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The general view of the opening of the fifth plenary session of the National People’s Congress on March 12, 2023 in Beijing, China. China’s annual political gathering, known as the Two Sessions, convenes the nation’s leaders and lawmakers to set the government’s agenda for domestic economic and social development for the next year. (Source: Photo by Lintao Zhang/Getty Images)
Resident Senior Fellow
Head, Trade 'n Technology Program
During the first half of March, the annual plenary meetings of China’s National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC), also known as the ‘Two Sessions’ meeting, were held. A highlight of the meeting was the reconfirmation of President Xi Jinping to a norm-bending third term in office as well as the elevation of two of his ex-‘chiefs of staff’, Li Qiang and Ding Xuexiang, to the top two positions at the State Council.
The common thread tying together the (few) norm-bending senior appointments at the senior State and Party levels – the reappointment of Finance Minister Liu Kun and Central Bank governor Yi Gang to their posts despite being kept off the Party’s Central Committee; the earlier reappointment of General Zhang Youxia as Central Military Commission vice-chairman and elevation of Wang Yi as Foreign Affairs Commission Office chief despite their crossing the retirement age limit – suggests a desire for continuity in key macroeconomic, national security and foreign policy areas.
The most important outcome of the ‘Two Sessions’ meeting was a root-and-branch institutional reorganization of government focused on the technology, finance, and data sectors. The Ministry of Science and Technology (MoST) is to become considerably more influential while shedding its R&D project fund management functions. A new and overarching financial regulator, the National Financial Regulatory Administration (NFRA) will be created, while the China Securities Regulatory Commission (CSRC), the securities regulator, is expected to guide capital market-based finance towards desired techno-nationalist self-reliance goals. Finally, a National Data Bureau is to be established to develop the digital economy and weave data into the fabric of the national economy as a ‘new factor of production’.
With Party Commissions retaking the policy reins at the S&T (via the Central Science and Technology Commission) and financial (via the Central Financial Commission and the Central Financial Work Commission) sectors, and with the Cyberspace Affairs Commission already active in the data governance space, the government reorganization plan constitutes the latest and most comprehensive Party-State response to the technology suppression measures instituted in the advanced manufacturing and digital sectors by the Trump and Biden administrations since the October 2017 19th Party Congress.
Beginning March 4th and continuing through mid-March, the annual plenary meetings of China’s National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC), also known as the ‘Two Sessions’ meeting, were held in Beijing. The ‘Two Sessions’ meeting is the most important event on China’s political calendar, with the exception of the quinquennial Party Congress of the Communist Party of China. The highlight to the March 2023 ‘Two Sessions’ meeting was the reconfirmation of President Xi Jinping to a norm-bending third term in office as well as to the chairmanship of the Central Military Commission (CMC). The relaxation of term limits of the President (and Vice-President) had been written into China’s constitution at the first ‘Two Sessions’ meeting (in March 2018) held after the 19th Party Congress in October 2017. That said, the power wielded by Xi flows primarily from his concurrent appointment as CPC General Secretary and CMC chair, a twinning of roles that was first established under Jiang Zemin in 1993. By contrast, his presidential powers are mostly ceremonial – although the president as head of state does serve as the international face of China.
The other highlight of the March 2023 ‘Two Sessions’ meeting was the inauguration of a new State Council team under newly minted Premier, Li Qiang. With the two five-year term-limit remaining in place for the posts of premier and vice-premier and incumbent Premier Li Keqiang opting for retirement, appointment at the top two executive branch positions of the State Council are now held by two ex-‘chiefs of staff’ of Xi Jinping. Premier Li was chief of staff when Xi served as Zhejiang Party secretary in the mid-2000s; Executive Vice Premier Ding, as head of the Party General Office from 2017 on, wielded power effectively as President Xi’s chief of staff at the time.
At the March 2023 ‘Two Sessions’ meeting, there were three overarching items on the agenda. First, to pick a slate of new personnel for key positions in government. Second, to lay down the key economic markers for government work in 2023. And third and most importantly, to legislatively inscribe an important institutional reorganization of government with a focus on reform and deepening of the science and technology (S&T), finance, and data sectors.
In addition to re-confirming President Xi Jinping to a third term in office, a slate of new, high-level appointments was finalized. The key appointments are:
The other four Politburo Standing Committee (PBSC) members were also assigned their respective roles. Third ranking member Zhao Leji became head of the National People’s Congress (NPC); fourth ranking PBSC member Wang Huning became head of the Chinese People’s Political Consultative Conference (CPPCC), an NPC’s advisory body; fifth ranking member Cai Qi in charge of communication and propaganda; and seventh ranking member Li Xi in charge of anti-corruption/discipline inspection. Outgoing PBSC member Han Zheng meantime is to step into the role of vice-president, for which the upper age limit (68 years) was relaxed at the 19th Party Congress. Supporting the Premier and Vice-Premiers at the State Council are five State Councilors. They are:
Perspective: With a new and untested (at the central government level) team stepping up at the State Council to take over important portfolios, including that of departing Premier Li Keqiang and departing economic policy czar Liu He, the overriding priority in the selections was to project stability and maintain continuity. In this regard, the most notable and surprising picks do not feature in the list above. They relate rather to returning Minister of Finance Liu Kun and returning People’s Bank of China governor Yi Gang. Both had reached retirement age for ministerial level officials (65 years) and neither was appointed to the Party’s Central Committee at the 20th Party Congress last October – hence, it was expected that they would retire from their posts. In a surprising twist, both Liu Kun and Yi Gang have been retained, in turn signaling an emphasis on continuity in these key economic portfolios. It bears remembering too that at the 20th Party Congress last October, the only two individuals (aside from Xi Jinping) to retain their Party positions despite having crossed the 68-year age limit were Wang Yi (who now heads the Party Foreign Affairs Commission Office) and General Zhang Youxia, (who stays on as vice-chairman of the Central Military Commission) – in turn, suggesting a desire for continuity in the key foreign and security policy areas too.
It is undeniable that Xi Jinping has cast aside the core Party-State precept that Deng Xiaoping had sought to institutionalize from the 1980s on. Traumatized by the political tumult of the later Mao years, Deng sought to ensure that the party would not be overcentralized and that separation would be built between party and state, with the latter afforded the autonomy to implement the policy decisions laid down by the former. He even went so far as to suggest once that party cadres should be withdrawn from state-owned enterprises. Deng went on to lay down a number of institutional markers related to senior leadership turnover: no lifetime tenure; retirement at age 70 (lowered to 68 at the 16th Party Congress in 2002); up or out after two terms in office, etc.
For Xi Jinping however, the reform and the pre-reform eras are not two eras that are “in opposition” to each other or can be “cut apart.” Rather they mutually relate to one another, and the party’s embedding within the organs of the state remains key to the construction of socialism in China. But aside from Xi’s reversal of the succession norm to the top post to benefit himself, has Xi Jinping really torn down the institutionalized edifice of senior leadership selection and orderly cohort power transfer as many have stridently claimed? Or has he mostly endowed a modicum of (desirable) flexibility to a set of norms whose institutionalization is in any case fairly young? Consider:
All told, far from annulling the senior leadership turnover norms that were sought to be institutionalized by Deng (aside for the succession mechanism to the top post to benefit himself), Xi Jinping has managed to recentralize power and minimize the distinction between Party and State while hewing substantially to the Dengist playbook. Therein may reside his political genius. And the few senior leadership appointment exceptions that have been made are, for the most part, welcome ones. A little flexibility can go a long way.
At the ‘Two Sessions’ meeting, like at previous ‘Two Sessions’ meetings, the government’s annual economic policy targets were announced. The key targets for 2023 include:
Earlier, at the Central Economic Work Committee meeting in mid-December 2022 which sets out the macro-blueprint for the government’s economic work-plan in the year ahead, the key priority focus areas listed for 2023 were:
Perspective: China faces a delicate economic balancing act in 2023. After three years of more-or-less depressed consumer confidence which held down the final GDP growth rate (averaged over the three years), the authorities are looking to stimulate growth – particularly private sector-led growth in 2023. Support for economic growth must not exacerbate legacy macroeconomic imbalances or risks to financial stability, however. Ideally, it should take the form of increased demand-side support, which would bolster household disposable income and facilitate a recovery of private consumption. Equally, the authorities are looking to shore up the property sector through (calibrated) support, but this must not be at the expense of exacerbating moral hazard, given the sector’s outsized footprint as a share of domestic investment and GDP. The authorities need to provide fiscal support to enterprises, furthermore, channeled through local governments but this must not be at the expense of exacerbating strains in local government finances. The authorities are looking to press on with (the tardy pace of) structural reform, including reform of SOEs and the lowering of market barriers to entry and exit, but which could elevate unemployment risks in the short-term and diminish consumer confidence.
Going forward, the State Council’s emphasis in 2023 appears to be on stimulating the ‘animal instincts’ of the private sector to carry the growth load while gradually paring back policy support to the macroeconomy during the latter half of the year in order to realize overall macro-financial de-risking goals. With the corner being seemingly turned in the overextended property sector (February 2023 data saw home prices recording their first month-to-month increase in 18 months), the economy should attain takeoff velocity by or before the midpart of the year.
With a view to responding to data security risks as well as counter the numerous technology suppression measures implemented by the U.S. government in the time since the first ‘Two Sessions’ meeting (in March 2018) after the previous (19th) Party Congress, the most important deliverable coming out of this year’s Two Sessions meeting is a root-and-branch reorganization of the government’s institutional leadership and oversight of the science & technological (S&T), financial, and data economy sectors. The key reorganization-related changes are:
The Ministry of Science and Technology (MoST) is to become considerably more influential in a policy-framing role and, at the same time, shed its secondary research fund management responsibilities. As per the reorganization, MoST will become the day-to-day operational manager and implementing authority for a to-be newly created (Party) Central Science and Technology Commission that will be housed within the ministry. In this construct, the commission will formulate top-level S&T policy with a view to realizing breakthroughs in core technologies, including those under Western embargo (probably taking over the role of the existing State Council leading small group), while a streamlined MoST will guide, coordinate and supervise a range of ministries and professional bodies responsible for scientific research. In effect, MoST is to become the empowered arm of the Central Commission that will play the control tower role on S&T policy. At the same time, MoST will also divest certain S&T related tasks and responsibilities including evaluation and administration of specific research projects to line ministries and agencies such as the Ministry of Agriculture and Rural Affairs, the Ministry of Industry and Information Technology and the National Health Commission, etc. The reorganization is in keeping with longstanding advice that MoST separate its policymaking function from its project fund-management role.
With an eye to maintaining a degree of continuity in order to ease the re-organization-related transition, the current MoST minister, Wang Zhigang, has been reappointed to the position. This came as something of a (minor) surprise. With Wang having reached ministerial-level retirement age (65 years) and kept off the Party Central Committee at the 20th Congress, all signs pointed to a new successor. Instead, like returning Minister of Finance Liu Kun and returning People’s Bank of China Governor Yi Gang, Mr. Wang is to return (for an undefined period of time) to lead his ministry too.
With a view to covering regulatory blind spots, prevent arbitrage, and channel capital towards desirable national innovation ends, two major reorganizations were confirmed at the ‘Two Sessions’ meeting.
First, the securities regulator, the China Securities Regulatory Commission (CSRC), is to shed its investor protection role and be elevated bureaucratically to ministerial-level status directly under the State Council. More importantly, CSRC is to take over responsibility for project approval and issuance of enterprise bonds from the National Development and Research Commission (NDRC – the state planning agency), suggesting that it will play a far more active two-fold role. First, it will steer capital to preferred priority areas, such as technology self-reliance, green and low-carbon development, social housing, etc., some of which are encapsulated within the central government’s ‘dual circulation’ and ‘common prosperity’ development paradigms. And second, it will serve as an important fiscal enforcer of the central government, given that enterprise bonds have for historical reasons almost entirely been issued by central and local state-owned enterprises (SOEs), and bonds issued by local government financing vehicles (LGFVs) account today for the preponderance of enterprise bond issuance.
Second, the China Banking and Insurance Regulatory Commission (CBIRC) is to be absorbed into a new and overarching regulatory agency called the National Financial Regulatory Administration (NFRA). The agency – which will also enjoy ministerial status under the State Council – will be responsible for regulating financial holding companies, which previously fell under the central bank’s remit, as well as the investor protection function shed by the CSRC.
China’s bond market is highly diverse, segmented, and has historically been overseen by multiple regulators. Enterprise bonds are one among a number of bond financing options that firms can choose from – the other principal ones being corporate bonds, medium-term notes, and commercial paper. Together, these four types of instruments comprise almost 80% of China’s credit bond market. Enterprise bond issuance has typically been dominated by China’s state-owned enterprises (SOEs), both at the central and local levels, and utilized to build out China’s impressive infrastructure. Notable projects in this regard include the Three Gorges Hydraulic Project, the national railway construction project, and the national grid. Enterprise bonds were first issued in the early-1980s and as China’s development horizons broadened, their use was expanded to finance projects in areas such as poverty alleviation and green and low-carbon industrial development. At this time, bonds issued by local government financing vehicles (LGFVs) account for the vast majority of enterprise bonds and, overall, account for a bit under 20% of outstanding credit bonds.
At the time of their initial issuance, enterprise bonds were jointly regulated by the People’s Bank of China (PBoC) and the State Council’s National Development and Reform Commission (NDRC). By the 1990s, the NDRC had taken over sole purview of these bonds. Now, as part of the government reorganization instituted at the March 2023 ‘Two Sessions’ meeting, sole purview is to shift to the China Securities Regulatory Commission (CSRC). In this capacity, CSRC will have a key role to play in de-risking China’s public finances, particularly with regard to paring down the build-up of off-balance sheet debt at the local government level. Ultimately however, CSRC as the supervisor of LGTVs-issued enterprise bonds can only do so much; restoring the resilience of local government finances will require a new intergovernmental compact that resolves the misalignment of local government revenues and spending responsibilities. Recent measures, such as increased transfers from upper-level governments and the shifting of a greater share of spending responsibility to the central government, while welcome, are inadequate. Key rather will be the need to rollout a wide-base recurrent tax on residential property, as is the case in virtually every advanced economy. The political will to design and impose such a tax seems to be lacking at this time, however.
Source: “The Future of China’s Bond Market,” Alfred Schipke, Marcus Rodlauer, Longmei Zhang, eds. International Monetary Fund, March 2019
Relatedly, and beyond this institutional reorganization of government-wide financial regulation, two new overarching Party bodies are to be created too. First, is the Central Financial Commission (CFC) which will oversee top-level design, coordination and supervision of financial stability and development, with the other being the Central Financial Work Commission (CFWC). The CFWC will in fact be the second coming of the body; it briefly existed from 1998 to 2003, during which time a major banking sector recapitalization was conducted that saw the four major state-owned banks hive-off their vast portfolio of non-performing loans. The Financial Stability and Development Commission (FSDC), the super-regulator that was created at the previous government reorganization in March 2018 and sits under the State Council, is to be meantime disbanded.
The early-2020s have witnessed a veritable ‘much thunder, much rain’ series of developments in China’s regulatory buildout of its data economy and governance regime. Under the hands-on direction of the (Party) Central Cyberspace Affairs Commission, a number of draft and final rules to implement the provisions of the Cybersecurity Law, the Data Security Law, and the Personal Information Protection Law were released. In keeping with this pattern of buildout, a new National Data Bureau (NDB) is to be now established, which will be housed under the National Development and Research Commission (NDRC), a ministerial-level department of the State Council. The NDB’s responsibilities will focus on development of the data economy, which is to include:
The current government data regulator, the Cyberspace Authority of China (CAC), is to shed these data development responsibilities in favor of the NDB. CAC will continue to remain in charge of enforcing data security, its core mission.
Perspective: The common thread that ties the reorganized functions of MoST, the China Securities Regulatory Commission, and the National Data Bureau is that each is being empowered in its sector to shear through the labyrinth of bureaucratism and translate the political and policy will of the Party’s high command into on-the-ground action. It is no surprise that this institutional reorganization of government is focused on the technology and data sectors, with capital market-based finance expected to play the key supporting role. The Party leadership has spoken plainly, after all, about the need to remedy China’s excess dependence in areas of core hardware and basic software (as well as raw materials and essential commodities) and establish a “new innovation system”. Equally, the Party leadership has spoken candidly of the need to provide state guidance of private capital to achieve national policy goals, and senior officials have highlighted the development of a ‘traffic light system’ to channel capital more effectively towards socially productive uses and curb its disorderly expansion. And as for the data economy, with a billion-plus users and consumers, Chinese leaders have made no bones about their desire to weave data into the fabric of the Chinese economy as a new “factor of production”. The National Data Bureau is expected to do just that. In important respects, then, the government reorganization plan constitutes the latest and most comprehensive Party-State response to the technology suppression measures instituted by the Trump and Biden administrations in the advanced manufacturing and digital sectors. With Party Commissions retaking the commanding heights of the S&T (via the Central Science and Technology Commission), finance (via the Central Financial Commission and the Central Financial Work Commission), and data (via the Cyberspace Affairs Commission) sectors, the Party-State work program will bear keen watching during the lifetime of the 14th National People’s Congress.
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