China Policy Institute: Analysis


foreign investment

2017 National People’s Congress: China’s Innovation-Driven Future

‘In the past 30 years, China’s economic development mainly relied on introducing results of the second industrial revolution, particularly foreign technology…. If China doesn’t change this approach, not only will it lag further behind (western developed countries), but also its economy will be locked up at the low end of manufacturing industry. Facing severe global competition, we don’t have many options but to pursue an independent innovation-driven development strategy.’

— Xi Jinping at the panel discussion of China Association for Science and Technology at the 12th CPPCC National Committee meeting, 4 March 2013

Though considered by many a rubber-stamp institution in China’s political complex responsible only for endorsing laws and policies already decided upon by the Party, the annual meeting of the National People’s Congress (NPC) of China still provides some useful perspectives on China’s present situation and future development. The 5th session of the 12th NPC met in Beijing between the 5th-15th March 2017, and in particular, has sent a strong signal of China’s continuous commitment to an ‘innovation-driven’ economic future. Continue reading “2017 National People’s Congress: China’s Innovation-Driven Future”

São Tomé and Príncipe drops Taiwan, embraces China

Written by J. Michael Cole.

The African nation of São Tomé and Príncipe on December 20 announced that it was severing diplomatic relations with the Republic of China (Taiwan) and establishing ties with the People’s Republic of China.

Following the news, Taipei announced that it was immediately severing diplomatic ties with the African country and withdrawing all diplomatic and technical personnel.

Taiwan now has 21 official diplomatic allies worldwide, and just two in Africa—Burkina Faso and Swaziland. Continue reading “São Tomé and Príncipe drops Taiwan, embraces China”

From disdain to greater interests: China and the rest of the world.

Written by Daouda Cissé.

China is at the heart of the world economy. China’s economy has never been more strongly connected to the global economy than today. Increasingly, China’s economic success or downturn has impact on the global economy. China’s impact on the current crisis of the global commodity market and the recent turmoil in the Chinese stock market and the consequences for different economies are examples in this regard. Continue reading “From disdain to greater interests: China and the rest of the world.”

HS2: the trouble with relying on China for high-speed rail

Written by Michael Synnott.

George Osborne has made a major commitment to investing in UK infrastructure with the announcement of a new independent commission to oversee it. In particular, he has emphasised the role of railways in making Britain “great”. But, as with Osborne’s plans for nuclear energy, he will be turning to China for help in building this costly infrastructure.

Osborne’s recent overture to the Chinese to bid to build the first phase of a new high-speed rail system between London and Birmingham (HS2) has left many in the UK perplexed and dismayed. The charge of kowtowing to the Chinese to take on this £11.8 billion project has been made and the UK chancellor has also been accused of acting in contempt of the country’s legislature – as legislation enabling HS2 to proceed has yet to be formally signed off by the Queen.

Underlying complexity

Inevitably, the headlines understate the underlying complexity. On the one hand, the chancellor seems keen to link the UK with the newly-created Chinese Asian Infrastructure Investment Bank. Such is Osborne’s commitment to this bank that he overrode strong objections from the Foreign and Commonwealth Office as well as the US president, Barack Obama, and the World Bank when he made the decision to join it.

Through this source the chancellor is also hoping for Chinese investment in the new nuclear power station at Hinkley Point, which carries a price tag of £25.5 billion. High-speed rail is, however, a more popular investment prospect than nuclear power. Canadian pension funds, for example, have already heavily invested in high-speed rail – it was only a few years ago that one acquired HS1. And these funds have signalled strong interest in further investment opportunities, including HS2.

Yet there is a possible technical link here between the HS2 project and a new energy source like Hinkley Point. Quite simply, if the HS2 scheme achieves its design goal of an operating speed of 250mph, it will require access to a significant new power source. So there is some urgency to steer finance into both projects.

Global leaders

Certainly, the HS2 project appeals to Chinese interests in purely business terms. The Chinese government is keen to position itself as a global leader in the field after developing the technology domestically to link its widely dispersed nation of 1.5 billion people. Beginning in the 1990s, Chinese engineers bought trains and technology from foreign firms such as Japan’s Kawasaki, Germany’s Siemens, the French Alstom, and Bombardier in Canada. They then adapted and reverse-engineered the imported technology until they evolved their own. Since 2003, China has laid more than 16,000km of high-speed track – more than half the world’s total – with 9,000km more planned by 2020.

But this rapid development has come at the cost of human life. First, in 2008, 72 people died when an express train from Beijing to Qingdao derailed. But in July 2011, in eastern Zhejiang province, another high-speed train crash killed 38 and injured 192. Failures in the signalling system caused a derailment of two trains and resulted in four carriages falling off a viaduct.

In a bid to stifle news or comment about this tragedy, officials ordered the burial of the derailed cars. People became reluctant to use the service as public confidence in high-speed rail eroded and China’s reputation in high technology faced international scrutiny.

Learning from experience

China claims to have learned from these accidents and now wants to build foreign earnings and influence using its hard-won experience in building the fastest high-speed rail systems in the most challenging conditions. Already Chinese rail builders have been selected to build a high-speed rail line between Belgrade in Serbia and Budapest in Hungary, as well as a new route to link Mombasa and Nairobi in Kenya. There is even a possibility of China’s participation in California’s high-speed rail project.

Plus, it is difficult to think of another source which could meet the strict specifications for rail tracks, rolling stock and signalling set out in the plans for HS2 – which bring the total cost to around £50 billion.

Yet there is something which both the UK and China may need to consider as Chinese companies are persuaded to sign up for the HS2 scheme. As we have seen in Africa and South America, Chinese businesses seeks to present themselves as scrupulously politically neutral when working overseas. It would be naive in the extreme to imagine that the progress of work on HS2 will not be attended and affected by local demonstrations and occupations. The prospect of middle-class protesters chained to mechanical diggers while dismayed Chinese project managers look on and police seek to clear the way for a very time and cost-sensitive project, is not one Chinese PR managers will want to see on the British tea-time news.

 is Senior Teaching Fellow in Strategy and International Business, University of Warwick. This article was first published on The Conversation and can be found here. Image Credit: CC by 10 10/Flickr.

One Year of Modi Government

Written by Pravakar Sahoo.

High inflation, dwindling growth, low investor confidence, and policy paralysis in the years before the 2014 general election resulted in high expectations from Indian industry, investors and the people at large: everyone looked to the new government, led by Prime Minister Modi, to ease their pain and bring the economy back on track. Since coming to power, the NDA government led by Modi has taken several important steps to revive domestic investment, ensure ease of doing business and attract foreign investors, so as to enable the success of the ‘Make in India’ initiative for manufacturing-led job creation and growth.

Ease of Doing Business: The government has taken many steps to ease doing business in India – not an easy endeavour, as reflected by India’s rank of 142 among a total of 160 countries (information published in the global competitive index 2014). The 2015-16 budget proposed many improvement measures, including the setting up of an expert committee to get rid of multiple prior permissions, commitment to Goods and Services Tax (GST), abolishing wealth tax, reducing corporate tax rates from the present 30% to 25% over the next four years, an e-business portal which merges into one place 14 previously separate regulatory permissions applications, a proposal to introduce a new bankruptcy law for easier exit of investors, a proposal to bring a public contracts bill for dispute resolutions, deferring general anti-avoidance rules for two more years and the creation of dedicated branches in courts for early resolution of commercial disputes.

These measures are all directed towards improving the business environment. The commitment to implement GST from 1 April 2016, and the phasing out of tax exemptions and concessions to corporates (which lead to innumerable tax disputes) are designed to create a transparent and more rationalised tax structure. Furthermore, getting rid of the distinction between foreign direct investment and foreign portfolio investment, and merging Forward Markets Commission with the Security and Exchange Board of India for market regulation, is intended to reduce multiplicity in administration and regulations and bring transparency in doing business. These steps are all directed towards reducing red-tape and procedural delays, improving enforcement of contracts, and facilitating quick dispute resolution.

The Finance Minister also renewed the commitment towards the enactment of the Goods and Services Tax (GST) Bill, which is heralded as a landmark business-friendly reform. The GST requires a Constitutional Amendment by both houses as well as by a majority of all state assemblies. The government demonstrated its commitment to the cause by periodically addressing states’ concern, handing out olive branches to stubborn opposition parties, and eventually getting states and opposition parties on board. The GST Bill, with some amendments, was passed in the Lok Sabha on 6 May 2015. This bill seeks to implement a uniform, comprehensive tax on manufacture, sale and consumption of goods and services. The GST will subsume a range of indirect taxes currently levelled at centre and state levels.

Many of the procedural and administrative hurdles that businesses face in India have also been tackled, or are set to be tackled, and many of these hurdles pertain to the complexity and multiplicity of paperwork, which is one of the major causes of red-tape in India. The launch of the eBiz portal for businesses is one of the technology-enabled e-governance efforts. The portal is an online single-window system which allows firms to navigate the documentation-related formalities of setting up and managing a business in India. As of today, eleven services can be availed online end-to-end 24 / 7 on the G2B eBiz portal. The government aims to integrate 26 central government services across nine departments on the platform.

The reduction in the number of documents required in order to import and export goods to and from India has been reduced to three from ten, thus substantially cutting transaction costs – one of the banes relating to trade in India. Security clearances for Foreign Investment Promotion Board (FIPB) investment proposals will now be cleared in 30 days, down from 90 days. The states have also been pitching in – for example, the time required for a new electricity connection in Maharashtra has been reduced from 67 days to 21 days, while the number of procedures involved for the same has been cut down to 3 from what was previously 7.

In terms of the broader governance architecture, the government has sought to streamline the regulatory regime by merging implementing authorities (for example, the proposed merger between Forward Markets Commission (FMC) and Security and Exchange Board of India (SEBI),) combining multiple and overlapping laws such as the proposed five-pronged labour code, to replace the 44 laws governing labour relations now. These mergers will help to improve compliance, while contributing significantly to the ease of doing business in the country. The much awaited labour reforms necessary for mass manufacturing in India were finally initiated at central government level by Prime Minister Modi on 15 October 2014. Any efforts to rationalise labour rules (around 250 altogether both at the central and state level), are a welcome step for the industry. The two key areas of reform announced are the ‘Unified Labour and Industrial Portal’ and the ‘Labour Inspection Scheme’. The objective criteria and transparent processes for labour inspection would be a relief for industry, more so for SMEs, which have allegedly been victims of the arbitrary use of labour rules by labour inspectors. The introduction of Labour Identification Numbers (LIN) and the implementation of the inspection process via a unified portal will go a long way in executing transparency in the use of labour rules. To undo the malady in India’s labour market, some changes have recently been initiated in the three acts that largely govern India’s labour market: the Factories Act (1948), the Labour Laws Act (1988) and the Apprenticeship Act (1961). Amendments to some restrictive provisions within all of these acts have been cleared by the cabinet, and are set to be tabled in Parliament. This is a crucial step and will help to prevent unnecessary procedural delays – an inordinate feature of doing business in India.

Infrastructure, Manufacturing and Investment

Boosting the manufacturing sector is imperative for the Indian economy. Around 1 million people enter the workforce every month, and unemployment hovered around 3.7% in 2013. At the same time, education and general skills are in short supply. As a result, low-skilled manufacturing jobs provide the highest chance of abating underemployment and unemployment. However, the contribution of the manufacturing sector has languished at about 15% of GDP for years. The NDA government has rightly identified the problem, and has therefore focused on the manufacturing sector; the government’s ‘Make in India’ scheme essentially announces to the world that India is a better place to invest in than before, that the government is doing what it can to ease the rules and simplify procedures, while investing in physical infrastructure. With the aim of making India a production hub for global manufacturing companies, the government has promoted the scheme extensively within and outside India. The focus sectors include mining, telecoms, textiles, automobiles, biotechnology, chemicals, construction, defence, food processing, leather, pharmaceuticals, and railways. Additionally, the government has placed more focus on ‘ease of doing business’ and in boosting physical infrastructure. Since taking office, the government has made elaborate plans to spend on infrastructure, mainly focusing on connectivity. As a result the government has made it a priority to provide timely environmental clearances for projects.

One of the most noteworthy steps of the Modi government is the focus on infrastructure development, both in terms of allocation and policy measures. The 2015-16 budget allocates a whopping US $79 billion of public investment (capital expenditure both by government and public sector undertakings) compared to US $57 billion in the financial year 2014-15 for infrastructure investment. The budget has increased the allocation by US $11.5 billion for roads and railways, provided US $16.5 billion for setting up of 5 Ultra Mega Power Projects, US $3.4 billion has been allocated to the National Investment and Infrastructure Fund and computerisation of ports and tax free bonds for infrastructure; these are just a few measures among many that are intended to provide quality infrastructure to help reduce trade and transaction costs of doing business. The overall objective of these measures is to improve competiveness and attract investment.

Further, the NDA government has taken number of measures to revive Special Economic Zones (SEZs), attract FDI and pursue reforms in important sectors like defence. The 2015-16 budget has taken effective steps to revive SEZs including giving investment allowance at 15% for 3 years to a manufacturing company which invests in plant and machinery and announcing special SEZs for women in 100 districts.

The hike of FDI caps in insurance and defence sectors to 49%, the sharp decrease in retrospective taxes and the raising of FDI limits in e-commerce, insurance, defence, and health insurance are all signs that the government is headed the reform way to attract FDI, which is necessary for manufacturing-led growth and subsequent job creation. Over all, the economic policy of the NDA government in its first year has been focused on reform, infrastructure, a focus on ease of doing business and reviving investment in the manufacturing sector and growth for job creation and improvement in the standard of living. Though it’s too early to measure the outcomes of these policies, the future of the Indian economy certainly looks bright.

Pravakar Sahoo is an Associate Professor at Institute of Economic Growth (IEG), Delhi and a CPI Blog Regular Contributor. Image Credit: CC by Global Panorama /Flickr

China and the Visegrad countries: Policies, goals and discrepancies

Written by Richard Q. Turcsányi.

Among the 16 Central and Eastern European (CEE) countries which are members of the China-tailored ‘16+1 platform’, the Visegrad states (V4) comprising of Hungary, the Czech Republic, Poland and Slovakia have since the platforms inception, been measurably advanced of their neighbours. However, there may be signs that its position within the CEE16 is ebbing. After the initial high level 16+1 meetings in Budapest and Warsaw, last year’s summit took place in Bucharest and this year’s gathering has been recently called for December 2014 in Beograd, irrespective of attempts by both the Czech Republic and Slovakia to host the event. Similarly, Hungary did not achieve its strategic partnership with China, in contrast to Serbia’s and Albania’s success in this endeavour. All in all, the four Visegrad countries have seen only modest improvements in economic relations with China since the diplomatic offensive started with the formation of the 16+1 platform in 2012.

Hence, the obvious task is to explain why the development of economic relations between China and the V4 countries has been lacking in spite of dynamic political developments. Furthermore, why, in some aspects, has China prioritised other states in the region ahead of the V4 countries? To explain this, I will look at the foreign and economic interactions of the V4 countries with China compared with the overall Chinese goals in the region. There is a gap between the V4 countries’ expectations of China and relative Chinese interests in the region. Similarly, while for China the V4 countries may rank the highest in the long term, in the short term the non-EU countries may be preferred for practical reasons.

The V4 countries are among the most developed and economically important states in the CEE16. They constitute roughly 4/5 of China-CEE16 trade and receive the bulk of Chinese investments in the region. They score highest in terms of tourist destinations and have embarked on various dialogues with China on multiple governmental, business and policy making levels. Its potential has been acknowledged also in the recent reports by Beijing’s CASS Kong Tianping and Liu Zuokui, who mention its “special position” in trading with China. The report puts them in the top four places among the CEE16 as attractive destinations for Chinese investment.

In relations with China, the V4 basically seek to achieve the same goals – greater direct investments in their economies and increased exports to China. While their success/failure in these aspects remains roughly similar, they employ different strategies. Hungary went furthest when it seemingly believed China could provide an alternative solution to the Western institutions for its financial and developmental problems. Budapest’s gamble that good political relations with China would transfer into significant economic benefits has not materialised and it remains to be seen how sustainable the approach will be if a rapid increase of China oriented economic growth does not arrive.

Similarly Slovakia believed for some time that Chinese investments could solve the major economic issues in the country, such as poor or underdeveloped infrastructure. However, this initiative came to an end after the elections in 2010, when the new centre-right government preferred EU-funding and also took a more critical approach towards China. The failed case of Chinese highway construction in Poland led even the returning left-wing government in 2012 to abandon its considerations. Under the relatively stable, economic conditions in the country at present, it is not beneficial for the Slovakian government to enter into a risky Chinese deal. Public opinion which perceived China rather cautiously may also play some role in this policy change.

This is the case even more so for the Czech Republic which has framed it’s foreign policy as an increasingly outspoken critic of China’s human rights record. However, there is no consensus on this issue in the country. While many conservatives and liberals took critical stance towards China, left-wing politicians call for pragmatic economic relations. The divided public opinion means that every election can bring about adjustments in the country’s China-policy. While it is not clear whether the critical stances towards China actually affected the outcomes, it surely did not help either.

Finally, Poland has recently been able to conduct pragmatic diplomatic relations with China, which in 2012 were elevated to a strategic partnership. While not overtly pressing its “values” yet standing its ground on some issues, Poland has been able to push forward its economic interests with China. There has been an apparent continuity and general political consensus on this approach in recent years in Poland, which has proven useful for Chinese policymakers. This functional approach combined with its economic size and dynamic development makes Poland a front runner of not only the V4 but the whole CEE16 in the eyes of Beijing. However, similarly to its V4 partners, it has not achieved breakthrough economic success so far – with hard earned experience relating to a failed Chinese constructed highway in 2011

There may be two basic argumentations for this alleged ‘failure’ of the V4 countries to capitalise on the recent rapidly developing relations with China. On the one hand, China may just prefer to deal with the non-EU member countries among the CEE16 which are not subject to EU and OECD regulations that China finds unfavourable. Further economic reasons might be that China wants to secure these markets for its cheap products. Geo-economically, the countries in South-Eastern Europe may have useful position for China due to transport routes. On the political side of this line, China may be seeking to subvert the EU integration process and/or the unity of the EU by playing members off against one another and building rival partnerships with prospective members. This argument could be further supported by the fact that these countries and their public perceptions are less critical towards China than those in the V4as demonstrated by the Czech Republic. In this context, being non-EU members makes these states preferred partners for China.

On the other hand, while acknowledging some value in the above arguments, China is trying to move up the value-chain and for this to occur, relations with the developed world are vital. Furthermore, China would like to see a multipolar world order, which is hardly possible without a united or multilateral Europe playing a role. China may still seek to create a favourable position to influence the EU decision making process – something for which good relations with the EU members are useful. EU members and the economically advanced countries among the CEE16 should be preferred for partnership.

It may seem that the second line of argument is in conflict with evidence of the V4 states’ relative failures in dealing with China. However, it should be noted that these V4 “failures” are only failures when measured against very ambitious foreign policy goals. In fact, the majority of the V4 hopes vis-à-vis China come from expectations of the rapid increase of investments, mostly in the form of green field investments and/or investment and support for problematic companies, to a lesser extent increasing exports, and perhaps the unrivalled leading position within the CEE16. The alleged shift of Chinese attention away from the V4 can thus be interpreted as the Chinese policy of having good relations with as many countries as possible. Furthermore, Chinese investors may be really inexperienced and have little knowledge about the realities of the region and combined with the strict EU rules, regional inefficiencies and lack of cutting edge technology may significantly decrease the willingness of potential investors to enter the market.

The conclusion is that the V4 countries should have patience and realistic expectations of China and plan their China-policies accordingly. While stable and working diplomatic relations are useful for both political and economic reasons, they are not a recipe for the instant growth of financial inflows and exports. At the end of the day, Beijing has many goals, some of which may be contradictory, and want to have as many good relations as possible, including with the V4, the CEE16, and the whole EU.

Richard Q. Turcsányi is a PhD candidate at the Masaryk University, Czech Republic

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