Burson-Marsteller - Striving for Progress While Maintaining Stability

承前启后稳中求进

Striving for Progress
While Maintaining Stability

2012 National People’s Congress


The National People’s Congress (NPC), China’s national legislature, is responsible for enacting laws, amending the constitution and
confirming the appointment of state leaders. It is also responsible for the examination and approval of national economic and social
development plans, the approval of related budgets and for providing reports on implementation. The annual meeting of the NPC, held in
March in Beijing, is attended by thousands of delegates from around the country and is the major milestone in the annual calendar of events
in China’s system of governance. The policies and initiatives approved by the NPC provide understanding and direction of the government’s
overall objectives and specific goals related to economic planning and promotion of key sectors, industries and regions.

Key Points of 2012 Government Work Report

In the Government Work Report (hereafter as the “Report”), Four Focuses:
Premier Wen Jiabao concluded that 2011 was “a good start”  Increase domestic demand especially consumer
to China’s 12th Five-Year Plan. He reviewed the demand
government’s achievements in controlling the Consumer  Enhance indigenous innovation, energy conservation
Price Index (CPI), transforming economic development and emissions reduction
patterns, developing social services, improving people’s  Deepen reform and “opening up”
well-being and deepening reform and opening up.  Improve social services and people’s well-being

This year, the final year of the current government, is “an Six Principles:
important year linking the past and future,” a statement that  Stabilize growth
repeats the message from the China Central Economic  Control prices
Conference held at the end of last year.  Restructure the economy
 Improve people’s well-being
In 2012, the government’s primary goal is to further  Implement reform
accelerate the transformation of China’s economic  Promote harmony
development model and adjust its economic structure. The
fundamental theme is “making progress while It is worth noting that this year’s economic restructuring will
maintaining stability.” The government’s objective is to keep follow the principle of “controlled support” (有扶有控) by
social harmony and create a favorable environment for the being selective and targeted. All economic development will
convening of the 18th National Congress of the Communist emphasize quality, efficiency, coordination and
Party of China (CPC) later this year. sustainability.

In reviewing the socio-economic situation, Premier Wen has
Nine Tasks:
pointed out that internationally, there exist challenges of
 Promote stable and robust economic development
slow global economic recovery and sovereign debt crisis,
through expanding domestic demand, especially
while domestically, there remain institutional and structural
consumer demand
conflicts.
 Keep overall price levels relatively stable
 Steadily develop agriculture and sustainably increase
The Report sets the 2012 key macroeconomic targets
farmers’ incomes
as:
 Accelerate the transformation of the pattern of economic
development and strategic economic restructuring
GDP 7.5 percent  Implement the strategic policies for the development of
science, technology, education and talent
CPI 4 percent  Ensure and improve people’s well-being
New Urban Jobs 9 million  Promote cultural development and prosperity
 Deepen reforms in key areas of the economic and
Urban 4.6 percent political systems
Unemployment  Improve the quality and standards of China’s “opening
up”
Exports & Imports 10 percent growth
Deficit RMB 800 billion (USD 127 billion) With respect to macroeconomic policy, China will continue to
implement a proactive fiscal policy and a prudent monetary
policy in 2012. The Report further specifies that these
To achieve this massive undertaking, Premier Wen outlines policies should be targeted, flexible and forward-looking. It
Four Focuses, Six Principles and Nine Tasks for 2012 underlines the importance of monitoring current
government’s work. developments and making timely and appropriate
adjustments.

Prepared by Burson-Marsteller
Government Relations & Public Policy Consulting Group


Burson-Marsteller Analysis of the 2012 National People’s Congress
“Making progress while maintaining stability,” the theme first approach that requires the acceptance of a slower-growing
put forward at last year’s China Central Economic economy. Increased quality means gradually upgrading
Conference, sets the tone for this year’s priorities and tasks. industries, moving up the value chain from low-skilled
Out of the nine major tasks listed in the Report, manufacturing to sectors that generate more value,
Burson-Marsteller China believes the following areas fostering indigenous innovation and increasing research and
represent the most important policy developments and development.
trends for 2012. These are summarized in three consecutive
parts: make progress, maintain stability, and how to make Premier Wen admitted in the Report that China missed its
progress while maintaining stability. 2011 goal to keep CPI within four percent; it rose 5.4
percent year-on-year. For 2012, the target has again been
I. Maintain stability set at four percent.

Lower GDP growth and control the CPI This decision indicates the government’s determination to
control inflation while leaving room for pricing reforms and
One of the biggest “surprises” from this year’s Report is that responding to the overall objective of improving people’s
China cut its GDP growth target to just 7.5 percent. This is livelihood. Economists predict that the lowered growth
the first time for China’s GDP target to fall below eight target will help stabilize price levels, making a CPI of four
percent since 2004. In 2011, China’s GDP increased 9.2 percent possible. They are concerned, however, that rising
percent year-on-year, well exceeding the eight percent production costs could cause inflation to bounce back when
target. Premier Wen stressed China’s progression towards the government begins stimulating growth. Elaborating on
"higher-level, higher-quality and longer-term development" the government’s plans to control prices, Premier Wen
and said that the country will move forward in line with the vowed to increase food production, improve distribution
seven percent annual growth target set forth in the 12th networks, reduce distribution costs and tighten regulations.
Five-Year Plan period.
The government’s goal to “seek a balance between
Given that China is still highly dependent on exports and economic growth and inflation while keeping them both
Europe is China’s largest trading partner, the weak global stable" is one of the Chinese government’s most critical
economy and European debt crisis are the chief external long-term priorities and must be approached carefully. This
reasons behind China’s lowered growth target. The explains why, as China’s economy slows and the trade deficit
European economy is visibly stressed; Greece is struggling reaches its largest gap since 1989, the government persists
to get back on its feet, and even larger, sounder economies that it has no plans to introduce a stimulus package as it did
like Italy and Spain are entangled in the crisis. The United during the global financial crisis.
States’ economy maintains a slow recovery and has resorted
to protectionist measures via political and legal procedures. To control the CPI, China must be resolute in stabilizing
commodity prices. The country should concentrate on
Domestically, the real estate market, which was a major expanding domestic demand, fostering the growth of
economic driver, has experienced stringent policy restraints emerging industries like high-tech, environmental protection
in the past two years. This trend will continue, as the and energy conservation, and equip these new industries to
government is determined to keep property prices at meet growing domestic demand. Together, this will help
reasonable levels. Increasing domestic consumption, though balance growth and inflation.
a top priority in recent years, is still short of substantial
improvement. This is especially true considering that Adopt proactive fiscal policy and prudent monetary
fundamental barriers to increasing domestic consumption, policy
such as education, healthcare and tax reforms, remain
major issues in need of further improvement and reform. As a key measure to control prices and maintain economic
stability, the Report says that the government will continue
In light of these challenges, analysts see the lowered target to implement a proactive fiscal policy and a prudent
as realistic and practical, and a decision that shows China’s monetary policy in 2012. The fiscal deficit in 2012 is
confidence. Premier Wen clearly stated in the Report that projected to be RMB 800 billion (about USD 127 billion),
this is a decision to focus on quality rather than speed, an consisting of RMB 550 billion in central government deficit

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and RMB 250 billion in local government bonds. Regarded as
"an appropriate level" by the government, it is a decrease of Public hospital reform will be put into action at certain levels
about RMB 100 billion from 2011 and around 1.5 percent of of the medical system. The government has pledged to end
GDP. the much-criticized system of using profits from hospital
pharmacies to subsidize medical services by the end of 2015,
Through proactive fiscal policies, the government is set to and three large hospitals in Beijing have been selected to
optimize spending by investing in and allocating resources to pilot a program that will combat this problem with
areas that will improve people’s livelihood, including government subsidies. However, Mr. Chen Zhu, Minister of
education, culture, healthcare, employment, social welfare Health, said the reform is now entering “deep water”,
and affordable housing. The government will also be more complicated by the conflicting views and interests of various
committed to technology innovation, environmental stakeholders, from governments to hospitals to businesses.
protection, energy conservation and rural development. The impact of healthcare reform on multinational players is
Short-term gains might be sacrificed in view of long-term uncertain.
interests, and we expect adjustments will be made to make
strategic industries more sustainable. This lays the A good sign is the encouragement of “social capital” to
foundation for more complex reforms that require bolder create a diversified medical services system open to foreign
changes in financial and tax policy restructuring. investment. This is a significant message to multinational
healthcare companies in the medical services,
To ensure that resources are allocated to prioritized areas, pharmaceutical and medical devices sectors. Though the
China has decided to continue prudent monetary policies. specific measures are still unclear, healthcare reform seems
This is in part a reaction to criticism of the RMB four trillion to be moving forward in tangible steps.
stimulus package meant to mitigate the impact of the global
financial crisis in 2008. Some critics claimed the stimulus Ensuring food safety is another important issue for
made matters worse by pumping excessive cash into an improving people’s well-being. Though this year’s Report
already overheated economy. The government is attempting does not articulate food safety in detail, the government is
to pave the way for healthy growth in key areas while determined to intensify supervision of the industry, with
remaining cautious about where it provides financial dairy products, drinks, meat products, food additives and
support. organic food on the top of the watch list. In China’s vast and
quickly developing consumer market, foreign food giants
II. Make Progress can more easily fall victim to scandals due to their brand
penetration and market leadership. Foreign companies have
Improve people’s well-being been criticized for applying a “double standard” to China by
lowering the quality of their products sold in the mainland.
In 2012, RMB 1.384 trillion (about USD 220 billion), will be Not only will foreign companies be more scrutinized by the
dedicated to areas like education, healthcare, social security, government, consumers and media, they are also required
employment, affordable housing, culture and agriculture. to be the industry’s role model, holding themselves to the
This is an 11% increase from 2011. same standards as in their home countries.

The current government under President Hu and Premier Increase domestic consumption
Wen has strived to build a “harmonious society,” and
continuously improving people’s everyday lives is the In this year’s Report, Premier Wen named "expanding
cornerstone of that objective. Expanding employment is an domestic demand, particularly consumer demand" the
important part of this, and Premier Wen has tasked all levels fundamental driver of China's long-term, steady and healthy
of government to create jobs, particularly in sectors such as economic development. Mr. Chen Deming, China’s Minister
services, technology and innovation-driven small of Commerce, announced that household appliance
businesses. subsidies for rural residents will continue and the Ministry
will introduce a series of policies making it easier and
Healthcare reform remains a high priority. In 2012, China cheaper for consumers to purchase environmentally friendly
will further improve the universal healthcare system and products.
expand basic medical insurance coverage. Medical insurance
subsidies will be raised by 20% from RMB 200 to RMB 240 Because China faces shrinking external demand, an
per person, per year. The government will expand medical uncertain global economic recovery and strong competition
insurance to cover more diseases and conditions. in traditional manufacturing, expanding domestic demand

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and shifting to a consumption-led economy is an inevitable The government will continue to restrict loans given to
transition. Currently, China’s consumption rate is about 35% industries that are considered energy-intensive, polluting or
of GDP, significantly lower than even other emerging overheated. Preferential policies and investment will be
economies, such as India (54%) and Brazil (63%). given to stimulate innovation-based small businesses. As
China’s economic landscape continues to evolve, the shift of
To further boost China’s domestic consumption, the Chinese traditional industries to the more economical western
government needs to address a range of issues, from regions is inevitable; the development of the eastern part of
income distribution and the social safety net to education, the country will be increasingly dependent on technological
healthcare and food quality. The consistent and effective innovation.
implementation of the government policies will be a critical
part of making domestic consumption an engine for China’s Energy conservation, emission reduction and environmental
growth, both this year and in the years ahead. protection were priorities in the 2011 work review and are
named again as priorities in 2012. Their importance has
This is still a work in progress, but the direction is clear: the been further confirmed by the central budget’s allocation of
government will continue its consumption-stimulating RMB 48.8 billion to these areas.
policies and flag new policies targeted at developing a green
economy and improving people’s well-being. The Report This is in line with the government’s objective to improve
announced specific work plans meant to increase individual people’s well-being and also a response to last year’s failure
incomes; extend consumer credit; control rising food prices, to meet targets in these areas. Premier Wen declared that
develop community services; boost the culture; tourism and “China will by no means sacrifice the environment and
health sectors; and encourage green products and online people’s health for economic development.” Industries
shopping as new consumption trends. related to environmental monitoring and governance are
expected to grow.
Transform development patterns and restructure
the economy III. Deepen reform and “opening up”

In this year’s Report, restructuring the economy is defined Deepen economic reform in key areas
as the country’s most urgent task for 2012; it is also a
long-term objective, symbolized by the reduction of the GDP The Report emphasizes the critical role of the state-owned
growth rate to 7.5 percent. The central government will economy, stating that it should be “unswervingly”
invest RMB 29.9 billion in boosting seven strategic emerging consolidated and further developed. But the Report also
industries, but with a more selective approach than years states that the government should “unswervingly”
past. encourage, support and guide the development of a
non-state-owned economy.
Special plans covering next-generation IT, high-end
equipment manufacturing, new materials and new energy This year’s debate seems to be in favor of the
vehicles will be released in the first half of this year. But non-state-owned economy. The Report stressed that
Premier Wen singled out new energy - specifically solar monopolies should be broken up and the private sector
energy and wind power - as industries where overheated should be given wider access to strategic sectors like
expansion has caused disorder and friction with major railroads, municipal administration, finance, energy, telecom,
trading partners. It is interesting to note that the wording in education and healthcare, creating a level playing field for
the Report has been revised from “stopping” to “preventing” all forms of ownership. It is said that the detailed measures
the blind expansion of these two sectors, which hints at a of “New 36 Articles,” which promote non-governmental
tradeoff between the government and vested interest investment, will be published within the first half of 2012.
groups, and also leaves room for further policy discussions. Top officials in the central government are realizing that
state-owned enterprises (SOEs), by taking advantage of
Another pillar of economic restructuring relies on moving their privileged positions to strengthen their monopolies, are
industries up the value chain. The Report calls for the negatively impacting China’s economy and making it difficult
optimization and reorganization of certain traditional for it to advance to the next level. When private and foreign
industries like automobile, steel, shipbuilding and cement to businesses are hampered by policy restraints, both visible
tackle the side effects of the RMB four trillion stimulus and invisible, and competition with SOEs, innovation and
package. industry development lack momentum.

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Another breakthrough can be seen in the repeated calls for between the agendas of political elites in the central
support of the real economy, especially small businesses. government and the priorities of local leaders, who are more
The government pledged to put immediate measures in inclined to focus on short-term economic and political
place, including reducing tax burdens, launching pilot achievements. Though the Report uses general language to
programs to convert business tax to value-added tax, describe reform, “transforming the functionality of the
enlarging funding for micro-businesses, setting up an RMB government” seems to be a top priority. This concept can be
15 billion fund for small- and medium-sized enterprises explained as sorting out the relationships between the
(SMEs) and promoting small-scale financial institutions. government and market, central and local governments, and
According to Mr. Miao Wei, Minister of Industry and the government and social organizations, in an effort to let
Information Technology, assistance will be particularly market forces distribute resources and motivate
directed to innovation-oriented and labor-intensive SMEs. governments.

These measures will address the growing complaint that In the past decade, China’s political system and policy
SOEs achieve market leadership through exclusive and making process have become more transparent. However,
preferential policies that prevent the private sector and there are a number of factors that need to be taken into
foreign companies from competing head-to-head with SOEs. account when evaluating whether the progress will continue
If the reforms are successful, it will help develop China’s and where it is heading.
private companies and sustain the long-term and balanced  First, the transition of China’s top leadership may not
growth of the entire economy. In addition, as foreign change the overall course of development, yet to what
investment struggles in Europe and the United States, a extent and how quickly reforms will be carried out
healthier China market is expected to draw high-quality remains unknown.
investment from abroad.  Second, the question of how all Chinese people will
benefit from China’s growth needs to be answered.
More opportunities may exist for multi-national companies The government’s management of China’s growth is
(MNCs) willing to explore ventures with businesses in the likely to impact whether reform is accelerated or
aforementioned sectors. The software industry, for example, stalled.
will benefit significantly as will institutions that provide  Third, despite all the other priorities, economic
financial services to SMEs. development remains the key. Given that the global
economy is struggling to recover from a recession, and
Expedite political reform and transform government China is determined to sacrifice size for quality, China’s
functions growth should continue to slow down. It becomes a
question of whether the government is ready and
According to the Report, China will continue to press political motivated to reform in a decelerating economy.
reform "with greater resolve and courage." At the
concluding press conference with Chinese and foreign Improve the quality and standard of “opening up”
journalists, Premier Wen delivered a strong warning about
the ''urgent'' need for reforms, without which, he said, It is highlighted in the Report that China is entering a new
tragedies like the Cultural Revolution could recur. stage of opening up - China is now the world’s largest
exporter and second-largest importer. The Report sets the
China’s top leadership is well aware of the importance of goal of foreign trade growth at around 10% year-on-year in
political and government reform. In his last NPC press 2012, a sharp slowdown from previous years when China's
conference as Premier, Wen Jiabao noted that, without imports and exports rose over 20% annually.
political reform, economic reform will not succeed and the
achievements China has already made will be lost. But, he This implies that, after 30 years of export-driven and
added that changes would have to come step-by-step and investment-led growth, China’s opening up is now exploring
under the leadership of the Communist Party of China (CPC). a new path of transformation and restructuring, particularly
Therefore, he explained that China’s political system should against the backdrop of diminishing external demand and a
be a socialist democratic one, with the CPC’s leadership at its global economic downturn. The severity of the global
core. However, the CPC’s evolution over time and methods environment also underscores the strategic role of exports in
to achieve improvement have become key issues, if not boosting employment and economic growth. As pinpointed
obstacles, of China’s political reform. by Premier Wen, “While expanding domestic demand is
crucial, we can never overlook the importance of external
As reform moves ahead, conflicts seem to be emerging demand in China's economic development.” This year,

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stabilizing exports will be more important than increasing the short-term in return for more sustainable development
imports. A series of supportive policies, including export tax over the long run. With the CPI target still at four percent,
rebates, financial incentives, and export market China is set to confront the enormous challenge of
diversification and trade facilitation measures are expected combating inflation while growing the economy.
to be announced and implemented shortly. China will adopt
new guidelines to encourage imports and promote trade China now emphasizes balance and quality over speed and
balance to alleviate unnecessary friction and tensions during quantity. By adopting a proactive fiscal policy and a prudent
a handover year. monetary policy, the government encourages the allocation
of resources to innovation, technology advancement,
As explicitly stated in this year’s Report, China will continue environmental protection, energy conservation, education,
to welcome foreign direct investment (FDI), but with social safety nets, affordable housing, employment and
increased emphasis on quality. Foreign investment will be other areas aimed at improving people’s livelihood. These
encouraged in advanced manufacturing, new and high measures will help expand domestic consumption,
technologies, energy conservation, environmental particularly in the context of shrinking investment and
protection, modern service industries, and the central and external demand.
western regions.
Upgrading and improving industries, particularly strategic
FDI has already witnessed changing attitudes and views emerging industries, will remain a core priority for China for
from the Chinese government, businesses and the general years. China aspires to create internationally competitive
public in recent years. In line with the overall direction of “national champions” in these sectors to realize its goal of
economic restructuring and moving industries up the value being an innovative country that can challenge foreign
chain, China enforced the newly revised “Industrial businesses. However, thanks to the distinctive advantages
Guidelines for Foreign Investment” early this year, focusing MNCs possess in knowledge, technology and experience,
more on quality, innovation and the movement of strategic foreign participation will be encouraged by the Chinese
industries up the value chain. As China’s market becomes a government. So the question remains whether foreign
more level playing field with the roll-back of preferences for companies should re-evaluate their operating strategies in
SOEs, these new areas and sectors of focus will present China. Are Chinese companies their partners or their
additional opportunities for foreign companies. Furthermore, competitors?
at home, foreign businesses will experience the challenges
and opportunities brought on by the Chinese government’s To accomplish all of this, top officials in the central
“going global” strategy, which encourages Chinese government realize that economic restructuring should
companies, both state-owned and private, to make overseas continue, and political and government reforms will be the
investments and acquisitions. foundation for the continued success of the economic
reforms. Premier Wen said that without political reform,
Conclusions economic reform will not succeed and the achievements
China has already made will be lost. One critical part of
This year’s NPC is the last session under the leadership of political reform is to transform the way the government
President Hu Jintao and Premier Wen Jiabao. The functions and improve the market’s essential role in the
overarching theme of “making progress while maintaining allocation of resources.
stability” reflects the willingness of Hu and Wen to stay the
course of pursing a “harmonious society” and quality growth The Chinese government’s role and policy priorities have
through gradual reform. The NPC was an opportunity to evolved along with China’s opening up and reform over the
reiterate the policies and priorities approved at last year’s past 30 years. As China moves up the value chain and
Central Economic Conference and ease the handover to the develops indigenous innovation, it is becoming increasingly
next generation of leadership. Maintaining both economic selective in how it utilizes foreign investment, placing
and social stability is the paramount objective – critical to greater emphasis on high-quality intangibles. Capital and
ensuring a steady leadership transition scheduled to happen technology are no longer the strongest enticements for
later this year at the 18th National Congress of the CPC. China’s central government, and they cannot override the
priority of sustainable growth. That said, the government
Considering the macro-economic situation in China and welcomes foreign companies who help China’s local
around the world, the government is determined to continue businesses grow their technology, management, and
transforming and restructuring China’s economic model. operation capabilities or expand into overseas markets.
This will require tolerance of a slower growing economy in However, energy-intensive and polluting companies,

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regardless of their current size or growth, are faced with a through donations alone; it must include investment in areas
bleaker future. that will help the Chinese government do things like foster
innovation, develop local talent, protect the environment,
Recommendations for Foreign MNCs and improve supply chain management.

Looking at the theme of the 2012 NPC, “making progress Therefore, foreign MNCs need to carefully evaluate in which
while maintaining stability,” as well as the corresponding sectors they will invest in China, how to conduct business,
policy dynamics and initiatives, foreign MNCs may not need how to engage and influence central and local governments
to overhaul their current business strategies and approaches and how to leverage and manage relations with key
in China. However, they need to ensure their goals and stakeholders, such as local business partners, industry
strategies align with the government’s latest agenda and organizations and think tanks.
priorities. This includes first understanding the current
perceptions and agendas of their stakeholders and then It is also worth noting that because China’s policies have
building a platform for consistent and effective become more inward-looking, adjustments in the allocation
communication with them. of government-led investment and financial resources are
expected. As China moves further down the road of
In addition to providing capital investment and sharing rebalancing the economy, economic nationalism may grow.
advanced technologies, foreign MNCs should be prepared to In this context, foreign investors will be increasingly
shoulder an expanding list of responsibilities attached to the required to contribute to China’s overall national objectives.
improvement of people’s livelihood. This cannot be done

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For further information on how Burson-Marsteller China can help you increase your understanding of China’s political and regulatory
environment and assist you with your specific policy analysis requests, please contact:

Ms. Jane Zhang
Director, Government Relations & Public Policy Consulting Group
Burson-Marsteller China
Tel: 86-10-5816-2584
Email: jane.zhang@bm.com

Mr. Weijia Wang
Senior Manager, Government Relations & Public Policy Consulting Group
Burson-Marsteller China
Tel: 86-10-5816-2559
Email: weijia.wang@bm.com

About Burson-Marsteller’s Government Relations and Public Policy Consulting Group
The Government Relations and Public Policy Consulting Group is composed of former senior government officials, public policy
experts and communication specialists. The Group provides senior-level counsel to clients on government affairs strategy, policy
analysis, government relations and issues management through an evidence-based and knowledge-driven approach.

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