Implication of China 2020 Government Work Report

Premier of the State Council Mr. Li Keqiang delivered a Report on the Work of the Government (Report) at the Third Session of the 13th National People’s Congress of the People’s Republic of China (China) on May 22, 2020. The highlights most relevant to industries are:

GDP – No express numerical target

Report: the report did not provide for any numerical GDP growth target due to the huge uncertainty of the pandemic and global economic situation. As a comparison, in the past 5 years, China always set forth one specific number or a range (e.g. 6-6.5% for the year 2019) as the GDP growth target annually.

The Report explains that not setting a numerical GDP growth target would enable all walks of life to concentrate on specific tasks ensuring stability on six fronts (i.e. employment rate, financial sector, foreign trade, foreign investment, (domestic) investment, (public) expectation, collectively “Six Fronts”) and maintaining security in six areas (i.e. job security, basic living needs, operations of market entities, food and energy security, stable industrial and supply chains, and the normal functioning of primary-level governments, collectively “Six Areas”).

TW: A hidden GDP target?

It is widely believed that a numerical GDP target was actually implied/embodied in the Report when setting forth other numerical targets such as employment, deficit etc.

Calculation results of the “hidden” real GDP growth target by economists mainly concentrate between 2-4%. Interview to the National Development and Report Commission indicates a wider range of expectation: a GDP growth of 1.75% would enable China to achieve its target of doubling the figure of average income per person of the year 2010; a GDP growth of 5% would enable China to achieve its target of doubling the GDP figure of the year 2010.

Key Priority – Employment rate and job security

Report: as mentioned in above GDP section, Six Fronts and Six Areas will be the focus of China in 2020, among which, stabilizing the employment rate and securing jobs rank as the top priorities.

TW: Difficulties to achieve massive lay-off by enterprises?

In the past, local GDP growth was a key component of the KPIs of local governments. For 2020, it is reasonable to forecast that elements mentioned in the Six Fronts and Six Areas may now weigh more in the KPIs of local governments. Against such a background, mass lay-off by enterprises may face more hurdles from the local authorities nowadays.

This has been proven in one of our recent cases, in which however we found an acceptable solution for all stakeholders. If a downsizing will become necessary, it will be important to carefully analyse the actual situation and interests of all stakeholders including authorities before deciding the route on dismissal of employees.

Foreign investment and foreign trade

Report: among others, China plans to:

• support the export by providing easier access to financing and reducing import/export costs
• significantly shorten the negative list for foreign investment
• draw up a negative list for cross-border trade in services
• create an equal and fair market environment to both domestic and foreign invested enterprises (FIEs).

The Report does not provide for specific timelines as to when the negative lists will be shortened or drown up respectively.

TW: difficulties in relocation or capital reduction?

Like with the new Foreign Investment Law effective as of January 1 2020, China obviously understands that foreign direct investment is a source of facilitating business growth in China. Accordingly, many local governments still have the preference to attract foreign investment over pure domestic investment. This includes in some cases the preference to attract green field investment by foreign shareholders or their HoldCos rather than by FIEs to do such an investment. Indirect investment via an onshore vehicle does not help localities to achieve their FIE KPIs. In such context, one can observe nowadays higher hurdles for FIEs to relocate from one locality to another; or to conduct a capital reduction since this would work against an increase of attraction of foreign investment.

Investment in projects

Report: China plans to provide more accessible financial support to selected industries and projects if qualified as “New Infrastructure and New Urbanization Initiatives and Major Projects” (New and Key Projects).

Funds reserved for such New and Key Projects include:

• 3.75 trillion yuan of special local government bonds, a 1.6 trillion yuan increase over the previous year;
• 600 billion yuan earmarked for investment to be reserved in the central government budget; and
• additional 100 billion yuan for State railway construction capital.

Examples of New and Key Projects include 5G applications, new energy vehicles (NEV), NEV charging facilities/poles, industries engaging in old town recreation initiatives (e.g. adding lifts to old community buildings aiming at facilitating the living and moving of elders), railway construction, and major projects in transportation and/or water conservancy.

Although not listed in the Report, various government departments in different official occasion mentioned that AI, cloud computing, data center, industrial internet etc. are also viewed as New and Key Projects by them.

TW: Opportunities for European business?

It is obvious that the construction of New and Key Projects, especially the construction of the new infrastructure is to invest for the future and seize the opportunities, to not only serve and guarantee epidemic prevention and control, but also enable China to achieve the technological leadership and frontiers of economics as intended by the government.

In general it is the first runners to define and develop the rules, while the others will need to follow. It is especially true for infrastructure providers which may shape the business model and environment for future business.

We therefore would deem participation in the New and Key Projects as vital for the concerned industries. Also considering the increasing tension caused by US-China trade war, European rooted business may have a fair chance in participating in and/or cooperating with China in such New and Key Projects.

Some localities provide for related opportunities and conditions precedents already. We certainly will be happy to identify those in case you are interested.

Tax reduction and potential impact on State-owned enterprises (SOEs)

Report: more proactive and impactful fiscal policies are promised by the Report.

From the governmental income perspective, the Report promises to, among others:

• additionally reduce the tax and governmental fees by 500 billion yuan comparing with that of 2019
• allow voluntary grace period for social insurance contribution of certain low-income people
• grant provincial level governments more freedom in deciding on land-use-right for construction – yet no details provided though.

From the governmental expenditure perspective, the Report requires that the governments shall reduce non-essential expenditures. The central government commits to reduce 50% of non-urgent and non-rigid expenditure. Governments are also required to collect and revive all kinds of receivables and/or not-utilized funds as much as possible.

The Report also forecasts to issue a Three Years’ Action Plan (“Plan”) to enhance the existing SOE reform. The Report does not provide for any timeline to release the Plan. Content wise, according to news report, the Plan will be a consolidation of some existing reform rules and pilot experiences, among which, prevention of the loss of State-own assets (SOA) is mentioned as one of the purposes of the Plan.

TW: More demanding SOEs?

According to the PRC Budgeting Law (latest revised on Dec. 29, 2018) and other rules and regulations, budgets of governments consist of four parts: general public budget (i.e. mainly the tax collection), government-managed funds budget (e.g. land-use right granting fees), state-owned capital management budget (e.g. dividends collected from State-invested enterprises, the payment received for transferring State-owned assets) and social insurance fund budget.

Since above fiscal policies will very likely result in a reduction of the governmental income from both general public budget and social insurance fund budget, it is understandable that the governments are trying to improve government income from the government-managed funds budget and from state-owned capital management budget, i.e. by easing the grant of land-use-right for construction, and potential by imposing greater pressure on SOEs for dividend distribution and for pressing to get better payment in case of transferring of SOAs.

In practice, we have seen in recent two years such increasing pressures from the Chinese SOE partners in joint venture projects to get (more or even undue) dividends. Recent judicial interpretation (i.e. Interpretation V to the PRC Company Law issued on September 28, 2019) is also in general supporting dividend distribution in case of a deadlock situation.

When agreeing on the corporate governance of joint ventures, or generally, on how such joint venture shall be steered and operated, foreign investors contracting with state-owned partners will need to carefully consider such additional pressure on the Chinese end.

Whether or not the acquisition of SOA would enjoy more freedom or would become more difficult and expensive is too early to say.

Crisis and opportunities

Like what the Chinese often quote that opportunities are embodied in every crisis, in general the Report gives us sufficient reason to hope for additional opportunities, especially for European rooted industries.