China Perspectives New Governance for the New Era

1. China Perspectives
New Governance for the New Era
Looking back at China’s Two Sessions 2018

2. Burson-Marsteller 2
Introduction
The National People's Congress (NPC), China's top legislature, and the National Committee of the
Chinese People's Political Consultative Conference (CPPCC), the country's top political advisory
body, held their annual meetings, known collectively as “Lianghui”, or “Two Sessions”, in Beijing this
March.
This year’s Two Sessions, namely the first session of the 13th NPC and the 13th National Committee of
the CPPCC, were significant as the first meetings since China unveiled its new Party leadership and
proclaimed its entry into a “New Era” at the Communist Party Congress in October 2017. The
gatherings were a significant first step to turn the Party’s bold vision and blueprint for this “New Era”
into action: for China’s “modernization to be basically completed by 2035”, and for “China to
become a great modern socialist country by 2050”.
The international community paid close attention to how developments at this year’s Two Sessions
might impact their ability to do business in or with China. They were also interested in the regional
and global implications of the sessions, bearing in mind China’s growing role as a regional and global
power.
This article examines the outcomes of this year’s landmark Two Sessions, and outlines implications for
the business community in China’s “New Era”.
Agenda and Results
The Two Sessions this year lasted from
March 3 to 15 for the CPPCC, and
from March 5 to 20 for the NPC. The
following items on the agenda are
particularly important:
Government Work Report
Chinese Premier Li Keqiang delivered a government work report at the opening meeting of the NPC
session. The Premier overviewed "historic achievements" made in the past five years in the areas of
economic growth, income growth, jobs, health care, social security, poverty alleviation, energy
consumption, and pollutant reduction, among others. Meanwhile, major targets for 2018 were set
“ As long as we remain united, work
hard together, nothing can stop
us from achieving the Chinese
dream by the Chinese people.
(Xi at the Two Sessions)
”

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including the target to achieve around 6.5 percent GDP growth and around a 3 percent CPI
increase.
The government work report was the first item on the agenda for the NPC session, and whilst it is
vitally important, its content was overshadowed this year by other more headline-grabbing
developments including constitutional amendments, reform and restructuring of government
institutions, and the election of new state leadership.
Constitutional Amendments
This year saw the first constitutional amendments in 14 years almost unanimously adopted at the NPC
- in a carefully stage-managed process. China adopted its first Constitution in 1954 and the current
Constitution was adopted in 1982 after the Cultural Revolution. Further amendments took place in
1988, 1993, 1999 and 2004.
In a landmark revision, the Presidential
term limit, of two five-year terms, was
removed from the constitution, and the
original expression "the President and
Vice-President shall serve no more than
two consecutive terms" was deleted.
This brings the Presidential term limit in
line with the posts of General Secretary
of the CPC Central Committee and
Chairman of the CPC Central Military
Commission, both of which have no
term limits. This three-post integrated leadership in the name of the Party, state and the army, without
term limits, will significantly strengthen the power and control of Xi for the longer term. Meanwhile, Xi’s
key policies and initiatives, such as anti-corruption, building a stronger army and the Belt and Road
Initiative are likely to continue well into the future and enjoy wide public acceptance.
The legislature enshrined the CPC leadership as “the defining feature of socialism with Chinese
characteristics” in the first article of the Constitution, a codification of the increasing and more
explicit role the Party system plays in governance since Xi took office.
Along with the emphasis on the overall leadership of the CPC over all areas of endeavour in every
part of the country, the amendment also elevated “Xi Jinping Thought” to become fundamental
law. It was already integrated into the CPC Constitution last autumn.
In addition, the amendment listed supervisory commissions as part of the top-level design for anti-
corruption, an institutional breakthrough amid the ongoing wave of a nationwide anti-corruption
campaign since Xi came into office five years ago. The controversial work of CPC discipline
“ From our own experience, the
Chinese people have come to
realize that unity is power, and
unity will take us forward. A
fragmented nation will never
enjoy development.
(Xi at the Two Sessions)
”

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inspectors is to be merged into a broader supervisory network over all state functionaries under the
Party's leadership.
State Council Reshuffle
During the third plenary session of the 19th CPC Central Committee in Beijing this February, a plan to
deepen reform of Party and state institutions was adopted. The plan concerning state institutions was
submitted to this NPC session for further review and approval.
The changes are profound and represent a bold and once-in-a-generation reorganization of
government functions. The reshuffle intends to streamline the function of government agencies, thus
improving efficiency and overall consistency, to centralize market supervision and law-enforcement
and thus boost coordination and quality governance.
Highlights of the reshuffle which may directly impact doing business in and with China include:
◼ Environmental Protection - The establishment of the Ministry of Ecological Environment
which will combine duties of the Ministry of Environmental Protection and duties from six
other ministries or agencies related to climate change, pollution from agriculture and
groundwater, watershed and marine environmental protection. The new “super ministry”
will lead China’s battle against pollution and further boost ongoing large-scale
enforcement efforts throughout the country. Both local and global companies will need to
ensure environmental compliance and have opportunities to show how they are going
above and beyond in supporting China’s green goals.

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◼ Legislature - The merger of the State Council Legislative Affairs Office (LAO) into the Ministry
of Justice. Previously, draft laws drawn up by ministries or agencies were submitted to LAO
for review by the State Council before being tabled at the top legislature. The Ministry of
Justice will now play a new, vital role in moving forward China’s legislative process.
◼ Market Supervision - The establishment of a super State Market Regulatory Administration,
combining the State Administration for Industry and Commerce (SAIC), General
Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) and China Food
and Drug Administration (CFDA). The antitrust divisions of the National Development and
Reform Commission (NDRC) and Ministry of Commerce (MOFCOM) are also to be merged
into this “super ministry”. More powerful, coherent and coordinated market supervision and
antitrust enforcement is expected. This will target local and international companies and
reflect China’s evolving development priorities in a range of areas.
◼ Financial regulation - Shifting from a “central bank + 3 commissions” financial oversight
structure to a “central bank + 2 commissions” system (People’s Bank of China (PBC), China
Banking and Insurance Regulatory Commission, and China Securities Regulatory
Commission), a refinement of the current regulatory structure to better forestall and curb
potential risk. The role of the PBC was further elevated in the new setting. Banks and other
financial institutions will need to quickly grasp these changes and the opportunities and
challenges they present.
◼ Taxation - The merger of taxation agencies at the provincial level and below to ensure
more efficiency and cost reductions. The institutional reunion is part of the broader initiative
to clarify and optimize the fiscal relationship between the central and provincial authorities,
and the balance between administrative responsibilities and financial power with the aim
of incentivizing local efforts for sustainable growth, and reducing local governments'
dependence on land finance.
◼ Intellectual property – The reorganization of the State Intellectual Property Office will see it
cover not only the granting of patents, but also of trademarks and geographic indications.
The Office is subordinated to the State Market Regulatory Administration instead of being a
standalone agency under the State Council.
Other noteworthy changes include the brand new State International Development Cooperation
Agency, an aid vehicle complementary to the Belt and Road Initiative; the establishment of the
State Medical Insurance Administration, positioning the state more effectively to address drug
pricing; and the limited power transfer of the NDRC to other ministries, although its core functions
remain untouched.
Institutional reform takes time, and will require compromise in terms of implementation, personnel
arrangement, and organizational cultural integration. The intention of reducing bureaucracy also
carries the risk of actually creating more bureaucracy. Whether the stated policy objectives of this

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reform will be achieved, and to what extent, will need to be closely monitored. In the short run, there
should not be dramatic policy changes or inconsistencies that would either disrupt or negatively
impact doing business in and with China.
Two key questions remain unanswered. The first relates to the details of the reform of Party institutions
in view of the primary objective of strengthening the Party’s control over the state apparatus.
The second question is how local administrations at lower levels will follow the Cabinet reform and
make proper adjustments tailored to their specific circumstances, given the restructured relationship
between the central government and the regional authorities, including among others more
legislative powers at the local level. It is worth noting that some ideas for the cabinet reshuffle
originated from local pilots. One example is the Market and Quality Supervision Commission of
Shenzhen Municipality that oversees business registration, quality inspection, standards
management, and intellectual property protection in the city, and could have provided bottom-up
inspiration for China’s top-level design.
New State Leadership
One of the most important roles of the NPC session is the election of state leadership, most notably
the Chinese President, Vice President, Premier, and Vice Premiers.
As expected, Xi Jinping was elected Chinese President by a unanimous NPC vote. Wang Qishan, a
long-time partner of Xi who previously led Xi’s signature anti-corruption campaign, was elected as
Vice President.
Li Keqiang was endorsed as Premier of the State Council by NPC vote; while Han Zheng, Sun
Chunlan, Hu Chunhua and Liu He were endorsed as Vice Premiers. Unlike the others, Liu He, Xi’s top
economic advisor, lacks experience of presiding over a province, even though he is well respected.
In addition, Yi Gang, a U.S. educated academic and reformist, was appointed as the PBC head, an
appointment welcomed by the market. His predecessor, Zhou Xiaochuan, was widely praised for his
15 years of action in moving forward the opening up of China’s financial sectors.
Overall the state leadership appointments reflected the further consolidation of power by Xi – even
while some appointees are seen to have been previously aligned at certain points in their careers
with his predecessors.
Analysis and Implications
Governance

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The Two Sessions consolidated the already strong leadership of Xi following the 19th CPC National
Congress held in October 2017. The era of “Xi at the Core” looks set to continue for many years to
come.
Under Xi’s leadership, the new top governance, involving among others the State Council, National
Supervisory Commission, Supreme People's Court and Supreme People's Procuratorate is taking
shape. The roles of President and Vice-President, particularly the latter, will be enhanced and
assigned more responsibilities compared with their long-perceived role as being relatively symbolic in
certain respects.
The ministries and commissions of the
cabinet and the agencies under them
are expected to work “earnestly” on
their respective agendas in
accordance with Xi’s speech at the
19th CPC National Congress.
Economy
According to forecasts by several major international organizations, China’s economic growth looks
strong. However, there are still many areas of the economy that need significant improvement or
upgrading. For example, China ranked 78th out of 190 economies in terms of ease of doing business
“ The road ahead will be very
long, but time waits for no man.
(Xi at the Two Sessions)
”

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by a recent World Bank project report – this is a ranking that the Chinese government knows its needs
to improve.
Consistent with the roadmap set at the 19th CPC National Congress, the Two Sessions and the
Government Work Report reiterated future priorities for economic growth: transition to high-quality
development, supply-side structural reform, drive for innovation and entrepreneurship, opening-up
for broader market access, poverty alleviation, filling regional gaps, and a better quality of life for the
people.
Meanwhile, the scale of future campaigns on anti-corruption, pollution control, inflated real estate
market, media and cultural censorship will continue to bring uncertainties and limit growth prospects
in certain sectors.
China-US Relations
The cautious optimism in China-US relations in the aftermath of President Trump’s state visit to China
last November is fading as the US has taken more action against Chinese trade and investment
practices, which are perceived by President Trump as being unsustainable and unfavourable
towards the US. It remains to be seen what more, and how measured retaliatory steps China will take
in response to recent tariffs, and the “301 investigation” measures introduced by the Trump
administration.
China imports are in a very risky position in any China-US trade tension scenario, and China may
target products of several important sectors for U.S. business such as automotive, agricultural, foods,
consumer goods, and technology with any early trade actions. The assumption is that targeting
products which could hurt the constituencies that are backing President Trump and the Republicans
could be most effective.
Vice Premier Liu He already met with senior
US officials earlier this month, but it seemed
the mission of “settling bilateral trade
disputes through cooperation rather than
confrontation” has failed. Newly elected
Vice President, Wang Qishan, has been
entrusted with preventing the China-US
relationship from deteriorating.
Doing Business in or with China
2018 year marks the 40th anniversary of China’s reform and opening up. The country appears set to
become the largest economy in the world in the years to come and to play a more influential role in
“ A trade war does no one any
good.
(Premier Li at a press
conference after the
conclusion of the NPC session)
”

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global affairs. The messages from the Two Sessions are consistent with Xi’s promise to open China’s
doors wider to foreign investors and further liberalize and facilitate trade and investment, including
expansion of market access to sectors like financial services, telecommunications and medical
services, expanding imports and lowering import tariffs. Companies that can show how they are
supporting China’s sustainable development and are committed partners have opportunities to
prosper in a range of industries.
There are also challenges. As Chinese business expands globally and moves up the value chain to
compete more actively in many sectors, China will continue to favour national champions to the
detriment of foreign business interests. It will also ask for more (e.g. tech sharing) in return for access
to its growing markets in some cases – knowing how reliant global firms are on China for growth or
even survival. Stronger Party rule and concerns about foreign countries might also prompt stricter
measures for national security purposes such as the controversial cyber security law that came into
force in 2017, or the requirement for establishing Party organizations at foreign enterprises. China’s
focus on tackling corruption, combatting pollution, protecting labour rights and consumers –
enhances the risks for companies that fall short in these areas. They may in fact become the
proverbial “chicken that gets killed to scare the monkeys” to show the Party/government is taking
tough measures. Given global developments – there is also a heightened risk for some companies
that they could become entangled in larger bilateral or geopolitical issues. Meanwhile, we expect
increased focus from global stakeholders on what global companies are doing in and in relation to
China – with the threat of increased protectionism looming and evolving concerns about China’s
political system in the new era.
In conclusion, in the short to mid-term the increased sense of continuity and predictability should in
certain respects be favourable for foreign businesses in China who wish to align their development
with key Party/government initiatives and priorities. However, foreign companies will need to closely
monitor the implementation and implications of decisions taken during the Two Sessions and carefully
plan for the opportunities and challenges that this and the evolving environment will bring. For many
companies, this requires an enhanced and updated capacity for engaging in public affairs and
government relations – a capacity fit for the New Era of Chinese governance and development.
Notes
On March 21, one day after the closing of the Two Sessions, the CPC Central Committee released
the full text of the plan on deepening reform of Party and state institutions and issued a circular
asking all regions and departments to implement it. The plan answered some questions raised in the
above analysis.
A clear governance adjustment was made. The separation of the Party system and the state system
has been further dissolved and eliminated. Xi embraces the integration between the two systems,
and even employs only the Party system in some key policy areas.

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Appendix
Brief bios of new leadership
Xi Jinping, born in June 1953, President, Chairman of the PRC Central Military
Commission, General Secretary of the CPC Central Committee, Chairman of the
CPC Central Military Commission.
Wang Qishan, born in July 1948, Vice President, former member of the Standing
Committee of the CPC Central Committee Political Bureau and secretary of the
Central Commission for Discipline Inspection of the CPC from 2012 to 2017.
Li Zhanshu, born in August 1950, Chairman of the 13th NPC Standing Committee,
member of the Standing Committee of the CPC Central Committee Political
Bureau.
Wang Yang, born in March 1955, Chairman of the CPPCC National Committee,
member of the Standing Committee of the CPC Central Committee Political
Bureau. Former Vice Premier since 2013.
Li Keqiang, born in July 1955, Premier, member of the Standing Committee of the
CPC Central Committee Political Bureau.
Han Zheng, born in April 1954, Vice Premier, member of the Standing Committee
of the CPC Central Committee Political Bureau. Former secretary of the CPC
Shanghai Municipal Committee from 2012 to 2017.
Sun Chunlan, born in May 1950, Vice Premier, member of the Political Bureau of
the CPC Central Committee. Former head of the CPC Central Committee's
United Front Work Department from 2014 to 2017.
Hu Chunhua, born in April 1963, Vice Premier, member of the Political Bureau of
the CPC Central Committee. Former secretary of the CPC Guangdong Provincial
Committee from 2012 to 2017.
Liu He, born in January 1952, Vice Premier, member of the Political Bureau of the
CPC Central Committee and general office director of the Central Leading
Group for Financial and Economic Affairs. Former deputy head of the NDRC.

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Cabinet structure
Ministries, commissions of China’s cabinet after reform
Ministry of Foreign Affairs Ministry of National Defence
National Development and
Reform Commission
Ministry of Education
Ministry of Science and
Technology
Ministry of Industry and
Information Technology
State Ethnic Affairs
Commission
Ministry of Public Security Ministry of State Security
Ministry of
Civil Affairs
Ministry of Justice Ministry of Finance
Ministry of Human Resources
and Social Security
Ministry of Natural Resources
Ministry of Ecological
Environment
Ministry of Housing and
Urban-Rural Development
Ministry of Transport Ministry of Water Resources
Ministry of Agriculture and
Rural Affairs
Ministry of Commerce
Ministry of Culture and
Tourism
National Health Commission Ministry of Veterans Affairs
Ministry of Emergency
Management
People’s Bank of China National Audit Office
New organs to be formed under China’s cabinet
State Market Regulatory
Administration
State Radio and Television
Administration
China Banking and Insurance
Regulatory Commission
State International
Development Cooperation
Agency
State Medical Insurance
Administration
State Grain and Reserves
Administration
State Immigration
Administration
State Forestry and Grassland
Administration

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