2014 NPC Emphasizes Market-Oriented Economic Reform

Senior Chinese officials continued to emphasize the importance of market-oriented economic reforms at China’s recent meeting of parliament, though little substantive commercial legislation was passed during the session. Environmental protection, administrative reform, and anti-corruption were major themes of discussion at the second session of the 12th National People’s Congress (NPC), which ended March 13.

Discussions on financial sector reforms received significant attention in Chinese media, with regulators promising to roll out a pilot program for private domestic banks and liberalize the deposit interest rate in the next 1-2 years. While the discussions illuminated some new ideas on how Chinese regulators wish to implement reforms, timelines and specifics of policy implementation were generally not disclosed, leading to continued concern on the details of economic reforms and what it will mean for international companies.

Government lays out administrative, environmental reforms as legislative priorities

According to the NPC Standing Committee work plan, central government priorities in 2014 will focus on administrative reforms to promote China’s governing system and modernize the country’s governing capacity. As is customary at annual NPC meetings, a number of laws were inspected and will be revised, including the Budget Law, the Administrative Procedures Law, the Law on Administrative Review, the Environmental Protection Law, the Air Pollution Prevention and Control Law, the Tourism Law, and the Patent Law. Further measures are likely to be revised regarding the implementation of the Air Pollution Prevention and Control Law. In addition, China’s State Council will submit a report on conserving energy and reducing emissions for review.

Meanwhile, China’s Supreme Court and the Supreme Procurator have said they will focus on deepening judicial reform by improving transparency and China’s system of jurisprudence, including strengthening supervision over law enforcement officers. Anti-corruption measures will continue to be the focus of judicial reforms.

Financial reform takes center stage

China’s lead financial regulators emphasized the need for capital market reform at a March 11 press conference. Zhou Xiaochuan, governor of the People’s Bank of China (PBOC), said that China will pursue interest rate liberalization by gradually reducing the interest margins of banks. According to Zhou, the interest rate is likely to rise during the early stages of liberalization but fall after a “new equilibrium” is established. Zhou said that many reforms had advantages and disadvantages, and that short-term pain cannot be ruled out, especially in considering the beneficial impact of interest rate reform in the long run.

Zhou also said that China is very likely to ease its grip on the deposit rate for banks in the coming one or two years. But he also said that RMB internationalization still has a long way to go. Zhou stressed the importance of creating conditions to facilitate cross-border RMB use, including the opening of China’s capital account. China’s initial financial reform plans will focus on facilitating RMB flows, although Zhou emphasized that China will not pre-set the “speed or tempo” for promoting cross-border use of the RMB.

Private banks to be promoted, credit risk “controllable”

Starting this year, China will set up five private banks on a trial basis, with the possibility of extending these trials in the future, according to China Banking Regulatory Commission (CBRC) Chairman Shang Fulin. The first five banks will be located in Tianjin, Shanghai, Zhejiang Province, and Guangdong Province. Ten private companies, including Internet firms Alibaba and Tencent, have been selected to participate in the pilot program, which will focus on servicing small and micro-enterprises, as well as residential communities. Each of the banks will be co-sponsored by at least two private capital providers.

In the same speech, Shang also addressed industrial overcapacity reforms, which include stricter credit policies for businesses that are heavy polluters. He further said that China’s credit risk is “controllable,” and that current bad asset provisions and bank capital are sufficient to deal with any crises. Shang said that the CBRC has drafted measures to respond properly to any issues of systemic risk and pressure, and that it will ensure the continued stable development of China’s banking sector.

MOFCOM’s Gao discusses Shanghai FTZ, administrative reforms

Ministry of Commerce (MOFCOM) Minister Gao Hucheng spoke about the China (Shanghai) Free Trade Zone (FTZ) in his work report, saying that government agencies are working on reducing the number of sectors with foreign ownership restrictions in the FTZ. He said that MOFCOM plans to use Shanghai FTZ policies to serve as a model for future FTZs, of which Guangdong and Tianjin are next in line. Gao also said that business registration reforms will be expanded nationwide in late March, shortly after the NPC. In the meantime, supervisory agencies are working to strengthen enforcement, communication, and supervision procedures so as to further advance enterprise operations in the pilot zone and encourage trade facilitation. Gao noted the incremental nature of reforms multiple times through his speech, asking for patience as regulators study appropriate implementation.

Tax reform continues to expand

During the NPC, finance minister Lou Jiwei also announced plans to continue China’s tax reform in three areas: budgetary reform, tax system reform, and fiscal governance reform, the last of which will set new standards for central-local government budgeting and spending. Lou also said in his work report that the pilot business to value-added tax program will be extended to railway, postal, and telecom services. In addition, the Ministry of Finance is considering future implementation of environment taxes and property taxes, and is researching “appropriate adjustments” to the scope of the consumption tax.

“Super–ministry” of transport established

China’s Minister of Transport Yang Chuantang announced the creation of a new “super-ministry” of transport that will consolidate the railway, civil aviation, and postal ministries and launch in mid-March. The new ministry will be responsible for transport strategies, policies, laws and lawmaking plans, and standards setting. Other areas that the ministry will cover include waste disposal services and supervision management, along with setting safety standards for motor vehicle operation and vehicle performance testing.

Implementation key for commercial and financial reforms

Market-oriented economic reform continues to be a priority for Chinese leaders at the central and local levels, but implementation remains key. The most recent session of the NPC continued to focus on environmental reform, improving living standards, and economic sustainability, with leaders making public statements regarding potentially significant commercial and financial reforms. However, with no major legislation passed and no clear timelines announced, there continues to be concern about when reforms might be implemented and whether they will address issues important to international companies. The reform agenda the Chinese leadership has undertaken is complex, and without concrete plans, some analysts worry it may be too difficult to push forward key reforms needed for the sustainable growth of the economy. USCBC will continue to monitor and report on the progress of these policies as they are implemented over the coming year.

By Angela Fan and Nick Marro