Insightview.eu has invited China expert Joergen Delman, professor emeritus, PhD, to write about China’s annual meeting of the National People’s Congress [NPC] and the simultaneous session of the national advisory body, Chinese People’s Political Consultative Conference [CPPCC].
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‌China’s leadership is looking into unprecedented headwinds. National and international dilemmas have accumulated over the last few years and have been aggravated by the three years of COVID restrictions and lockdowns.

The first session of the new 14th National People’s congress gathered in Beijing in early March to agree on the way forward to address the challenges and to elect a new state and government leadership.
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‌Last work report
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Outgoing Premier Li Keqiang delivered his last work report of the government and used most of the report to express satisfaction with achievements under his tenure as premier while also heaping praise on Xi Jinping’s leadership as has become the norm in such official reports under Xi’s leadership.

Not until three quarters into the report did Li get to an extremely brief analysis of the headwinds that China is facing. He acknowledged that domestic demand, which is the current panacea for reviving the economy, remained a pronounced problem. Further, Li noted that private investors and businesses are discouraged by the current economic and business environment. The Chinese Communist Party [CPC] has caused this by sending mixed signals about its policies towards the private sector in recent years. The leadership seems to prefer to service SOEs while putting the private sector, especially the larger companies, into a political cage. The state also wants to exert influence through investments. Public investments in private-sector companies increased from $9.4 billion in 2016 to more than $125 billion in 2020. Yet, Li Keqiang promised continued protection of property rights and the rights and interests of private enterprises. He assured that the government would encourage and support private businesses in expanding their businesses, not least MSMEs and self-employed individuals.

In a sideline meeting with political advisory delegates, Xi Jinping also insisted that the Party-state would support and guide the development of the private sector. He said that the CPC Central Committee “has always considered private enterprises and private entrepreneurs as being in our ranks.” This is not entirely supported by facts, though. Attendance by private sector executives at China’s Communist Party congresses has fallen almost 50 per cent since Xi Jinping assumed power in 2012, reflecting that the political status of business tycoons is on the decline.

Li emphasized that unemployment is another major challenge. Although official figures set urban unemployment at 5.5%, a stable figure since 2018, unemployment amongst youngsters aged 16-24 hovered around 17 % at the end of 2022. This year, 11.5 million new college graduates are due to hit the job market. The aspiration of this group is critical for the future of the country as well as for the legitimacy of the CPC.

The UN forecasts that China’s population will decline from 1.426 billion this year to 1.313 billion by 2050 and below 800 million by 2100. Surprisingly, Li Keqiang only noted briefly that there is a need to stimulate more births. His successor, the new premier Li Qiang said at a press conference on March 13 that "China's demographic dividend has not disappeared. Our talent dividend is in the making and will be a driving force for the country to remain strong and robust." He pointed to the 240 million highly educated people already working.

Li Keqiang brought up the well-known risks in the real estate market. Although the government lent a helping financial hand to ease restrictions that stifled an already suffering market in 2022, construction of residential floor space sold in China dropped by nearly 27%, while real estate investment fell by 10%, according to official numbers. Li announced that the current support policies will be continued.

                         
‌Further, Li noted that China’s small and medium-sized financial institutions are burdened by debt and they are exposed to operating risks. The solution here will also be more financial help from the state. Another key challenge is the so-called “budgetary imbalances of some local governments”, which are “substantial” in Li’s words. Although the true scope of local government debt is largely guesswork, it is evident from the central government’s interventions that the problem is massive. Li Keqiang proposed to allocate 3.8 trillion RMB for local government special-purpose bonds this year, compared with 3.65 trillion yuan in 2022.

Overall, Li Keqiang’s program for the next year offered no surprises. The main priority is to get the economy back on track with a projected GDP growth rate of around 5 %, which will still be difficult to achieve according to Li Qiang, the new premier. The specific quantitative targets in the government program were also predictable. While the CPI is expected to rise by 3%, ordinary Chinese can expect that their incomes will be in step with economic growth, so that potentially they could have a small nominal increase in incomes. Environment and climate change policies are to continue, while efforts will be devoted to reduce the use of fossil fuels, especially coal consumption, which rose beyond expectations last year.
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Leadership in fighting mode

Despite the toned-down language of Li Keqiang’s report, the Chinese government is obviously in a crisis mode. The government agenda has become securitized in different ways due to international challenges, and there will be a strong focus on military modernization and capacity building. Li advised that governments at all levels should support the development of national defence and ensure mutual support between civil sectors and the military. He even called for “a new chapter of unity between the military and the government and between the military and the people.”

The NPC deliberated a yearly defence budget of RMB 1.55 trillion [$224.8 billion], a nominal 7.2 per cent increase from 2022. According to a CSIS analysis, China’s military budget is as much as the aggregate defence budgets of the next 13 countries in the Indo-Pacific, including India and Japan, in order of the size of the defence budgets. However, China’s military expenditure pales against the US defence budget, which is nearly three times higher [2021 figures]. In this context, it should be noted that the US has a global military presence while China remains primarily focused on security in the Indo-Pacific region.

While the Chinese leadership insists that the Taiwan reunification issue must be solved as a matter of urgency, the position of the government remains unchanged. Li Keqiang and Li Qiang both repeated the current policy, i.e. to advance economic and cultural exchanges and cooperation and invite more Taiwanese to come to and invest in China. This time on, there were no threats of military intervention.
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Government reform

After its meeting at the end of February, the Communist Party Central Committee announced that a central CPC and government reform plan was forthcoming. The ultimate objective of the reform is to strengthen the Communist Party’s leadership over the modernization of the state’s system of governance.
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The state leg of the reform program was presented to the 14th NPC on March 7. The reform aims to strengthen the administration of strategic mandates that have encountered specific difficulties in recent years. Notably, the State Council will establish a new National Financial Regulatory Administration to strengthen central financial regulation and supervision. This new agency will also include the Central Bank. A similar reform is planned for securities regulation, where there is a need for better oversight over financial stability and risk and for reining in large corporate and financial institutions that may bring systemic risks via regulatory arbitrage among multiple authorities.
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The State Council will also establish a new National Data Administration to address data-security practices to streamline the regulatory structure in the field to contain the risk exposure of businesses and other organizations. This administration will work with: Network and cyber security management; digitalized public and social services; smart city management; development and coordination of public IT systems; regulation of data sharing across various types of operators, data management systems, and platforms; data-based planning; big data management and storage. The National Data Administration will become the top data regulator in contrast to the current structure in which multiple ministries share oversight. Wall Street Journal noted that the new “agency would [also] rule on whether multinational companies can export data generated by their operations in China” as well as investigate issues such as the use of algorithms for data manipulation or for inducing internet addiction among minors.
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In addition, the China National Intellectual Property Administration will be elevated to a top-level agency under the State Council, so that it is no longer subordinate to the State Administration for Market Regulation. Presumably, this would strengthen IPR protection.

Finally, some ministries will reorganize, especially the Ministry of Science and Technology [MOST], which will play a stronger role in relation to other ministries to help China achieve technological breakthroughs through better “macro-management functions”, including science and technology planning and financing. The reform document explained that the reform of MOST should counter international competition within science and technology and “the serious containment and suppression by external forces” [more below].

The reforms within the Communist Party’s central bureaucracy are unknown as yet, but it has already been disclosed that the CPC will set up a Central Science and Technology Commission that will provide policy back-up for MOST, signalling that tech-driven development and tech security has become a strategic focus of the CPC leadership.
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US cognitive dissonance?

Neither Li Keqiang nor Li Qiang spent time discussing Russia’s war against Ukraine, which has put China in a precarious situation internationally. Their focus was on the conflict with the US, although it was odd that Li Keqiang’s report to the NPC had no specific pointers to specific international conflicts and that he did not mention the US at all.

It is common knowledge that the US leadership has long entertained the idea that China’s rise will threaten the position of the US as a superpower and that President Biden has announced that the US must maintain its competitive stance over China. A wish for substantial decoupling between the US and China seems to dominate the US political agenda.

Following the trade war, which started under President Trump, the US has most recently prevented China from buying critical technologies in the US and elsewhere, such as Taiwan and the Netherlands. Leading actors on both sides declare that a military conflict could be imminent. The Chinese spy balloon incident in February aggravated the conflict.
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Beijing also accuses the US of crossing China’s most fundamental ‘red line’ by stepping up its official engagement and its arms deals with Taiwan as well as through its attempts at creating alliances in the Indo-Pacific to encircle and contain China.

In the midst of the mutual ‘mud-slinging’, China still insists that it would prefer to pursue more constructive engagement with the US. However, on the sidelines of the NPC session, the tone of the Chinese leadership was belligerent. On March 6, Xi Jinping stated that "Western countries led by the United States have implemented all-round containment, encirclement and suppression of China, which has brought unprecedented severe challenges to our country's development".
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On March 7, China’s new foreign minister, Qin Gang, noted during his first NPC press conference that China will defend its core interests and oppose hegemony and power politics. He advised that ”(i)f the United States has the ambition to make itself great again, it should also have a broad mind for the development of other countries. Containment and suppression will not make America great, and it will not stop the rejuvenation of China.”
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While the bilateral relations seem beyond repair right now, trade relations develop as if nothing changed. Bilateral trade in goods hit a new record in 2022, and the US trade deficit with China expanded by 8.3 per cent year-on-year to reach US$382.9 billion. However, China experienced a substantial pullback of U.S. private equity and venture capital investments in 2022. The aggregate value of U.S. investments in China declined about 76% year-on-year to $7.02 billion from $28.92 billion. As for M&A and fresh funding involving U.S. private equity firms, there was also a drop to the lowest quarterly level in the last two years.
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We may ask if we witness a kind of cognitive dissonance between the behaviour of US companies trading with China and the perceptions of American political leaders pursuing trade war tactics and dreaming of outcompeting China? While this may be the case with trade, we might argue that there are some decoupling efforts in the area of foreign direct investments [FDI]. US companies now go local in China to navigate the current conflict, and the ensuing restrictions, or they divest to other markets where investments make more sense and are more secure.
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Tech-competition

‌Chinese companies have already shown that they can produce their own cutting-edge technologies in some areas. China has gained much of its industrial capacity from a vast and sophisticated research and industrial manufacturing eco-system with a highly skilled workforce. This system has created process knowledge embedded in “communities of engineering practice” that may engage both Chinese and foreign companies, amongst them many US industry leaders. While China has been fast learning within these communities, many foreign companies may find that they may lack access to such complex systems for further innovation if they decouple from China.
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Even more, China is moving fast ahead on basic and applied high-impact research. A report by the Australian Strategic Research Institute [ASPI] reveals that China has built the foundations to position itself as the world’s leading science and technology superpower across the majority of critical and emerging technology domains. China’s global lead in research extends to 37 out of 44 technologies that ASPI is tracking, spanning defence, space, robotics, energy, the environment, biotechnology, artificial intelligence [AI], advanced materials and key quantum technology areas. ASPI’s research shows that, for some technologies, all of the world’s top 10 leading research institutions are based in China and are collectively generating nine times more high-impact research papers than the second-ranked country (most often the US).
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There may still be technology gaps, like in the case of advanced chips, but they will be closed soon. This is a wake-up call for the US and Europe to contemplate how to cope with this challenge, i.e. whether to seek confrontation, selective decoupling, or cooperation is the way forward.
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New state and government leadership

‌Li Keqiang is now retired and is likely to go down as the weakest premier that China has had since 1949. The new premier, Li Qiang, is a close ally of Xi Jinping’s like his colleagues on the standing committee of the CPC politburo. All other key appointees, including vice president Han Zheng, vice-premiers, state councillors, and ministers within the new government, are also Xi loyalists for what we know.
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Xi Jinping was elected third-term President with zero opposition and all votes in favour. Li Qiang had three votes against him and eight abstentions. At a time when Xi is in full control and demands complete loyalty, this result was a bit surprising and showed that some of the delegates to the NPC had guts enough to display dissent.
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It is noteworthy that the new defence minister, Li Shangfu, was put on a US sanctions list in 2018 for being responsible for procuring Russian weapons. Whether this will prevent him from speaking to his US counterpart is uncertain. Li Shangfu is known for being successful in offering expertise to Xi Jinping on military modernization and space issues. He is an aerospace engineer and has worked with the development of China’s military aerospace industry for decades. His appointment confirms that the aerospace industry has won respect and political clout under Xi. Many of its technocrats have taken on key political positions to the extent that experts are talking about a rising aerospace clique in Chinese politics.
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The NPC ended without surprises. The way forward is more of the same – stability, security, and moderate growth. The session once again signalled that China would not lie flat. It will continue to challenge US “hegemony” and fight for its position in the world. The new leadership is ready to move ahead.
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‌18. January 2023 - Podcast: China after COVID - What does Beijing want - and what does it mean for us? [language: Danish]
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