PROTECTING YESTERDAY WHILE BUILDING TOMORROW

The China Dream of the most ambitious reformers in the Communist Party of China has hit the cold light of day.
That is abundantly clear in this 13th Five-Year Plan (FYP) that seeks to march China into the future while digging in
its heels to hold on to much of the past in politics, policy and the shape of the economy.
On March 5, 2016, over 3,000 government
officials, business leaders and luminaries
descended upon Beijing for Chinas annual
Two Sessions, a joint gathering of the
National Peoples Congress (NPC) and the
Chinese Peoples Political Consultative
Conference (CPPCC). Delegates spent two
weeks applauding the achievements of
the past year, reviewing the governments
upcoming priorities and approving central
guidelines for future policy development
and implementation. This year, the NPC
ratified Chinas 13th Five-Year Plan (FYP), a
blueprint that enumerates Chinas social,
economic and political goals for the period
from 2016 to 2020.

Three years ago when the Party issued the groundbreaking Third
Plenum document, economic reformers and business people were
almost giddy over the laundry list of game-changing reforms. The
market was to take a decisive role in the economy, state-owned
enterprise behemoths were to be disciplined and somewhat
dethroned, the iron-grip of central government planners was to
be relaxed as they morphed from all-powerful deciders to service
oriented regulators, and China was to become even more open to
foreign business.
That was then. This is now.

Since those heady days of the Third Plenum pronouncements,

Chinese President and Party Chairman Xi Jinping has emerged
as a muscular leader who is employing tools of the Partys past
to advance his agenda of the great revitalization of the Chinese
nation. His focus has centered on solidifying political control and
social stability through an aggressive anti-corruption campaign and
a wide-ranging clampdown on journalists, attorneys, academics and activists. At the same time, the leadership has
been backtracking on its economic and financial reform plans while taking small steps forward along paths of least
resistance.
With the 13th FYP, the Party under Chairman Xi is seeking to clean up a pile of distortions left over from three
decades of growth-at-all-costs with a collection of compromises aimed at preserving stability-at-all-costs. That is
not to say that the 13th FYP is mired in yesterday. There is a vision of a different future. The plan outlines a blueprint
for a significantly upgraded and modernized manufacturing and technological base, a cleaned up environment and
greener way of life, a more consumption-oriented economy with increased support and room for entrepreneurs,
and improved healthcare and social security systems. The plan also outlines a tremendous amount of infrastructure
spending for airports, sea ports, bullet trains, subways and expressways to tie the country together as regional
municipalities are merged into megacity clusters of 100 million people or more.
The question is how smoothly and successfully the country can move forward while continuing to goose growth
through government financing of state-owned enterprises (SOEs) and infrastructure. Premier Li Keqiang has
promised to eliminate SOE zombies that live on state loans and lose money just to keep people employed. But
instead of highlighting the Third Plenum initiative to reform central SOEs by treating them as investments instead
of assets, the 13th FYP mostly puts forth past prescriptions (see section below for more detail). This is due to the
Partys focus on having strong political control of the economy and economic actors. Furthermore, it also reflects
anxiety about social unrest if unprofitable industrials were to launch mass layoffs. When Zhu Rongji laid off some 50
million SOE workers between 1993 and 2003, workers did not have social media to organize themselves. What they
did have was a booming economy primed to absorb them, and fewer expectations than todays workers.
This is just one example of the tensions in Chinas yesterday-tomorrow dilemma. Such pressure points abound in the
13th FYP, from the push for innovation, to efforts in financial reforms, to attempts at green development, and the
expansion of social services. We take a closer look at these issues in the sections below. Winding down yesterday,
while winding up tomorrow is the challenge at the heart of Chinas 13th FYP.

For foreign companies, a China with slowing

but still world leading growth means the worlds
second largest economy will remain a place
that few companies can afford to avoid. To tap
into Chinas tomorrow, foreign companies need
to examine the governments development
targets and align with its plans. But they
also need to remain focused on protecting
their global business and core intellectual
property. As China struggles to pull itself out
of yesterdays quagmire, companies should
be prepared for this New Normal of policy
inconsistencies and increasingly assertive
demands as price of entry into the Chinese
market.
Entrepreneurship and Innovation: Tomorrows
Growth Engines?
Both entrepreneurship and innovation, though
not new concepts in Chinese policy, have taken
on new meaning as they are increasingly touted
as fundamental pieces to the puzzle of Chinas
development. This is especially clear in the 13th
FYP, in which innovation-driven development
is repeatedly referred to as a new driver for
Chinas economic growth, a tool for economic
restructuring, and a way to meet employment
goals.
Over the years, various Chinese government
projects have attempted to spur domestic
R&D and indigenous innovation. From
projects laid out in the Medium- and LongTerm Plan on the Development of Science
and Technology to the Strategic Emerging
Industries to the more recent Made in China
2025, the Chinese government has a consistent
history of technological aspirations. The most
recent iteration, first outlined in a State Council opinion released in June 2015, is captured in the slogan Mass
Entrepreneurship and Innovation, which features prominently in the 13th FYP. Indeed, the 13th FYP maintains the
goal of having scientific and technological advances contribute to 60 percent of economic growth.
Today, however, the stakes are much higher. The Chinese government is now relying on innovation-led development
to propel China up the manufacturing value chain and promote industrial upgrading. Additionally, an environment
more conducive to entrepreneurship has been posited as a means of addressing the increasing number of college
graduates looking for jobs each year a potential source of instability. The 13th FYP presents a neat package
of approaches: from the longstanding goal of reforming Chinas science and technology management system,
to the simplification of government procedures for companies and individuals which first appeared in the Third
Plenum concept of administrative streamlining, to more recent initiatives such as Internet Plus, which aims to apply
Internet technologies across traditional industry, and Made in China 2025, which lays out a roadmap for indigenous
technology advancement.

Though the governments intent is clear, it is unclear how successful it will be in unleashing domestic innovation and
entrepreneurship as a significant force in the countrys economic development. Regardless, these efforts are sure to
impact multinational companies operating higher up on the manufacturing value chain, as the government ramps
up efforts to wean itself off foreign technology products.
SOE Reform: Hard to Cut Ties with Yesterday
The Chinese government has repeatedly acknowledged that in order to achieve more sustainable economic
growth, it must significantly reduce overcapacity in SOE-dominated industries such as steel, aluminum, cement,
chemical, shipbuilding and heavy equipment. As the European Union Chamber of Commerce recently noted in a
study, though demand and prices have plunged globally, Chinese steel production is now more than double the
combined production of the US, Japan, India and Russia. In 2011 and 2012, China produced as much cement as the
US did during the entire 20th century.
Although the 13th FYP pays lip service to this problem by calling for proactive, prudent resolution of excess
capacity, its moderate language pales in comparison to Li Keqiangs statement at the end of NPC 2015 when he
declared, This is not nail clipping; this is wrist cutting. No matter how painful, we must bring down the knife.
Coming on the heels of a year fraught with stock market volatility and steep declines in exports, this linguistic
retreat reflects official ambivalence over how to carry out difficult structural reforms while preserving social stability.
The 13th FYP itself is short on details concerning SOE reform and lacks a specific timeline for implementation.
Nevertheless, prior to this years NPC, the Chinese government announced its intention to transfer or replace
about 1.8 million workers in the steel and coal industries, as well as cut 100-150 million tons of steel capacity. While
opening these industries to market competition and facilitating the exit of debt-ridden SOEs would be the most
efficient way of making these cuts, Li Keqiangs Government Work Report characterized bankruptcy as a last resort,
instead favoring mergers, mixed-ownership reforms, reorganizations and debt restructuring. Given Chinas track
record, it is unlikely that these reforms will wean SOE executives from their tendency to prioritize old loyalties
and short-term political gain over market fundamentals. As a result, the government will encounter considerable
difficulty as it attempts to reduce excess capacity across traditional industries.

Financial Reform: A Prerequisite for Tomorrow

Even though Chinese officials have expressed disapproval of massive stimulus on many occasions, Premier Li
Keqiangs Government Work Report repeatedly signals that Beijing is determined to keep the economic growth rate
above 6.5 percent in 2016. Financial reform is vital to achieving this goal. This year, China will focus on monetary
and fiscal easing, moving to increase its M2 money supply and aggregate social financing to 13 percent (possibly
creating RMB 17.9 trillion in new finance); expand its fiscal deficit to RMB 2.18 trillion; increase general payments by
12.2 percent (some of which usually subsidizes local enterprises); and make upward adjustments to debt ceilings for
certain local governments.
Liquidity unleashed from monetary and fiscal easing is expected to provide a boost to Chinas recently sluggish
real economy, which has troubled local governments and enterprises alike. Regardless, the key to rebalancing
the Chinese economy lies in incentivizing local governments and businesses to grow sustainably. Currently, local
governments and SOEs in particular are more than happy to embrace monetary easing without considering
whether they are actually drinking poison to quench thirst. For example, local governments are now issuing bonds
to replace old debts while enterprises, including those in excessive sectors, are receiving an influx of loans from
more diversified channels, including commercial banks, the margin trading market, peer-to-peer (P2P) and private
lending.
However, uncertainties prevail: the danger of capital bubbles persists, and overcapacity has been exacerbated by a
steady stream of capital input. Furthermore, recent government actions to handle financial volatility have provided
fresh cause for concern. In early January this year, domestic bank lending volume hit a historic high, which quickly
caused overheating in the real estate market. Even more worryingly, most of these loans were believed to have
gone towards rolling over old, unsustainable debts.
The 13th FYP focuses on reforms to ensure efficient budget expenditure, a healthy financial system and strong
supervision over market players. Even so, the extent to which these reform measures will become reality remains
unclear; in fact, most measures in this years plan have been proposed before. For example, reform of
registration-based stock issuance was brought up in 2014 in order to relieve debt and increasing direct financing for
enterprises. Although the 13th FYP still prioritizes this as a top reform over the next five years, Premier Li omitted
registration-based reform from his Government Work Report this year, possibly to avoid further destabilizing Chinas
volatile financial market.
One Belt One Road: Geo-Strategy with a Commercial Twist
Chinas One Belt One Road (OBOR) initiative, alongside the Beijing-Tianjin-Hebei Coordinated Development
Plan and the Yangtze River Economic Belt Development Plan, is a key regional development priority in this years
Government Work Report. On paper, these regional plans are a testament to the sharing principle of the 13th
FYP, promoting integrated, mutually beneficial development among regions. A more hard-nosed motivation behind
these initiatives is to increase investment and stimulate the economy. In early 2015, local government investment in
OBOR infrastructure exceeded RMB 1 trillion. The potential for heavy investment to boost GDP has propelled local
governments to compete in building ports and industry parks, as well as in attracting investment a competitive
model of development that may contradict the central governments coordinated development strategy.
This rings of Chinas old investment-reliant growth model. Perhaps Chinas newly-raised concept of capacity
cooperation, which urges Chinese companies to promote their equipment, technologies, standards and services
abroad, may be a differentiator. Vowing to establish various funds to support capacity cooperation, the government
plans to align the OBOR initiative with efforts to reduce overcapacity by linking domestic manufacturers to overseas
markets.
Green Development: Cleaning up the Consequences of the Focus on Growth
As one of the five principles set to underpin Chinas development over the next five years, green development
4

features heavily in the Two Sessions and the 13th FYP. Dubbed as Chinas greenest Five-Year Plan to date, 10
out of 25 priority targets set in the 13th FYP are related to the environment, all of which fall under a group of 13
binding targets that must be achieved by 2020. Notably, this is the first time in Chinas history that a specific PM2.5
target has been included in a FYP.
While the 13th FYP targets confirm the governments intent to combat pollution and deepen Chinas clean energy
transition over the next five years (which will offer opportunities for companies involved in renewable energy or
energy efficiency technology), as usual, environmental objectives will have to be balanced against economic growth.
Full realization of environmental targets will require the government to address stubborn, politically sensitive issues,
including overcapacity.
Poverty Alleviation and Healthcare: Key to the Partys Legitimacy
The 13th FYP places special emphasis on poverty alleviation, a key element of Xi Jinpings goal of building China
into a moderately prosperous society by 2021. In order to achieve this moderate prosperity, the government
has promised to lift 50 million Chinese out of poverty and to bring Internet access to 90 percent of villages across
the country. Calls to modernize the countryside might translate into infrastructure projects and measures to increase
rural spending power, both of which will contribute to Chinas economic course. This proposal also includes new
language of targeted measures in poverty alleviation, which encourage innovation while calling for a more robust
management system.
Healthcare reforms also remain a core government priority as part of ongoing efforts to help China develop into a
well-off society. In the coming years, demand for medical services is expected to grow exponentially in response to
Chinas rapidly aging population. In addition, the rising prevalence of chronic diseases will require more advanced,
costly treatments. This predicament has driven government efforts to expand healthcare coverage while containing
ever-growing costs. To deal with these challenges, Li Keqiang committed to continue increasing public funding for
healthcare by 9.6 percent in 2016 year-on-year. However, rising public healthcare spending, which only accounts
for 5.6 percent of the countrys GDP, will not be enough to deal with these mounting challenges and deliver on the
governments promises to improve and expand healthcare services across the country.
The 13th FYP aims to improve healthcare services in rural areas as a way to bring Xis promise of poverty alleviation
to fruition. Effectively encouraging private investment in the healthcare sector will be key to realizing this goal.
However, difficulties on the ground, including countless administrative and regulatory hurdles, stand in stark
contrast to government rhetoric. For example, the 13th FYPs calls to rationalize the price of medical services signal
that the government will continue taking measures to decrease the prices of drugs and medical devices; however,
these signals directly contradict the governments announced intention to decrease intervention in price formation.
About APCO Worldwide
Founded in 1984, APCO Worldwide is an independent global communication, stakeholder engagement and business strategy
firm with offices in more than 30 major cities throughout the world, including in Beijing, Shanghai and Hong Kong. To find out
how APCOs integrated services can help your company, visit apcoworldwide.com.
For more information about APCO Worldwide in China, please contact:
James McGregor
chairman, Greater China
Suite 903, Tower C,
Office Park No.5
Jinghua South Street
Chaoyang District
Beijing 100020
Peoples Republic of China
Phone +86.10.6505.5128
jmcgregor@apcoworldwide.com

Anne Wang
director
Suite 903, Tower C,
Office Park No.5
Jinghua South Street
Chaoyang District
Beijing 100020
Peoples Republic of China
Phone: +86.10.6505.5127
qwang@apcoworldwide.com

Linda Du
managing director
Unit 301-303, Platinum Tower
233 Tai Cang Road
Shanghai 200020
Peoples Republic of China
Phone +86.21.5298.4668
ldu@apcoworldwide.com

5
2016 APCO Worldwide. All rights reserved. Design: StudioAPCO

Amy Wendholt
managing director
1102 Prosperity Millennia Plaza,
663 Kings Road,
Quarry Bay,
Hong Kong
Phone +852.2826.9338
awendholt@apcoworldwide.com