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13th November, 2013

A Review of the Third Plenary Communiqué
Deepening economic liberalisation a...
coordination between the centre and the provinces with the support of fiscal and
taxation reform. At the same time, the pu...
The Third Plenum marks the one-year anniversary of Xi Jinping’s ...
The Third Plenum takes place at an important juncture in China’s economic development....
framework” for the country's major institutions. The world will be watching with interest the
nation’s progress against th...
Fiscal Reform: Advancing Financial Services
The reforms indicated as being under consideration in terms of China’s economi...
Security and Stability: Strengthening Central Power
A quick glance at the social media reaction to any number of China’s t...
An online poll showed that social welfare issues, including equitable income distribution,
social security, healthcare, pr...
With real estate bubbles and rising food inflation continuing to be a major issue, an easing of
overall economic growth to...
However, the notable absence in the communiqué of significant reforms of state-owned
enterprises, especially central gover...
Moving into the next ten years, success for foreign companies in China will depend now
more so than ever on bei...
The Communist Party of China (“CPC”) was founded in 1921 and today ...
Brunswick is the global leader in financial and corporate communications, providing senior
counsel to clie...
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China Analysis - Third Plenary Session of the 18th Party Congress

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Brunswick’s team in China have put together an overview of some of the key take-aways from the Third Plenary Session of the 18th Party Congress. This is a critical meeting in the Chinese political cycle and the output from this specific meeting will influence the country’s economic development over the next five-to-ten year period. It also marks one year in office for Xi Jinping and the new leadership team.

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China Analysis - Third Plenary Session of the 18th Party Congress

  1. 1. CHINA & THE THIRD PLENUM 13th November, 2013 A Review of the Third Plenary Communiqué Deepening economic liberalisation and enhancing the role of market forces KEY TAKE AWAYS th th On 12 November, the Third Plenary of the 18 Central Committee of the Communist Party of China (“CPC”) concluded. The gathering marked the first anniversary of Xi Jinping taking office and provided critical insight into the developmental priorities of the leadership. The communiqué released at the close of the four-day meeting detailed a number of broad reforms designed to support sustained economic growth and address societal concerns. The communiqué reinforces a commitment to continuing to deepen economic liberalisation and enhancing the role of market forces, while maintaining centralised power. Many of the details contained in the communiqué cement directives and actions undertaken over the last year and fundamentally are evolutionary adjustments rather than revolutionary changes. In the weeks ahead more details will emerge from different ministerial and department level meetings and follow-up statements, in particular the release of the CPC Central Committee Decision on Major Issues Concerning Comprehensively Deepening Reform, while over the next four months the Plenary will be analysed and converted into policies that can be executed by the government. Between now and the National People’s Congress in March next year further detail and industry specific implications will become visible. In addition, th the overarching goals of the Plenary will filter into the development of the 13 Five-Year Plan (2016-2020), the creation of which is in its early stages. Key highlights from the Plenary communiqué include:  Economic Reform – Not Political: Economic administrative reform remains paramount as officials work to transform China’s economic growth model away from exports and fixed investment. Political reform is not on the cards. The CPC will act as the paramount designer, coordinator and supervisor to the proposed reform. For more information MEI Yan Senior Partner ymei@brunswickgroup.com St. John MOORE Partner smoore@brunswickgroup.com Rose WANG Partner rwang@brunswickgroup.com Gordon GUO Director gguo@brunswickgroup.com November 2013 www.brunswickgroup.com  Strengthening the Centre: At the same time, the Party will establish the Central Party Leading Group on Comprehensively Deepening Reform to design reform plans and to coordinate and supervise the implementation. The Party will continue to play a leading role in carrying out reforms decided at the Plenum.  Role of the Market: One of the core tenets to come out of the Plenary is that a greater emphasis will be placed on allowing the market to play a “decisive” role in the allocation of resources as opposed to merely a “fundamental” role, to use the terminology of the last decade. The communiqué stressed that the core solution to economic reform lies in defining a proper relationship between the government and the market. Market reform was one of the most mentioned concepts in the communiqué.  Changing Role of Government: The communiqué noted the importance of the role of government in the economy to adapt to match the developmental position of the country. The authorities will continue to reduce bureaucratic red tape and improve Page 1 of 13
  2. 2. coordination between the centre and the provinces with the support of fiscal and taxation reform. At the same time, the public should have the ability to scrutinise the use of power and “let power operate under the full glare of the sun”.  SOE Reform: It was agreed to place equal importance to the development of public and non-public sectors. However, the dominance of the public sector will remain and it was stressed that the basic economic system depends on public ownership as a cornerstone of its long-term success. The reform plan inferred SOE privatisation by saying that the development of mixed ownership will be proactively encouraged.  National Security: A State Security Council will be created to enhance the national security system and the country’s overall security strategy. Potentially modelled on the U.S. National Security Council, the Council will reinforce Xi’s central control.  Anti-Corruption: The endemic nature of corruption risks the legitimacy of the Party and long-term sustainable economic growth and innovation. The recent campaigns against officials and corporate conduct show no sign of subsiding and represent a new operating norm. The communiqué calls for restraining and coordinating power while also strengthening anti-corruption systems.  Urbanisation and Social Welfare: Emphasis was also placed on improving urban-rural relations and ensuring that people living outside cities have equal participation in the modernisation of the country. Commitments to land reform and granting more property rights to farmers were stressed, as were ensuring a fairer and sustainable social security system while deepening structural reform in the healthcare system.  The Environment: Environmental issues and ecological progress have been marked as vital to the people's wellbeing and China's sustainable development. The communiqué urged drawing a red line under ecological protection that would include leveraging market forces to effect change – such as with the implementation of a paid-for resource system. The Plenum set 2020 as a deadline for achieving “decisive results”. The date continues a th time frame set in 2006 at the Sixth Plenary Session of the 16 Central Committee of the Communist Party of China that set the goal to achieve “a harmonious socialist society” and th the conclusion of the 13 Five-Year Plan (2016-2020). Reaction to the communiqué since it was released has been mixed. Some have voiced disappointment about the lack of detail and that it was not ambitious enough in its reform agenda. The lack of detail is a product of the system and the interplay between the Party and the governmental apparatus. It is also important to bear in mind that in many ways the communiqué and statements coming out of the Plenary are as much intended for internal audiences within the Party and government as it is for external audiences. The CPC Plenary sessions are designed to set overarching goals or ‘mission statements’ that are then implemented at the government level. As a result there is a natural absence of the execution detail. November 2013 www.brunswickgroup.com Page 2 of 13
  3. 3. A YEAR IN REVIEW: A LOOK BACK AT THE FIRST YEAR IN OFFICE The Third Plenum marks the one-year anniversary of Xi Jinping’s rise to the helm of the Party when, unlike his predecessor, Xi took all key Party titles immediately. Two aspects have defined Xi’s first year in office: the launch of a range of initiatives to address key public concerns; and his consolidation of power across a broad range of interest groups. The new leadership team faces distinct challenges – from rebalancing the economy to tackling the fiscal and environmental consequences of the country’s investment-led growth model. Social pressures, among them soaring house prices, poor access to healthcare and education, environmental degradation, and unequal economic development, are significant. Meanwhile, trust in officials has waned following repeated instances of corruption. Defining themes of the last year: New Levels of Access: Xinhua published unprecedented levels of background into many of the senior leaders’ lives showing a glimpse of their family lives as “normal” people.  Man of the People: Xi moved quickly to end flowery speeches, empty talk or traffic controls (when senior officials are travelling).  The Southern Tour: In December, Xi sent a clear nod towards the market-oriented reforms initiated by Deng Xiaoping in 1992 by emulating Deng’s Southern Tour.  Road to Renewal and the China Dream: Xi has been forthright in his pledge to continue the “great renewal of the Chinese nation” and achieve the “China Dream”.  Battling Corruption: The new administration quickly launched an anti-corruption initiative focused on official abuse of power. The campaign has since touched executives at major SOEs, as well as private domestic and multinational companies. Officials Detained: In the last year at least 11 officials above the vice minister or governor level have been investigated and many more junior level officials have been detained.  Policy Framework Remains Intact: Pre-existing macro policies have remained in place. The government continues to prioritise policy stability.  Rebalancing the Economy: Chinese leaders have repeatedly called for a shift from a reliance on investment and exports to domestic consumption and services. They have encouraged quality over quantity and prioritised strategic emerging industries.  Administrative Reform to Continue: The new leadership has taken a number of steps to reduce excessive bureaucracy. The launch of the Shanghai Free Trade Zone formed part of these efforts to support growth via further market liberalisation.  Environment Prioritised: Environmental degradation and the public health impact of air, soil, and water pollution remain firmly on the political agenda. Economic Targets: Economic target for 2013 set at 7.5% per annum with inflation at 3.5%. Political Liberalisation – Not a Priority The last year has demonstrated that the new leadership team are committed to pushing greater levels of reform. However, none are political. Rather, over the last few months there has been increased emphasis on controlling information flows with the promulgation of new laws that quell the spread of rumours. Prominent commentators have been instructed to refrain from commenting on a number of sensitive issues, including universal values, freedom of speech, civil rights, crony capitalism, and judicial independence. Continuous Economic Reform The economic priorities of the new leadership remain implementing a proactive fiscal policy and a prudent monetary policy, maintaining policy continuity and stability, and adopting a more forward-looking, targeted and flexible policy approach. This is driven by an apparent consensus, even within the upper echelons of the Party, that failing to change the economic model today puts China’s longer-term growth in serious doubt. In other words, the Party has clear incentive to take action. November 2013 www.brunswickgroup.com Page 3 of 13
  4. 4. THE THIRD PLENARY SESSION IN DETAIL The Third Plenum takes place at an important juncture in China’s economic development. The fiscal and social issues currently facing China demand a more systemic and structured transformation to the very model China’s last two decades of growth has been largely driven by. The reform agenda and roadmap promulgated by the Central Committee during the Third Plenum covers a wide spectrum of policies but largely focuses on the social and economic role of the government, as well as defining the CPC’s mission over the coming decade as strengthening Party leadership. th The Third Plenary Session of the 18 Party Congress marked the first full year in office of the new leadership team and an important symbolic milestone in the consolidation of power of Xi Jinping and Li Keqiang. Xi and Li have taken the reins quicker than the previous generation a decade ago and have acted with greater authority and decisiveness. However, China is much more economically advanced and socially complex than it was with the previous generations of leadership, and it is changing rapidly. There has been a clear call for the new leadership to provide a holistic structured design to reforms. The new leadership vowed to break interest groups that have benefitted from the economic model of the last 20 to 30 years. The public hoped the Third Plenary session will provide the roadmap to realise their own individual “China Dream”. The reform programme can be summarised largely as institutional innovation aimed at taking China’s economy and society to the next stage in the country’s development. At the core of the programme is a redefinition of the relationship between the central, and provincial or local levels of government, the government and the market, and between the government and the general public. The uppermost objective of the reform package is to give the market a greater and more powerful role in rebalancing the Chinese economy, while the government will in turn focus on ensuring social fairness and equality. At the same time, how these reforms are implemented will continue to follow a gradualist approach. If the core decision of the 1993 Third Plenum was to adopt market-oriented reforms as Party policy, the current plenum puts China onto a trajectory to transform itself into a market economy in the true sense of the word. To achieve this, the government has indicated it will reduce direct interference in the market and normal business operations, starting with the approval processes as the first iteration of this. Key Areas of Focus The narrative that has emerged from the Third Plenum is one of a government grappling with the issues that are most fundamental to local society. Among the various statements and policy directions set out in the communiqué, the central and underlying preoccupation to them all is with the major and structural issues that China as a nation faces – feeding its people, keeping the lights on, and providing its citizen a society that is safe, fair and meets people’s most basic of needs. The challenge for China’s leadership is determining how to best tackle these issues and achieve meaningful progress against a background of a large, diverse population with disparate needs across different geographies, a set of entrenched and powerful vested interests, and an economy that is still embryonic in any number of critical functions. The communiqué sets the year 2020 as the deadline for reaching “decisive reform results in key sectors” and for establishing “a well-developed, scientific, procedure-based and effective November 2013 www.brunswickgroup.com Page 4 of 13
  5. 5. framework” for the country's major institutions. The world will be watching with interest the nation’s progress against this target. Rural Reform: Agricultural Scalability China’s rural sector and population were the focus of bolder reforms announced following the Third Plenum. Specifically, the communiqué pledges to address the “two-tier” system of land ownership that prevents farmers from selling their land, saying “farmers should participate equally and enjoy the fruits of modernisation”. Current law stipulates farming land falls under “collective ownership” managed by local party officials. The system not only restricts rural workers as they try to migrate with their families to urban areas in search of a better life, but it has prevented Chinese agriculture from achieving scale and therefore modernisation. China has over 20 per cent of the world’s population, but less than eight per cent of its arable land. It already relies significantly on imports for a number of staple food products, and volatility in global markets for commodities such as soybeans has caused significant issues for China in recent years. Food mostly produced by rural farmers farming by traditional methods on small plots of land will not be able to keep up with the demands of country’s increasingly urbanized population. Another potentially significant article in the communiqué suggests the distinction between urban and rural land in terms of use for construction will be eliminated, allowing cities to expand more rapidly and potentially meaning farmers could receive higher levels of compensation when land is appropriated for development. th Land reform also formed part of the communiqué issued at the Third Plenum of the 17 Central Committee in 2008; however, the proposal met with strong resistance from local officials, who rely on land sales as their chief source of income. Tax Reform: Balancing the Books Dovetailing into this issue, a number of the proposals to reform China’s tax code go precisely to the problem of providing local governments with legal access to sustainable revenue streams. Nearly all local governments rely heavily on land auctions for revenue, contributing significantly to skyrocketing price of real estate in many cities across China. Compounding the problem, there is no system in place through which local governments can directly access debt markets, which has given rise to various suspect ‘off the books’ and circuitous practices being adopted to borrow funds. The communiqué suggested a number of changes to the tax regime, including continuing to expand property tax pilot programmes, and reform of the consumption tax. The resource tax currently levied on the production of coal and certain metals by volume is to now be calculated on the basis of a price. Together, this could provide a stable income base to some of China’s most underdeveloped provinces, particularly western China, which has long been an objective of developmental policy-making. In addition, tax reform will also be used as a means of achieving specific policy aims, such as curbing pollution and improving energy conservation through expanding the implementation of a carbon tax. November 2013 www.brunswickgroup.com Page 5 of 13
  6. 6. Fiscal Reform: Advancing Financial Services The reforms indicated as being under consideration in terms of China’s economic and financial systems suggests recognition that China, as an economy led in the future by domestic consumption, will require more sophisticated and flexible financing support than when the economy was led by direct investment and exports. The key planks for these efforts will be liberalisation of China’s renminbi exchange and interest rate regimes. The mechanisms have already become increasingly market orientated in recent years, and the communiqué’s nod to this issue continues the long-standing recognition that the renminbi's rise as a global currency and China’s own capital account needs requires greater convertibility. The financial reforms further suggested are aimed at introducing a greater degree of competition into the financial services sector. This point also further underlines the importance being placed on the private sector. Given a key limitation on growth in the private sector is access to capital, given state-owned banks tend to prioritise the needs of SOEs, the importance of lowering institutional barriers for more market-orientated players to serve this need is clearly recognised. Social Welfare: Improving Social Security Access Partly tied to the issue of China’s hukou (or household registration) system which restricts access to certain welfare benefits to one’s hometown, providing equitable access to basic social security remains an important social issue. As China’s population ages, providing a social safety net is becoming an increasing challenge for local and municipal governments. The communiqué undertakes that China will strive to make social welfare fairer and more sustainable, saying that “reform of social affairs is vital to guarantee all citizens enjoy the fruits of China's development”. It is also a key ingredient in maintaining social stability, a fact the government is well aware of. The current system is fragmented and the benefits enjoyed by different individuals can vary widely. While in 2012 China introduced a basic universal social security system as a significant first step, eliminating gaps and disparities in the system will be the next challenge. Judicial Reform: Law & Order In terms of legal affairs, the communiqué has pledged judicial reform, including upholding respect for the authority of the constitution, improving the enforcement of administrative law, safeguarding the rights and independence of the courts and its officers, and improving the legal protection of human rights. The communiqué states that the public should be allowed to scrutinise the use of power so that power is “caged” and operates “in sunlight”, a nod to increasing transparency and accountability of government at all levels. China records tens of thousands of instances of civil unrest per year, mainly local cases of conflict between people and their local government, which tend generally to be over issues related to land rights or public health scares where the local community has been unable to win redress for their grievances through official channels. With trust in the Party already weakened by instances of blatant abuse of power, the government’s inability to show results when it comes to fundamental ‘kitchen table’ issues of air quality, housing prices and food safety, and the growing expectations of China’s burgeoning middle class beyond a basic standard of living, the Party understands that legal and judicial processes need to work and work effectively if they are to maintain stability and their hold on power. November 2013 www.brunswickgroup.com Page 6 of 13
  7. 7. Security and Stability: Strengthening Central Power A quick glance at the social media reaction to any number of China’s territorial spats with its neighbours over the past year underlines that China’s might and standing on the international stage is not simply a matter for the Party, but is also something the average Chinese person cares a great deal about and has ever-growing expectations over how it expects its government to act. During his first year at the helm, President Xi Jinping has accompanied his vows of economic rejuvenation with a more confident and assertive position on many foreign policy issues, underpinned by on-going efforts to strengthen control over political power. In what has been interpreted as a move to strengthen this agenda, during the Third Plenum the Central Committee approved the establishment of a State Security Council. Specific details on the role of the council and where it will sit within the Party leadership or with the organs that currently coordinate China’s foreign policy are yet to be clarified. The communiqué describes its function as being to “perfect the state security system and state security strategy, and to ensure national security”. The plan for the Security Council, which observers believe could work much like the U.S. National Security Council, was one of the few concrete measures announced in the communiqué. While such a move has been widely discussed in policy circles for over ten years, the fact that Xi Jinping has achieved this within his first year in office again underlines his clear and more assured mandate than his predecessors. The establishment of the Council will also provide a platform to allow other key senior leaders to engage in State security matters. At the moment national security issues are handled by several Party bodies, including the Central Military Commission, which controls the armed forces, a Foreign Affairs Leading Group and a National Security Leading Group. The Council should resolve challenges coordinating and driving forward national security matters. The other thing to note about the consolidation of power to the centre is that change and reform will need a strong hand to drive it through the myriad of vested interests that inevitably disrupt the execution of new policies or attempts at reform in China. While centralising power at the same time as promising reform may seem inherently contradictory, in fact it points to the awareness within the senior leadership of what it will take to lead China successfully down this road to reform. REACTION ON THE STREET Zhao Xiao(赵晓), economist and professor with seven million Sina Weibo followers: “The Third Plenum closes and reforms continue… but the fundamental issues don’t seem to have been touched, it does not quench our thirst, one bucket of water can’t put out the fire we see before our eyes.” November 2013 www.brunswickgroup.com In the lead up to and during the Third Plenum, there was extensive discussion on social media forums about the meeting, despite the scarcity of news or information, reflecting the high expectations from the general public around the government’s reform agenda. In online discussions, “reform” was a dominant topic. Key opinion leaders, including academics and senior journalists, expounded on macro political and economic themes, while for the man on the street there was just one question: “What about me?” While the overall reaction was offhandedly accepting that the communiqué sets the right agenda, there is also clear impatience, as expressed on social media, for real and immediate action on the issues that matter to people’s everyday lives. Many people were critical over the lack of progress on SOE reforms in particular and concern that they or other powerful vested interests could once again stymie meaningful change. The reaction to the State Security Committee was generally positive, with netizens hopeful it will help ensure social stability and help China gain more power in foreign affairs. Page 7 of 13
  8. 8. An online poll showed that social welfare issues, including equitable income distribution, social security, healthcare, prices of household goods, and reform of the hukou system are areas all netizens are most eager to see tangible process as the communiqué is translated into actual policies. Also of note, there did not seem to be any controls in place over what people could search for or discuss online, with no visible “search keyword bans” in operation during the Plenum. This perhaps points to the growing acceptance with government of social media as an important ‘safety valve’ and platform for people to vent grievances, but also a useful tool for the government to monitor and understand the sentiment of the people. IMPLICATIONS TO BUSINESS While the outcomes of the Third Plenum in large part reinforce much of the same themes seen over the past year, the added granularity and context around the announcements provide valuable insight into the likely shape of economic reform over the coming decade. The full impact to the business environment will become clearer as more details are released from the plenary, in particular the release of the CPC Central Committee Decision on Major Issues Concerning Comprehensively Deepening Reform. In the meantime, we have highlighted some of the overarching implications that are likely to affect businesses operating in China in the coming years. If one considers the operating environment ten years ago and what has been accomplished (both good and bad), it is safe to say that the country will be in an entirely different place again when the reigns pass to the sixth generation in 2022. Economic Changing Economic Growth Model Rebalancing the Chinese economy is the most fundamental challenge facing the nation at this time. The most obvious and stark ramification of this change is that the preferential treatment enjoyed in China by foreign businesses in the past will be no longer, whether it be tax rates, access to land or government support in shepherding applications through internal approval processes in exchange for hard currency and investment dollars in order to drive simple GDP growth. This is an approach no longer aligned with macro policy priorities. Beyond a levelling of the playing field, there is risk that the pendulum could swing much further. Foreign businesses will need to create much more sophisticated levels of engagement with government and other stakeholders in China around clear common goals. Slowing Overall Economic Momentum As per the graph below, economic growth tends to slow in the years following each major Third Plenum, reflecting the fact that structural reforms, while good for the longer term, tend to slow growth in the short term. November 2013 www.brunswickgroup.com Page 8 of 13
  9. 9. With real estate bubbles and rising food inflation continuing to be a major issue, an easing of overall economic growth to allow for meaningful reform of China’s fiscal and economic structures will be important for China’s continued economic welfare – and by extension the health of the global economy as a whole. Companies, again both domestic and foreign, relying purely on riding the wave of top line national growth to achieve corporate growth will not do well. Increasingly companies will need to have specific and targeted strategies for success in the China market. Further, the general slowdown is likely to further accelerate outbound M&A activity, as cashed-up domestic company look abroad to maintain momentum and market growth that is no longer achievable simply by relying on the Chinese market alone. Business Environment Reduced Role for Government in Business To balance this, the environment for doing business in China is likely to become more transparent and efficient for both domestic and foreign businesses alike. As the labyrinth of government approvals lessens, and bureaucratic red tape is streamlined, the ability to do business with the government on a ‘normal footing’ will likewise get easier. Another aspect to this is the rise of provincial power. While relationships and mutual understanding at the central level will remain important, a company’s networks and stakeholder engagement strategies at the provincial and local level will slowly become increasingly important. A Level Playing Field It has been a tough year for many multinationals in China, from state media campaigns against prominent foreign companies to anti-corruption and price-fixing investigations. While it may seem simple to suggest the government is attempting to target MNCs through the campaigns, the moves can also be interpreted as part of government efforts to address the basic needs of the ‘man on the street’ around better consumer protection, affordable healthcare and so on. For the general public, the “China Dream” means a better life and a better standard of living. The new leadership has deliberately visited many poor and remote regions in its first year, promising to address basic needs for comfortable housing, affordable healthcare and aged care, universal access to compulsory education, income growth, cleaner air and water. While foreign investment is recognised as playing an important economic role, at the end of the day, domestic issues and priorities will trump foreign business interests every time. Political Progress will Continue to be Slow Reform strategies aiming at protecting or forgiving vested interests could be resisted by the people. In return, those vested interest groups might staunchly resist any reforms which could endanger their interests. China’s political leaders know how high the stakes are, and the consequences of not reforming or tackling the tough issues is that it would be unlikely China can sustain economic growth and maintain social harmony. November 2013 www.brunswickgroup.com Page 9 of 13
  10. 10. However, the notable absence in the communiqué of significant reforms of state-owned enterprises, especially central government SOEs, and opening up market access to the strategic sectors of the economy they control, shows that while many in the government accept that SOEs are at the root of many serious structural problems, the state sector is also a key tool for carrying out and maintaining control over the government’s political and economic agenda. This function will likely be protected in at least the short term. Also, it would be a mistake to think the Party thinks and acts with one voice and one mind. While there are some factions who would like to achieve accelerated economic reform, other groups still believe strongly in a strategic role for SOEs. The communiqués endorsed by the Central Committee needed to find a middle ground between both camps. Further, those looking for detailed western style political reform will be disappointed. Whether that is sustainable in the long run in terms of the demands true market liberalisation will place on China’s power structures, only time will tell. Policy by Experimentation Ever since the first opening up and reform policies at the end of the 1970s, China has a tradition of policy-making by experimentation, or as an editorial in People’s Daily called it this week, "crossing the river by feeling the stones”. A recent example of this is the Shanghai Free Trade Zone – the launch is significant in that it sets the tone and direction for future policy, and provides a low-risk opportunity for the government to trial different measures and mechanisms. At the present time, it is still unclear what that may look like specifically and there are also uncertainties around to how any reforms piloted in the zone would be rolled on a national scale. The communiqué points out that to better adjust to the new realities of economic globalisation, China must accelerate the pace of opening-up, both internally and in terms of the outside world. The country will lower the thresholds for investment, accelerate the construction of free trade zones, and boost opening-up in both inland and coastal areas. The lessons from the 1978 Third Plenum, which saw many years of the leadership “groping” for how it actually wanted to implement the new economic model of “reform and opening up” adopted by the Central Committee, underline that while the reforms announced may be bold in part, it will take some time (and back and forth) before these take final shape. Therefore, foreign companies need to be prepared to operate with a certain ambiguity in the government’s policies and guidelines – but also be prepared to take the opportunity to feed into the formulation of these policies where possible, and where a company has particular expertise or knowledge that may help inform the process. Environment and Public Health Issues A key driver behind the determination to rebalance the economy is the clear and unacceptable impact economic development has had on people’s health and general wellbeing through the side effects of pollution and environmental degradation. Any company that has the technology and solution to assist China in solving this problem would be wellplaced, particularly given the dramatic potential consequences in terms of social unrest and the Party’s hold on power if the government cannot start to demonstrate real results in this area. November 2013 www.brunswickgroup.com Page 10 of 13
  11. 11. Conclusion Moving into the next ten years, success for foreign companies in China will depend now more so than ever on being able to articulate a clear and compelling local value proposition within the current policy framework. At the same time, ultimately the realisation of the Chinese Dream is impossible without China engaging with the rest of the world. Facing multiple challenges on the foreign policy front, the new leadership has demonstrated its determination to embark on peaceful development, by managing strategic competition with the US, easing tensions with Europe by reaching a settlement on trade issues and trying to reassure Asian neighbours with disputed territorial claims. China wants to be seen by the world as committed to mutual prosperity and being a ‘good global citizen’. November 2013 www.brunswickgroup.com Page 11 of 13
  12. 12. 1. POLITICAL BACKGROUNDER THE COMMUNIST PARTY OF CHINA The Communist Party of China (“CPC”) was founded in 1921 and today has a membership of approximately 82.6 million citizens including government officials, military officers, state owned enterprise workers, private business people, farmers and students. Membership has th grown from less than 40 million members at the 12 Party Congress in 1982 to 66 million th ten-years ago when Hu Jintao and Wen Jiabao took the helm of the Party at the 16 Party Congress. Over the last decade more than 17 million members were added. CENTRAL COMMITTEE OF THE COMMUNIST PARTY OF CHINA The Central Committee of the Communist Party of China (“CCCPC”) is responsible for th managing the Party’s affairs for a five-year term. As of the 18 Party Congress, the Central Committee is composed of 205 permanent members and 171 alternate members; 184 new th members were introduced in to the 18 Party Congress. Permanent and alternate members th th were elected during the 18 Party Congress meeting that concluded on 14 November, 2012 by the delegates who attended the Party Congress. Appointees to the top Party and government positions, including the leaders of China’s provinces, are drawn from the members that make up the Central Committee. One of the key functions performed by the Central Committee is electing the Politburo (currently 25 people) and in turn the Politburo’s Standing Committee (currently seven people). THIRD PLENARY SESSION OF THE 18TH CPC CENTRAL COMMITTEE The Central Committee (中国共产党中央委员会), considered the highest ranked organ within the Party, holds plenary sessions that gather all members of the CCCPC and special guests to discuss and approve major policy decisions. The Third Plenum traditionally focuses on economics while other sessions deal with areas such as ideology and propaganda or specific tasks such as electing members of the Politburo and Standing Committees. Over the last 30+ years the Third Plenum has been the launch pad for many of China’s major reforms. One of the most significant Third Plenums took place in December 1978 and marked the beginning of market reform. In 1993, the Third Plenum endorsed the “socialist market economy”, which laid the foundation for fiscal, state-owned enterprise and banking sector reforms that were driven by former Premier Zhu Rongji. th Third Plenary Session of the 18 CPC Central Committee Date: Participants: th th 9 November to 12 November, 2013 204 Central Committee members and 169 Alternate Central Committee members POLITBURO AND THE STANDING COMMITTEE The CCCPC is led by the 25-person Political Bureau or “Politburo” (中国共产党中央政治局) and the seven-person Standing Committee which sits at the top of the Politburo. The CCCPC is responsible for appointing the General Secretary, members of the Politburo, the Standing Committee, and members of the Central Military Commission. November 2013 www.brunswickgroup.com Page 12 of 13
  13. 13. BRUNSWICK GROUP Brunswick is the global leader in financial and corporate communications, providing senior counsel to clients around the globe on critical issues that affect reputation, valuation, and business success. BRUNSWICK PUBLIC AFFAIRS Brunswick works with its clients to monitor and respond to the business environment, build understanding among key groups, address public policy issues, mitigate negative changes to the operating environment, and ensure business continuity. We advise our clients on the most effective messages they can use to communicate their case, whom they should target, and how they should engage. We work closely with in-house government affairs teams to broaden public support for our clients’ positions and build a better understanding of their businesses amongst relevant policy-making audiences. Our approach combines government relations, media relations, issue management, and corporate citizenship strategies to influence public policy, build a strong reputation and find common ground with stakeholders. The Brunswick team is available to provide additional guidance on issues addressed in this report. FOR MORE INFORMATION MEI YAN SENIOR PARTNER +86 (10) 5960-8650 ymei@brunswickgroup.com November 2013 www.brunswickgroup.com ST. JOHN MOORE PARTNER +86 (10) 5960-8603 smoore@brunswickgroup.com ROSE WANG PARTNER +86 (10) 5960-8606 rwang@brunswickgroup.com GORDON GUO DIRECTOR +86 (10) 5960-8661 gguo@brunswickgroup.com Page 13 of 13