China Power

What Will the National People’s Congress Bring?

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China Power

What Will the National People’s Congress Bring?

David Cohen gives us his take on what to watch for.

With the opening of the National People's Congress (NPC) next week, China's long transition season is coming to an end.  Incoming leaders Xi Jinping and Li Keqiang will take over the government as President and Primer during the session, and they will have their first chance to present new laws.  If they have plans to begin taking on the interest groups which dominate China's state economy, this is the venue where they will present them.

From the reports which have emerged so far, it seems that there are three areas to watch for economic reforms: organizational changes to the government, environmental protection, and urban housing and local government finance. 

Organizational changes would be the key to taking on the tight bonds between state-owned companies and regulators which largely protect the former from private competition.  Changes to local government finance could reduce their dependence on bank financing and land sales, making it possible to address the issues of forced demolitions and “financial repression” – the reliance on the savings of Chinese depositors to finance government.

Organizational reform:

Major reforms in China have historically required changes to the structure of the government – with weak systems for internal oversight, what the law says is less important than who implements it.  The last decade has seen more and more power accrue to institutions like the National Reform and Development Commission (NDRC) and the Ministry of Industry and Information Technology (MIIT), which focus on industrial policy and have been closely involved in the push to make the largest SOEs into “National Champions.”  They protect the privileged status of these companies, and a push toward market competition will require reducing these agencies' powers and giving market-oriented agencies the power to compete with them.

The Party's Central Committee has already approved a restructuring plan, which will be formally ratified at the NPC.  Although the details have not yet been announced, Xinhua reports that it will “further separate government administration and enterprises,” which fits with Caixin's and Bloomberg's reporting that the enormous – and corruption-plagued – Ministry of Railroads will be broken up, with the regulatory functions given to the Ministry of Transportation and operations spun off as a new SOE.  This is progress – and it would mean that regulators' salaries will no longer be directly paid by profits from the industry, although massive SOEs have proved adept at manipulating their regulators without this advantage.

The same reports suggest that nothing will be done to the NDRC and MIIT, despite rumors in recent months.  This would be unsurprising – Chinese leaders usually start weak and accumulate power as they get opportunities to place their people in influential jobs, and a shaky economy has created fears of a recession that might threaten the Party's legitimacy.  A Chinese leader would have to feel very secure indeed to start his term as President by taking on the largest interest groups in the system and the main drivers of China's recent economic growth.

Cheng Li of The Brookings Institution disagrees, arguing that Xi's popularity and relatively united Politburo gives him the strength to take on the NDRC now.  He also gives a good overview of other proposed changes to government structure in an interview with the Wall Street Journal's Tom Orlik.

In addition to reducing the power of SOE-focused agencies, a move away from state-driven growth would require finding champions for the market economy – and the waiver of mandatory retirement for central banker Zhou Xiaochuan has led Reuters to argue that the People's Bank of China has been nominated for this role


Action on the environment is, of course, long overdue, and needed to address the increasingly dangerous levels of air (as well as water and soil) pollution that have been spectacularly demonstrated in Beijing this winter.  Given the recent outcry over pollution within China, it seems certain that the government will address it.  But this issue too has an institutional dimension – China's environmental standards are enforced by local governments, which are simultaneously responsible for managing the local economy, making them beholden to polluters.  All too often, they are also the owners of local state-owned companies engaged in heavy industry, and rely on them for revenue.

In this context, Daniel Rosen at China Economic Watch argues that the recent guidelines on consolidating heavy industry from the Ministry of Industry and Information Technology are a good sign: the plans call for rolling up local SOEs into a few regional and national companies, taking them out of the hands of local governments.  But unless local officials can be convinced that providing clean air and water is as important to their careers as growth and employment, they will remain locked in a race-to-the-bottom competition to attract investment. This portends poorly for the environment.

Local government:

Revamping local government financing is an unsexy topic, but if Li Keqiang is able to make changes stick it could be a boon to long-awaited rebalancing away from investment-driven growth – and give the government some room to make progress on stopping land seizures and forced demolitions.  These are issues of major concern to China's leaders.  Li Shenming, a high-ranking member of the legislature and China's ministry-level Academy of Social Sciences, made a public call for urgent reforms this week, suggesting that they will be on the agenda at the NPC.

As Rosen notes, taking local SOE revenue out of the already-strained finances of local governments by restraining land sales will require giving them a new source of funds.  Reuters reports that this may happen with a reform to China's bond market that will open it to municipal governments, which have been forbidden from issuing bonds since the reforms to government finance of the mid-90s.

If the bond markets attract private investors, they could allow China to address two huge issues – forced demolitions and dependence on bank deposits for government financing.  As the new book China's Superbank argued, these are closely related: municipal governments rely on bank loans for their finances, which are secured by effectively selling in advance decades' worth of land sale revenue through local government financing vehicles, which commits them to continuing land seizures in order to make their debt payments.  Meanwhile, the capital for these loans largely comes from bank deposits, which pay extremely low interest rates and rely on a lack of alternative opportunities for investment to attract customers.

Municipal bonds could allow local governments to appeal to investors directly (or, more precisely, through the mediation of the Ministry of Finance), competing with banks to offer better returns.  This seems to be the plan, as other changes – such as increased capital requirements – seem to be having some effect.  This week, China's fifth-largest bank raised deposit rates for the first time since regulations permitting such competition were issued in June.

Of course, bonds also have to be paid, so without creating other sources of revenue they will not loosen the pressure on local governments to sell land.