Foreign investment in post-COVID-19: What’s changed?

Foreign investment in China post-COVID-19: What’s changed?

Lessons learned from China’s Two Sessions 2020 China’s major, visible political event each spring is the “Two Sessions,” typically held in March, but this year delayed until May because of the pandemic. Under the current economic and social pressures, the sessions were discernibly different from previous years, and those differences are useful for entities looking to make foreign investment in China to contemplate when seeking guidance on future policy and regulatory trends. The Two Sessions are the most significant publication of five major reports: Premier ’s government work report and annual reports of the National Development and Reform Commission, Supreme People’s Court, Supreme People’s Procurate, and Ministry of Finance. It is also the formal beginning of work to craft the 14th Five-Year Plan.

A massive number of participants streams Global media often refer to the NPC Among the significant features was the into Beijing for the China’s Two Sessions, as China’s “rubber stamp parliament” swapping of “sixes.” The GDP goal of members of two key political and social and emphasize that the CPPCC has growth in the 6 percent range was organizations. The National People’s no constitutionally defined power abandoned, and two rhetorical formulas Congress (NPC) is China’s legislature, a This significantly understates both emerged: the Six Stabilities and Six huge body of nearly 3,000 members with a the importance of the sessions and Guarantees. In mid-December of last representative standing committee of about the usefulness of understanding what year, President Xi spoke at the Party’s 170 members. The full Congress, which transpires. There are three functions of Central Economic Work Conference and includes all the leaders of the Party across the sessions. One is to report the emphasized the “Six Stabilities,” which the entire country, meets for about two challenges, steps taken, and successful express the government commitment to weeks a year, while the standing committee achievements of the top leadership in the “stabilizing employment, finance, foreign meets continuously. The Chinese People’s year just concluded. Another is to set forth trade, foreign investment in China post- Political Consultative Conference (CPPCC) the leadership’s goals and proposed steps COVID-19, investment, and expectations.” is a large body that serves an advisory for the year ahead. And finally, there is a The Six Guarantees are assurances to function to the Party leadership. It genuine consultative process by which the public that include employment and consists of senior Party leaders, leaders sentiment and support is measured and basic livelihood. Both of these highly of the political parties outside the Chinese local reports are collected from the promoted, explicit sets of goals emphasize Communist Party (CCP), leaders of diverse leaders who come to the Two Sessions employment. As in countries around organizations like the Communist Youth from all over China. the world, China’s COVID-19 experience League and All-China Women’s Federation, dramatically ramped up unemployment, and, importantly, business leaders from What can be gleaned from this is what the especially in the demobilization of China’s key sectors, private and state-owned leadership priorities are, and within that, nearly 300 million migrant workers, one enterprises (SOEs), including technology what the perceived value and role of foreign third of the total labor force. and real estate. investors may be in the near future. Foreign investment in China post-COVID-19

Employment has, of course, always been reform, has regarded the State sector as the has been the driver of employment. Outside a concern of the leadership, and SOEs primary pillar of economic growth. Official of core state-owned entities, like the big have been partners in providing stable annual statistics attributed GDP growth banks, insurers, and funds, service growth employment, even when it affected unit contributions to three classes of enterprise has been in the private sectors—online labor costs negatively. What is the relevance according to ownership—state-owned, content and retail, logistics, social financing, of this shift from an emphasis on GDP to private, and foreign-invested—with the supplementary education, privately funded one on employment? intent for state-owned industrial production health care, advertising, and travel services. to drive growth. Employment contributions The new emphasis on employment were not primary measures. Large capital One obvious increase in central and local stabilization and job creation can work to flows from the PBoC through the state government interest is in health care reform, the benefit of foreign investors. Decades banks went disproportionately to SOEs and, shaped by lessons from the COVID-19 crisis. of data have given both the private sector in the hands of SOEs, into assets. Ultimately, MNCs in health care and adjacent social, in the Mainland and foreign investors the measures that counted were capital retirement, and health-related sectors such significant credit for job creation. In the investments, and that held true for foreign as diet and fitness are in various stages course of recovery from the COVID-19 peak, investors as well. At the local level, leaders of enhancing the service components of large MNCs have reported that their access were motivated to draw large, capital- their China business models. In several to government and Party leaders at the intensive investments into their trade and sectors, MNCs are migrating toward a local level has improved, and the priority development zones. It was often said that less capital-intensive, service-focused topic is job creation, a shift from a dominant a $100 million investment into a facility model of engagement in China, in some interest in large capital facility investment. that employed 100 people was far more landmark cases selling off physical assets to attractive to local leaders than a $10 million domestic parties and focusing on customer In addition to a new focus—we might investment that employed 1,000 people. relationships, technology and management say “scorecard” for provincial and service revenue, and brand development. local leaders—the rising importance China’s domestic stimulus spending of employment and job creation has followed this pattern and went into the While it is undeniable that another theme implications for regulations and capital supply side of the economy, in contrast to of China’s Two Sessions, was self-reliance, resources from every level of government. recent US stimulus, which focused on the indigenous innovation, and balanced In a broad sense, policy will deemphasize demand side of the economy, with direct trade, we believe the space is opening for travel of inland migrant workers to remote checks to consumers and consumer service foreign investors to grow in a variety of manufacturing centers on the east coast providers from airlines to restaurant chains. service activities, create jobs, and support and instead emphasize creating jobs closer That made liquidity injections strengthen increased household consumption. This to the workers’ official residences. the state’s industrial activity and tend implies a significant shift in attention for As we have argued in previous publications, toward depreciation in China because of MNC executives who oversee existing this could materially reshape China’s supply supply surpluses, as opposed to inflation complex businesses with local R&D and chains in many sectors. driven by increased demand. manufacturing, and it should also shape the value proposition that newcomers to China But there is a deeper change implied. If primary measures are shifted in the way present to regulators, domestic value chain implied by China’s Two Sessions, we can partners, and potential funders. GDP growth targets had several impacts expect a commensurate shift in regulation, on performance measures and resource incentives, domestic investment, and growth distribution. Given the historic emphasis opportunities, tilting toward service sectors. on the SOE role in industrial production, In the recent decade, service sector growth the leadership, from the beginnings of

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