-
sues such as the South China
Sea and Korean Peninsula secu-
rity remain strained. And while
others question China’s com-
mitment to free trade and pre-
venting commercial espionage,
Beijing remains convinced that
Washington and its allies are
more concerned with contain-
ing China than building genuine
trust.
Despite this rather fraught
backdrop, trade and invest-
ment will remain a key tool for
improving ties with other na-
tions. Forums like the Asian In-
frastructure Investment Bank,
which got off to a flying start
last year, should facilitate genu-
ine collaboration. And Beijing’s
resolve to use its Belt and Road
Initiative (see map above) as a
means of growing both its eco-
nomic and diplomatic influence
should not be underestimated.
In his keynote speech, Premier
Li emphasized continued im-
portance of trade and invest-
ment, identifying services and
manufacturing as areas where
FDI restrictions will be further
“relaxed,” while pledging sup-
port for Chinese companies
seeking to export goods and ser-
vices. Such talk alone is unlike-
ly to convince those who have
complained that China’s com-
mitment to openness has not
been matched by genuine mar-
ket access. But while the years
of generous tax policies and
eye-watering margins are gone,
there is good money to be made
for companies whose expertise
can make a telling contribution
in priority sectors.
Hong Kong,
Macau & Taiwan
Mainland China’s image in
Hong Kong has been strained in
the past couple of years. While
the protests against Beijing’s
perceived interference in the
autonomous region’s political
affairs have subsided for now,
tensions continue to bubble un-
der the surface. Relations with
Taiwan, which recently elected
the traditionally pro-independ-
ence Democratic Progressive
Party (DPP), could also conceiv-
ably come under strain.
For its part, the Chinese govern-
mentisstickingtoitslongstand-
ing position. In his work report,
Li Keqiang reiterated Beijing’s
commitment to implementing,
“to the letter and in spirit,”
the ‘one country, two systems’
principle vis-a-vis Hong Kong
and Macau. And when asked
about the relationship during Li
Keqiang’s press conference on
March 16th he opined that Hong
Kong will maintain long-term
stability and prosperity before
opining that “the Hong Kong
SAR government has the abil-
ity and Hong Kong people have
the wisdom to properly han-
dle the complex issues in Hong
Kong”. He concluded by saying
that “the central government
will give full support to any pro-
posal from the SAR government
that helps maintain Hong Kong
long-term stability and pros-
perity and contributes to the
well-being of people in Hong
Kong”.
Regarding the outlook for
cross-Taiwan Strait relations,
Li emphasized at his press con-
ference that so long as the new
government in Taiwan adhered
to the “one China” policy there
would be no issues.
The trend towards increasing
reliance of other regions on
mainland China, economically,
if not politically, is unlikely to
change in the near term. But
Beijing is acutely aware of the
potentially destabilizing effect
of dissatisfaction in Hong Kong,
and will be watching carefully
when the DPP’s Tsai Ing-wen
assumes office in May.

Sectors
in focus Healthcare
Reform of the public hospi-
tal system and roll-out of basic
medical insurance was promi-
nent during the 12th Five-Year
Plan as the authorities sought
to “deepen reform of the phar-
maceutical and healthcare sys-
tems”. From no national insur-
ance five ago, all citizens now
have access to basic health in-
surance.
Creating a healthy China was
raised at multiple points in the
lianghui and Li Keqiang noted
that health is at the root of hap-
piness.
To support a healthy China,
the focus on access contin-
ues. To alleviate pressure on
large hospitals, resources at
smaller healthcare facilities
in urban and rural areas are to
be increased. An initial batch
of large hospitals will adopt a
modern online appointment
reservation systems. The de-
velopment of private hospi-
tals (including those with for-
eign investment) will continue.
The premier also stressed the
importance of improving the
skills of general practitioners
and pediatricians with more
training and creating a human
resource and remuneration sys-
tem to motivate and attract the
best medical professionals.
Ensuring affordability has been
added to the agenda. In 2011 the
authorities stressed the need to
“genuinely cut drug prices”.
Which sectors will prosper?
As China transitions its economic growth model from one built on infrastructure, manufacturing
and export to one that leverages services, consumer spending and more advanced manufacturing,
companies that did well in the past have no guarantee of the same opportunities in the new phase.
Equally, in the new environment there are some sectors that can expect significant growth opportuni-
ties.
In his meeting with the press on March 16th Premier Li noted that he’d read a foreign report saying that
a “visit to a heavy industry left the impression of depression, while the next stop to a technology park
left the impression that the economy is growing at a double-digit rate”, going on to note that “hope
and challenges coexist”.
It is clear from the 13th Five-Year Plan that low end products in such heavy industry as iron and steel,
coal mining, aluminum, glass panel and cement will suffer from the initiatives to cut excess overcapac-
ity and changing demand. The Plan has outlined an “innovation-driven development strategy” with a
desire that “industries must be propelled toward medium-high end”. By the end of the Plan “advances
should be made in core technologies such as information communication, new energy, new materials,
aviation, biological medicine and intelligent manufacturing”. While achieving this, protecting the en-
vironment remains critical.
Beyond understanding the direction of the economy and what sectors are being prioritized, it is also
important to note that opportunities over the next five-years will differ regionally within China as well
due to the vast differences in economic development that prevail across the country.
Some of the sectors that will see opportunities range from film, entertainment and leisure, healthcare,
and education to services, environmental, and R&D based industries. Below we look at a few key sectors.

troduced to the stock market,
but maintained that the regu-
lator would step in “decisive-
ly” in the event of further mar-
ket turmoil. He also cautioned
that while a registration sys-
tem to remove barriers to pub-
lic listings was in the works,
it would take time to design a
fully-fledged regulatory frame-
work to support the launch of a
registration-based IPO regime.
Central Bank Governor Zhou
Xiaochuan played down con-
cerns over capital flight, stress-
ing the value of the yuan was re-
turning to “normalcy,” and said
the government would continue
to look at ways to ensure regu-
lation “solves problems” and
“increases efficiency” in the
capital markets.
There is a sense that China’s
leaders are gradually getting to
grips with the role finance needs
to play in the Chinese econo-
my, but we are some way from
foreign players being allowed
anything like a prominent role
in the sector. While improving
access to capital for corporates
and allowing a greater role for
private financial institutions—
notably in Internet finance—are
priorities, creating opportuni-
ties for foreign firms to increase
their exposure to China is not.
And Premier Li sent a strong
signal in his work report with
his twice-repeated assertion
that “the job of financial insti-
tutions is to provide better ser-
vices to the real economy”.
In the long term, we should see
less volatility in the markets
and greater sophistication from
regulators, but it won’t be an
easy journey.
Technology
Innovation is the primary driv-
ing force for development and
must occupy a central place in
China’s development strategy,
stated Premier Li at the start of
this year’s lianghui. He noted
that it was critical the country
adopt a strategy of “innova-
tion-driven development” to
promote “new growth engines”
across areas such as telecom,
clean energy, medical tech-
nology, new energy, industrial
equipment, new material and
biotechnology. In parallel, the
Internet Plus strategy that was
introduced last year continues
to feature as a means to trans-
form and reinvigorate tradi-
tional industries as well as even
government services.
Speaking at the China Develop-
ment Forum following the end
of this year’s lianghui, Xu Sha-
oshi, chairman of the National
Development and Reform Com-
mission, promised foreign com-
panies equal treatment with lo-
cal companies. Yet many parts
of the technology sector contin-
ue to be challenging for foreign
investors.
The current innovation initia-
tives are in many ways an evo-
lution from the indigenous in-
novation policies that caused
concern among investors
roughly ten years ago. While
the phrase indigenous innova-
tion has largely disappeared,
the broad intent remains—a
strong desire to build domestic
technology capabilities.
In the technology space, Chi-
nese officials’ national security
concerns have led to a signifi-
cant tightening of regulations.
This ranges from the location of
data to the origin of hardware.
Those providing traditional and
social media services as well as
those in the Internet Content
Provider arena are also facing
an increasingly controlled envi-
ronment. This tightening is not
expected to loosen in the cur-
rent climate.
Yet only last year did pricing
return to the agenda at the li-
anghui with a call to “stop the
practice of charging more for
medicines to make up for low
prices for medical services” and
to “lower extortionate prices on
medicines”. This year there is a
renewed focus on “medical ser-
vice pricing reform and reform
in medicine distribution”. Ma
Xiaowei, vice-minister of Na-
tional Health and Family Plan-
ning Commission, noted that if
current pilot price negotiations
are successful then those drugs
may be included on the national
reimbursement list thereby in-
creasing patient access to previ-
ously high-priced medicines.
In addition to the measures
mentioned already—this year
Li Keqiang stressed the need
to speed up the development
of a safety monitoring system
for food and pharmaceuticals
thereby “reinforcing every line
of defense from the farm to the
dining table, and from the labo-
ratory to the hospital”.
Energy
In its last Five-Year Plan the
government vowed to revolu-
tionize the structure of China’s
energy sector, moving away
from an overreliance on coal to
include a higher proportion of
renewables and cleaner fossil
fuels in the energy mix. In the
plan’s 13th iteration, this trend
is set to continue.
Nonetheless, there remains a
tension between the need for
structural change and the need
to fuel development in inland
areas. While it has now put a
brake on coal development in
the eastern part of the country,
the government is following a
less strict policy in the interior,
recognizing the geographic im-
balance in clean energy infra-
structure and levels of economic
development.
In upstream oil and gas, there
are (optimistic) hopes that SOE
reform will allow market forc-
es to clean up so-called “zom-
bie enterprises” and create a
more efficient value chain in
which private Chinese and for-
eign players can have a great-
er—although still limited—
role. Meanwhile, a government
pledge last year to liberalize
pricing of oil, natural gas, and
electricity will hopefully create
better value for consumers and
downstream players.
Financial services
After last year’s financial mar-
ket turmoil, China’s leaders
were keen to use the lianghui to
convince the market that les-
sons had been learned. Premier
Li promised further liberaliza-
tion of interest rates, a more
“market-based” mechanism to
define the value of the yuan, and
steps to allow commercial banks
greater room to invest in small
businesses. Following mur-
murings that the much vaunt-
ed Hong Kong-Shanghai Stock
Connect had been a disappoint-
ment, the government promised
that an equivalent mechanism
connecting the autonomous re-
gion with the Shenzhen Bourse
would be in place by the end of
2016—theoretically offering
overseas investors another ave-
nue into the mainland.
Newly appointed China Secu-
rities Regulatory Commission
head Liu Shiyu told the press
that the widely derided circuit
breaker mechanism—the fail-
ure of which cost his predeces-
sor his job—would not be rein-

What next
Rising stars,
potential
contenders
At the end of next year Xi Jinping
will conclude his first five-year
term as head of the Commu-
nist Party of China (CPC). The
months ahead should begin to
give an early indication of rising
stars that may be contenders
to be elevated into more senior
positions at the 19th Party Con-
gress which is expected to be
held around October or Novem-
ber 2017. Some of those who
rise at the 19th Party Congress
can be expected to be in the sen-
ior leadership team for the 20th
and 21st Party Congress periods
(2022-2032).
At the 19th Party Congress
(2017-2022), we anticipate that
11 to 14 officials in the 25-per-
son Politburo and five members
of the seven-person Standing
Committee will retire. Only Xi
Jinping and Li Keqiang are ex-
pected to remain in the Standing
Committee. Based on current
rules and recent past precedent,
the General Secretary / Presi-
dent (Xi Jinping) and Premier (Li
Keqiang) are expected to serve
two five-year terms before re-
tiring from office at the end of
the 19th Party Congress in 2022.
Predicting whose political influ-
ence is rising or falling is chal-
lenging at the best of times. In
this current climate it is even
more challenging and there is
much speculation over who may
be contenders.
The most obvious candidates to
fill the vacant Standing Com-
mittee seats will be members of
the Politburo who do not retire.
Assuming the process remains
unchanged, of the current Po-
litburo members only two are
able based on age to serve in the
leadership team for two terms
beyond the 19th Party Congress
(2022-2032)—Hu Chunhua and
Sun Zhengcai. It remains far too
early to predict with certainty
the future of Hu or Sun.
Yet, it is possible that the seats
in the Standing Committee
could be filled by one or more
officials who are not currently
in the Politburo—similar to the
rise of Xi Jinping. Xi was a mem-
ber of the 16th Central Commit-
tee of the CPC (2002-2007), but
not a member of the Politburo.
He was elevated into the Stand-
ing Committee at the 17th Par-
ty Congress (2007-2012) before
taking the helm at the 18th Party
Congress in 2012. Xi’s rise into
the Standing Committee caught
many observers off-guard.
The successor in waiting to Xi
Jinping will most likely be a
member of the Politburo in the
19th Party Congress and even
more likely a member of the
Standing Committee. Based on
the last two transitions (Jiang
Zemin to Hu Jintao and Hu Jintao
to Xi Jinping) the future General
Secretary / President and Pre-
mier has shadowed the current
leadership team for at least one
five-year Party Congress cycle.
This phased transition is a crit-
ical approach to ensuring conti-
nuity and consistency in leader-
ship.
So—who are the contenders?
In the coming months we ex-
pect some provincial and min-
isterial positions to be rotated.
These appointments will give
early clues. Another question
on observers’ minds looking at
the future contenders—what
type of leader will Xi be after
he leaves his official positions?
Will he step away quickly and
hand the reins completely to a
new leader as Xi’s predecessor,
Hu Jintao, did? Or will he take a
more hands-on role and contin-
ue to exert influence?

What is the lianghui?
Lianghui (两会两会) means “two meetings” and is
the informal reference to the annual gathering
of the National People’s Congress (全国人民代表大会全国人民代表
大会) and the Chinese People’s Political Consul-
tative Conference (中国人民政治协商会议中国人民政治协商会议) which
is typically held during the first two weeks in
March.
What is the NPC?
The National People’s Congress (NPC) is the
highest legislative body in China and has sole
responsibility for enacting legislation in the
country. The NPC meets once a year in March
and enacts and amends basic laws relating to
the Constitution, criminal offences, civil affairs,
state organs and other relevant matters. When
the NPC is not in session each March, the Stand-
ing Committee of the NPC is tasked with enact-
ing and amending laws, with the exception of
basic laws that must be enacted by the NPC.
The NPC is also responsible for electing and ap-
pointing members to central state organs—in-
cluding the Standing Committee of the NPC, the
President of the People’s Republic of China (cur-
rently Xi Jinping) and the Premier of the State
Council (currently Li Keqiang). Based on nom-
inations by the Premier, the NPC is also respon-
sible for appointing China’s Vice Premiers, State
Councilors, and Ministers.
This is the Fourth Session of 12th NPC. The 12th
NPC was formed in March 2013 and will serve a
five year term. This year’s session was held from
March 5th to 16th with 2,943 delegates (2,986
were elected in March 2013).
What is the CPPCC?
The Chinese People’s Political Consultative
Conference (CPPCC) is a political advisory body
that consists of representatives from a range of
political organization, academia, business lead-
ers, celebrities, and other experts. The Nation-
al Committee of the Chinese People’s Political
Consultative Conference (中国人民政治协商会议全
国委员会会) meets on an annual basis at the same
time as the NPC.
This is the Fourth Session of 12th CPPCC. This
year’s session was held from March 3rd to 14th
with 2,214 delegates (2,237 were elected in March
2013).
What is the Five-Year Plan?
A relic of the planned economy, China’s Five-
Year Plan model provides a blueprint for eco-
nomic development in a mixture of overarching
goals and specific targets (such as GDP growth).
While market forces play an increasingly deci-
sive role in the Chinese economy, Five-Year Plan
targets are still an important yardstick by which
the government measures its own economic
performance. The latest Five-Year Plan, run-
ning from 2016 to 2020, is the thirteenth since
the Communist Party took power in 1949.
Political
Backgrounder

China’s Annual Political Gathering 2016

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