EGA Five Facts to Know: China's Two Sessions 2023
The annual week-long meetings of China’s top legislative bodies, known as the Two Sessions, concluded on March 13 in Beijing. These government meetings complete the leadership transition outlined during the Party Congress in October. The Two Sessions are one of the most important political occasions for the Chinese government and set the policy tone for China’s economic, social, military, and diplomatic priorities for the year. While many were expected political outcomes — Xi Jinping was officially appointed to a third term as president and his close ally Li Qiang was chosen as premier — there were also numerous significant developments. The financial regulatory system underwent a major restructuring. A new foreign policy tone reflects hardening views toward the United States. And, unsurprisingly, the economy remains front and center. Looking ahead to how these policy trajectories might impact businesses in the coming year, here are five facts to know from China’s Two Sessions 2023:
1. Xi Is the Chairman of Everything Important
After a decade of consolidating power, Xi now begins his third term as president of the government, making him the longest-serving president in China’s history. Over that time, Xi’s political maneuvering has ensured that his policy priorities are at the top of the agenda and that he’s personally in place to lead all of them – by creating leading small groups, restructuring party and government, and positioning his allies to help implement. Most recently, at the Two Sessions, Xi committed to “intensive” and “wide-ranging” reorganization of state entities, which marks the most significant institutional reorganization since 2018. Notably, the changes brought key functions under direct supervision of the State Council — which reports directly to Xi — further affirming Xi’s central role in policy priorities and decision-making going forward. The significant structural changes to government oversight of finance as well as science and technology reflect Xi’s post-pandemic goals in an increasingly complex geopolitical landscape: to bolster economic recovery and to reduce overdependence on foreign sources for high tech.
Key developments include:
The creation of a new National Financial Regulation Administration (NFRA) under the direct authority of the State Council, which will now also oversee the China Securities Regulatory Commission (CSRC).
After Xi named data a key factor of production and essential to GDP, a new National Data Bureau will facilitate comprehensive data management to advance a “digital China.”
The Ministry of Science and Technology (MOST) will now focus on domestic tech innovation — with certain functions delegated to other agencies to streamline innovation in key sectors such as agriculture.
The intellectual property rights agency was moved under direct supervision of the State Council in an effort to bolster policies that strengthen the innovation economy.
In conjunction with these streamlining measures, all agencies under the main state organs are tasked with reducing their headcount by 5%, which will augur a period of adjustment.
2. Xi's Technocrat Allies Are in Place to Deliver on His Policy Priorities
Last October, Xi Jinping was confirmed as General Secretary of the Party and placed his allies into key party positions. Now, as president, Xi has placed his allies into key government positions. Li Qiang, the new premier, served as Xi’s chief of staff in Zhejiang and his path to power through Zhejiang and Shanghai mirrors Xi’s own roles in those provinces. As Xi’s close acolyte, he will likely have more latitude over economic issues than his predecessor Li Keqiang. The other vice premiers are also Xi loyalists. Ding Xuexiang, for example, was also Xi’s chief of staff and was just appointed China’s first-ranked vice premier. In line with Xi’s consolidation of power, having loyalist leaders leaves Xi with key decision-making influence in all portfolios of the government.
But the new government leaders, who are also high up in the party apparatus, are more than “yes-men.” Most are career politicians who, though not widely known internationally, are experts in their selective fields and have deep experience domestically. Incoming Premier Li served in three of the most important provincial economies — Shanghai, Zhejiang, and Jiangsu — and his biggest task this year will be reviving China’s economy post-Covid and restoring confidence in the private sector. Economist He Lifeng, who previously ran the state macro-planning agency, replaced Liu He as vice premier overseeing economic and commerce affairs, a portfolio he’ll share with Premier Li. The two other vice premier spots were filled by former corporate executive Zhang Guoqing and defense industry technocrat Liu Guozhong. Amid the reshuffle and the new leadership’s lack of central government experience, Xi also retained some ministers in key positions, including Liu Kun, Minister of Finance, and Yi Gang, head of the central bank, in a signal that financial stability takes priority this year and that we are likely to see continuity of fiscal and monetary policy. With his allies now securely in place, Xi is well poised to deliver on his policy priorities.
3. Chinese Consumers Need to Spend Their Way to China's Recovery
China is facing intense economic headwinds this year, and government leadership knows it needs to get the economy back on track. The annual Government Work Report delivered at the outset of the Two Sessions included the word “stability” 90 times — the most since China’s reform and opening-up 45 years ago and an indicator of China’s concerns about domestic instability and broader geopolitical tensions. The struggling real estate sector and skyrocketing levels of household savings will challenge the central government’s efforts to boost domestic consumption — a key facet of Beijing’s economic recovery strategy. Outgoing premier Li Keqiang highlighted the importance of stimulating consumer spending in his work report and noted the top priorities of increasing household income and promoting services consumption. Beijing has set its GDP growth target for 2023 at “around 5%,” one of the lowest in recent decades, but one that will still be difficult to achieve given current economic headwinds. The work report also emphasized the importance of foreign trade and domestic consumption in boosting the economy — a sign Beijing will continue to promote its dual circulation strategy.
4. Foreign Investments Still Welcome, but from the U.S?
Top officials, including Xi, Li Keqiang, and his successor, Li Qiang, have all promoted the importance of foreign investment in recent weeks. Parts of Xi’s speech from the Central Economic Work Conference in December were published in the party journal ahead of the Two Sessions, reiterating Xi’s goal for China to focus on retaining high-quality foreign investment. Li Keqiang highlighted the role foreign investment should play in advancing China’s manufacturing and technology sectors in the work report and noted that Beijing will support foreign enterprises establishing R&D centers in China. In his first press conference as premier, Li Qiang noted that China remains an attractive destination for foreign investment and that foreign companies are optimistic about development prospects in China. While rhetoric is trending in the right direction, the proof will be in implementation. It remains to be seen if the business environment will see real improvements as a result of Xi and Li’s comments, and if foreign enterprise, and US business in particular, will be treated equally. It will be important to watch how merger and acquisition deals involving foreign parties proceed, if China expands market access in certain sectors or reduces import tariffs, and importantly, if China retaliates for wide-ranging US export controls, which it has yet to do but has the policy tools to do so.
In addition to voicing support for foreign investment, Xi and Premier Li also stressed support for the private sector more broadly as key pillars of the economy. Xi told several tech leaders on the sidelines of the Two Sessions that Beijing will support the development of sector leaders to become more competitive on the international stage. Echoing Xi’s support, Premier Li reassured the private sector that all firms in China will have equal opportunity to succeed. However, Xi also urged business executives to “share the fruits of growth” with employees and called on them to play a bigger role in his Common Prosperity drive — so while Beijing is renewing its push to attract foreign investment, efforts to regulate the playing field will continue.
5. China's Diplomatic Tone with the U.S. Is Shifting — and It May Hurt U.S. Business
“Western countries — led by the U.S. — have implemented all-round containment, encirclement and suppression against us, bringing unprecedentedly severe challenges to our country’s development.”
— President Xi Jinping
China is stressing its openness to foreign engagement, particularly when it comes to economic and trade issues (see Fact #4). The new foreign minister, Qin Gang, now the youngest party and state leader in China, outlined an approach to diplomatic strategy that emphasizes engaging other countries and stabilizing the geopolitical environment. China wants to be seen as a responsible global stakeholder and needs a stable global economy for the sake of its own. Last month it proffered its “Position on a Political Solution to the Ukraine Crisis” (often called China’s Ukraine Peace Plan), and last week it brokered the agreement between Saudi Arabia and Iran to resume diplomatic relations.
But China’s top leaders may be shifting their diplomatic tone with a hardening line vis-a-vis the US. While an aggressive tone among some of China’s diplomats is not new – thus the term “wolf warrior” diplomats — China’s spokespeople often merely allude to the US in public criticisms rather than naming it directly. But, significantly, during the Two Sessions, both Xi Jinping and Foreign Minister Qin Gang directly called out the US. In addition to Xi’s comment about the US’ “containment, encirclement and suppression” of China, Qin said that the US and China would see conflict if the Biden administration continued to “speed down the wrong path” of containment. Meanwhile, Premier Li, in his first official statement on foreign policy, took a milder tone on US-China cooperation: “China and the US can and should cooperate. There is great potential for China-US cooperation. Containing and suppressing will do no one any good.” China may be open to cooperation, but the current trajectory and China’s shifting tone portends challenges for some US businesses in China.
Want to know more about China’s Two Sessions?
Watch EGA's webinar The Two Congresses: Business Implications of China’s National People’s Congress and the US Congress’ New China Committee featuring panelists Leigh Wedell, EGA COO, Marty Reiser, EGA Senior Advisor, and Trey McArver, Cofounder of Trivium, a China policy analysis firm. Moderated by Chynna Hawes, EGA Director, China.
Available on EGA’s YouTube channel here.