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Business Review of Premier ’s Government Work Report

The annual Government Work Report, Investment leading the way March 2017 delivered by Chinese premier Li Keqiang at Fixed asset investment will remain a key the Fifth Session of the 12th National People’s driver of ’s economic growth, though Congress on 5th March, 2017, sent out many there is an emphasis on “effective important messages. Besides reviewing the investment” for 2017. The government will achievements of 2016 and rolling out the invest 800 billion yuan in railway government’s goals and priorities for 2017, construction and 1.8 trillion yuan in highway the Report discusses major investment and waterway projects in 2017. Construction opportunities that foreign companies should on another 15 major water conservancy be mindful of and the kind of business projects will begin; and work on major rail environment they will operate in, in the transport, civil aviation, and coming year. telecommunications infrastructure projects Premier Li announced a wide array of policy will be speeded up. goals, ranging from economic opening to The government is expected to continue its reform measures, creating over 11 million massive investment in major state projects in new urban jobs, keeping CPI at around 3% to the areas of clean energy, transport, seeking a steady rise in import and export communication, oil and gas, environmental volumes and reducing at least 3.4% in energy protection, modern logistics, city rail, consumption per unit of GDP. emerging industries and upgrading of Noticeably, GDP growth rate for the coming manufacturing, as included in the 13th year has been set at “around 6.5%, or higher if Five-Year Plan (2016-2020). possible in practice,” relative to the range of Given the lukewarm growth of 3.2% for 6.5-7% for 2016. The targeted GDP growth rate private investments relative to robust growth is lower than the actual GDP growth of 6.7% in of 18.7% for state sector in 2016, Premier Li 2016. This is a realistic goal, given the promised that the government would improve uncertainties at home and abroad, along with policies and measures to encourage private the squeezing effect of the supply-side structural investment, and continue to promote public- reforms which will be accelerated this year. private partnerships (PPPs). In order to pave the way and create an In terms of regional development, the amicable climate for the all-important 19th government will continue to pursue its National Congress of the Communist Party of “Three Grand Investment Strategies.” These China to be held in autumn this year, the are the , Beijing- government has adopted “seeking progress Tianjin-Hebei city cluster, and the Yangtze while maintaining stability” as the core theme River Economic Belt, in addition to for 2017. Focused on improving quality and international industrial capacity cooperation effectiveness of growth, the government has scheme. set the goals of “stabilising growth, deepening reform, making structural adjustments, improving living standards and guarding against risks.” Emerging industries and As the standards of living improve, people’s investment hot-spots demand for high-quality services has soared. Premier Li pledged to step up efforts to ensure China’s Development Plan for Strategic people’s access to equitable and quality Emerging Industries will be implemented education, make progress in building a fully this year. The government will healthy China, develop new types of think accelerate the R&D and commercialisation of tanks with distinctive Chinese features, work new materials, artificial intelligence, to develop cultural industries and launch integrated circuits, bio-pharmacy and 5-G extensive ‘Fitness-for-All’ initiatives so that mobile communications. more people can enjoy sports and stay fit and The government will also step up efforts to healthy. This will create enormous business implement the initiative, opportunities in areas such as education, promote application of big data, cloud elderly care, healthcare, tourism, e-commerce computing, and the Internet of Things. It will and creative services for foreign companies. also encourage use of new technologies, new forms of business, and new models to bring Pro-business reform actions about transformation in the production, A prominent feature of this year’s action plan management, and marketing models of is the government’s renewed commitment to traditional industries. National smart deepening structural reform to create a manufacturing demonstration zones and business-friendly environment. manufacturing innovation centres will Specifically, the government pledges to be built. streamline administration, delegate more Environmental protection will be another powers, and improve regulation and services sector of interest to foreign investors. The to enable the market to play the decisive role government has set aggressive targets of in resource allocation. It will also expand the cutting sulphur dioxide and nitrogen oxide piloting of granting market access to foreign emissions by 3%, drastically reducing fine companies on the basis of a negative list1, and particulate matter (PM2.5) density, reduce the discretionary powers of the strengthening the prevention and control of government while giving the market more water and soil pollution, and improving freedom to take its course. control over exhaust emitted by motor To improve private investors’ confidence in vehicles. China’s judicial system, the government has State-owned enterprise (SOE) reform could vowed to improve the property rights and also provide some new opportunities as the protection system for the rights of economic government vows to make substantive entities under all forms of ownership and the progress this year on joint ownership in property rights of citizens. In addition to industries such as electricity, petroleum, addressing infringement on the property natural gas, railways, civil aviation, rights of businesses, the government will telecommunications, and defence. Further, provide equal rights and opportunities and the government plans to advance structural fair rules for all market entities. All industries reform in the power, and oil and gas sectors and sectors, for which entry is not explicitly to open their competitive operations to the prohibited by laws or regulations, “will be private sector. open to all types of market entities,” in Premier Li’s words.

1 The negative list refers to sectors and businesses that are off-limits to foreign investment, and is an extension to the existing investment-approval method of specifying categories that are "encouraged", "prohibited" or "restricted". The negative list method was first adopted in the China (Shanghai) Pilot Free Trade Zone after it opened in 2013. The term negative list first emerged during international investment treaty negotiations, and is now common practice globally, with many countries outlining sectors that are key to national security or sensitive to increased foreign competition.  Source: http://usa.chinadaily.com.cn/epaper/2015-11/03/content_22359380.htm

2 PwC More importantly, following the set of new speculative house purchasing will be measures on attracting foreign investment prohibited, as “houses are built to be released in January 2017, Premier Li offered inhabited, not for speculation,” in President further commitments to foreign investors. Xi’s words. These include revisiting the catalogue of In 2017, the government will establish not industries open to foreign-invested firms only a robust long-term mechanism for (FIEs) and making service sector industries, promoting steady and sound development of manufacturing, and mining more open to the real estate sector, with multiple levels of FIEs; encouraging FIEs to be listed and issue demand being met primarily by the market, bonds in China; treating FIEs the same as they will also provide basic housing support. domestic firms on applications, standards- Cities that are under big pressure from rising setting and government procurement; and housing prices need to increase appropriate allowing FIEs to enjoy the same preferential supply of land for residential use. policies under the Made in China 2025 initiative. Thus, the housing boom of 2016 is unlikely to continue in 2017. As part of the supply-side structural reform efforts to cut cost for business, the RMB exchange rate and bad debt government has promised to overhaul government-managed funds, abolish The RMB has been under great pressure for municipal public utility surcharges and 35 devaluation recently as the interest rate of the administrative charges, reduce government US dollar has gone up and the M2 money imposed transaction costs and lower energy supply is projected to grow by another 12% and logistics costs. In addition, the this year. It reached a record 155 trillion yuan government will also investigate and punish by the end of 2016, making China’s stock of the production and sale of counterfeit and currency in circulation equivalent to that of substandard goods, false advertising, and the US, the EU and Japan combined. price fraud to better protect consumer rights. Given the changed situation, it is interesting It needs to be noted that all these liberal to note that in the Government Work Report, measures are set against the background of Premier Li used a new expression of dwindling foreign investment in China in “maintaining the currency’s stable position in recent years, particularly in manufacturing. the global monetary system.” This indicates With rising cost of production and that the government is more tolerant in depreciating RMB, more Chinese companies accepting a weaker yuan this year. are relocating to lower cost neighbouring Preventing systemic financial risk is one of the countries and even to America. Bold tax cut key priorities for 2017. China’s five biggest plans by the US and the UK for strengthening banks reported a combined loss of 274 billion their competitiveness will only encourage this yuan (around US$40 billion) from writing off trend. They also resonate with the calls of bad debts for the first nine months of 2016. At President at the World Economic the end of September 2016, the average ratio Forum in Davos in January 2017 to oppose of non-performing loans (NPL) had risen to protectionism and promote further 1.72% from 1.69% at the end of June 2016, globalisation and opening-up. according to China’s Banking Regulatory Commission. The real NPL rate, however, Another real estate boom? could be a few times higher, according to China’s real estate sector experienced a international rating agencies. surprisingly high growth in 2016. Sales of To address this rising concern, Premier Li commercial properties rose 22.4% year-on- pledged to reform the financial regulatory year, and real estate investment jumped by system and work systematically to defuse 6.9% over the previous year to RMB 10.3 major potential risks. He insisted that the trillion, which is 17% of total fixed fundamentals of the Chinese economy have investment. However, due to the rapid rise of remained sound, with high capital adequacy property prices in many cities, the ratio and provision coverage of commercial governments at different levels have recently banks. And the government has many laid new regulations to restrict further financial tools and instruments that can be investment and “speculative” purchases by used to fight off financial risks. residents and investors. Credits for

Business Review of Premier Li Keqiang’s Government Report 3 This is largely true, as most of China’s debts Besides, Chinese banks have already taken are domestic in nature, with limited various steps to mitigate the NPL risks. These international debt (which is below the include exploring new market-oriented and threshold of safety). The government still has innovative methods such as transfer of bad the power and will to keep things at bay. assets, securitisation of bad assets, debt- Finally, the Chinese economy will continue to equity swap, and credit default swap (CDS). grow, albeit at a slower rate. So many NPLs Some banks are taking pre-emptive actions to could be diluted and resolved along with raise capital from the market while pricing economic expansions. remains favourable in order to prepare for higher loan impairments. Given the factors above, a financial crisis is unlikely.

Conclusion

Maintaining stable and sound economic development as well as social harmony and stability are the key objectives for 2017, as the country gears up for the 19th Party Congress where the top leadership team will be significantly reshuffled. The government has demonstrated its commitment to deepening reform and opening-up, and set difficult tasks for itself. Foreign companies are poised to benefit from the new round of trade and investment liberalisation, while contributing to China’s economic advancement. If these liberal policies could be successfully implemented, it will be a win-win situation for both sides.

Contacts

Frank Lyn David Wu

PwC and PwC China Beijing Senior Partner Markets Leader PwC China North China Markets Leader +86 (10) 6533 2388 PwC China Government and +852 2289 1233 Regulatory Affairs Leader [email protected] +86 (10) 6533 2456 [email protected]

Elton Huang Allan Zhang

PwC China Shanghai Senior Partner Chief Economist PwC China Central China Markets Leader PwC China Centre of Excellence +86 (21) 2323 3029 +86 (10) 6533 7280 [email protected] [email protected]

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