On Sunday 15th March, China concluded the third session of the 12th National People’s Congress. The lianghui, as the annual political meetings are commonly known, is one of the most important events on the Chinese political calendar. This year’s lianghui set out further building blocks in the country’s reform agenda. With China’s top-line growth target lowered to around 7%—its lowest rate in a quarter century—Premier Li Keqiang delivered an unusually frank assessment of the economy’s structural problems, pointing to overcapacity, insufficient innovation and a historically successful economic model that is now having a difficult time driving the economy forward. Premier Li provided long-term policy direction design to provide an institutional solution to issues that may derail China’s development. In the coming months and years, China’s expectations of those operating in China—whether foreign investors or local Chinese companies—will continue to shift profoundly. Such a period of uncertainty brings new challenges and necessitates fundamentally new ways of conducting business. For more information please contact our Beijing office: http://www.brunswickgroup.com/contact-us/beijing/

1. Lianghui in Review
A review of theThird Session
of the 12th National People’s Congress
March 2015

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KeyThemes from the Lianghui
This year’s policy address shows
the administration remains serious
about reforms to tackle these issues
and ensure better governance, social
stability, and most importantly more
sustainable long-term economic
growth.
China’s rapid changes are creating
an increasingly complex operating
environment for foreign companies.
There is a mix of positive signals and
challenges at play, which we outline in
more detail below:
• The government is working to
reduce red tape and improve
access for foreign investment,
which could aid approvals in
sectors not on the restricted list.
• The corruption crackdown is the
‘new normal’ and is having some
beneficial impact, although it
remains unpredictable.
• National interests, as ever,
overshadow the reform agenda;
foreign companies need to
demonstrate how their value
propositions are aligned
with China’s economic and
developmental goals.
• Regulators are getting tougher,
and multinational corporations are
increasingly vulnerable to high-
profile corruption or anti-trust
investigations;corporate governance
matters more than ever.
• Stakeholder management is
increasingly complex, costs are
increasing and talent is harder to
find and retain.
We remain cautiously optimistic about
the long-term direction of policy laid
out in Premier Li Keqiang’s state of the
nationaddress,asthegovernmenttries
to provide an institutional solution
to issues that may derail China’s
development. In the coming months
and years, China’s expectations of
those operating in China—whether
foreign investors or local Chinese
companies—will continue to shift
profoundly. Such a period of
uncertainty brings new challenges and
necessitates fundamentally new ways
of conducting business.
Policy contradictions will require
careful navigation. On one hand,
Beijing still needs—and is actively
courting—foreign investment. Non-
financial foreign direct investment
utilised last year totalled USD 119.6
billion—up 1.7% year-on-year.
On the other, policymakers remain
keen to build domestic industrial
champions, so while China’s economy
benefits from foreign companies’
active participation, the approaches
that once brought corporate success
in China will not guarantee continued
success. Many sectors that the
government has prioritised as engines
of future growth are coming under
tighter regulation. While foreign
direct investment remains important,
China’s global expansion is fast
catching up to inbound investment;
last year non-financial outbound
direct investment reached USD 102.9
billion—up 14.1% year-on-year.
Below, we have highlighted the key
takeaways that are likely to affect
businesses operating in China in
coming years, examining both the
opportunities and the challenges that
lie ahead as the government’s reform
agenda gathers pace.
The annual meeting of China’s legislature wrapped up on Sunday
15th March with the leadership setting out further building blocks
in the country’s reform agenda.With China’s top-line growth target
lowered to around 7%—its lowest rate in a quarter century—
Premier Li Keqiang delivered an unusually frank assessment of the
economy’s structural problems,pointing to overcapacity,insufficient
innovation and a historically successful economic model that is now
having a difficult time driving the economy forward.

3. © BRUNSWICK | 2015 | 3
The Positives
Less red tape, more local control:
Central authorities will continue
to delegate more power to local
governments, reducing the need
for ministerial-level approval and
review. The move reflects a wider
goal to reduce the role of government
in business and to allow market
forces to work more efficiently,
notwithstanding the government’s
recent directive to state-owned firms
to merge. The removal of registered
capital requirements for new firms
has seen a 46% surge in new business
registrations in 2014.
Increased foreign investment:
Li Keqiang committed to halving
the number of fields in service and
manufacturing industries in which
foreign investment is restricted and
reducing the thicket of restrictions
foreign companies have traditionally
faced when seeking market access.
Prior to the conclusion of the lianghui
the government promulgated the
revised catalogue guiding foreign
investment which reduces the sectors
in which foreign investment is
restricted from 79 to 38 and sectors
that are prohibited from 38 to 36.
The authorities also stated that they
will work to evolve the catalogue to
a‘negative list’ approach that specifies
whichsectorsarerestrictedforforeign
investors; sectors not mentioned will
be considered open. Some areas such
as healthcare,new energy,tourism and
agribusiness are to be prioritised, but
the caveat remains that sectors where
Beijing has a clear national interest,
such as telecoms and finance, will
become very difficult to operate in.
Tackling corruption: Amid the
Xi administration’s sweeping anti-
corruption drive, multinationals are
reporting a sharp decline in grey-
market requests. The crackdown on
graft is part of the ‘new normal’ and
in the case of anti-corruption has been
too sustained and wide-ranging to
be considered a fleeting campaign or
purge. It is aimed at improving the
system of governance and weakening
the power of vested interests that are
blocking reform—and addressing a
genuine public grievance. However,
some critical decision-making in
government has been slowed as
officials seek to ensure consensus and
as the anti-corruption drive has an
impact on the bureaucracy.
A more systematic business
environment: Behind the alarming
headlines in the Western press, at
a grassroots level many managers
are reporting that doing business
has become less corrupt and more
predictable, with enforcement of
rules surrounding litigation and other
business processes becoming more
standardised. But a large gulf between
the letter of the law and effective
enforcement remains a problem.
The Challenges
China’s crackdown on the graft that
has lubricated the economy for the
past three decades continues unabated
and companies must adjust to a ‘new
normal’ business environment—
not just a ‘new normal’ economic
environment.
National interests overshadow
reform agenda: The leadership
team will remain strong advocates
of domestic industry interests and
this will likely lead them to support
policies that weaken overarching
reform goals. Certain industries
where the country has a clear national
interest,such as energy and resources,
finance, technology, and security, will
become more complex to operate
in. There is proposed legislation to
remove foreign equipment from the
financial sector and national security
interests have a growing influence that
affects new legislation on sectors from
NGO reform to telecommunications.
A desire to build strong national
champions of industry will continue
to influence authorities’ protection
of domestic players at the expense of
their foreign counterparts. Against
this background, in order to flourish
companies need to articulate a value
proposition that clearly demonstrates
how their role in China aligns with
the government’s broader economic
objectives.
Regulators getting tough: Both
domestic and foreign companies will
face greater scrutiny from regulators,
but while regulators often get tough
with domestic players behind closed
doors, foreign companies face a far
higher risk that their issues will be
brought out in the Chinese media
spotlight with implications for
global reputation. MNCs may also
be vulnerable to high profile public
corruption or anti-trust investigations
because they present more
straightforward targets for regulators
looking to send clear signals to the
market. Many of the landmark
cases that made headlines over the
last three years have been significant
learning exercises for the investigating
authorities involved and in the years
ahead companies should anticipate
more investigations.
Corporate governance should be an
ever more pressing concern: As the
graft fight continues, companies must
ensure their corporate compliance
systems are genuinely fit for purpose
in China, and reflect the complexity
of the local operating environment.
Thoughtful localisation is crucial and
a one-size-fits-all global model will
rarely suffice. Beyond corporate
compliance, this also requires
companies to be responsible in
every aspect of their operations and
conduct—not just socially.
Growthisslowing: China’sleadership
downgraded their growth target for
2015 to “around 7%” from last year’s
“around 7.5%” (last year the economy
grew by 7.4%). The administration
began lowering economic growth

4. 4 | 2015 | BRUNSWICK ©
expectations at the start of the 12th
Five-Year Plan (2011-2015) when
they targeted “around 7.5%” for the
first year and “around 7%” for the
whole five-year period—marking the
first time they had targeted growth
below 8%. While infrastructure
projects remain an important element
of the growth engine, the authorities
are shifting attention to support
longer-term growth. At the same
time, with the government’s austerity
drive continuing, companies reliant
on luxury spending will continue
to feel the pain. However, the
authorities’ desire to spur innovation
could offer opportunities in sectors
from technology to pharmaceuticals.
Increasingly complex stakeholder
management: Many signals from
Beijing remain contradictory, such as
the government voicing commitments
to increase imports of high-tech
equipment and components even as it
seeks to bolster domestic industry and
increase the technological security of
sectors deemed to be vital to national
interests. The crackdown on graft
has underlined the need to build a
much broader network of advocates
to support corporate engagement
at both a local and national level.
There is a Balkanisation of domestic
interest groups, and as a result
officials are reluctant to take decisions
without being sure they have broad-
based support within government
and society at large. It is critical
that companies operating in China
today build an institutionalised and
sustainable stakeholder engagement
programme and not rely just on
personal connections or‘guanxi’.
China’s rising global profile is
fuelling bilateral tensions: While
it is positive to have a more engaged
China in the global community,
Beijing’s growing assertiveness will
at times present distinct challenges
to all at the table—such as navigating
regional sensitivities. Related
disputes may cause bilateral tensions
that impact the business environment.
Costs are increasing and talent
is harder to retain: The cost of
conducting business in China is
increasing significantly—from the
cost of raw materials to the cost
of labour. The demand for skilled
labour—be it skilled manufacturing
employees to mid-and-senior
executives—is increasingly making
employee retention a key priority.
Meanwhile, the country’s continuing
pollution problems make it harder
to attract top international talent.
Pollution is also spurring local talent
to seek relocation overseas with their
families.
Ideological control continues to
tighten: Since taking office,President
Xi Jinping has presided over a broad
strengthening of government control
over political opinion and ideology.
The scope in which human-rights
activists, NGOs, lawyers, journalists,
and liberal academics can operate has
narrowed considerably. Formerly
open and public free-wheeling
debates on social media have reduced
under greater pressure from censors.
Authorities have called for universities
to refocus on ‘the core values of
socialism’, suppress criticism of the
Party, and reduce foreign influence.
Hopes the current administration
would combine economic reform
with political reform have thus far
proved misplaced, as the government
has sought to rein in the expression
of ideas that authorities deem
unacceptable, and imposed greater
restrictions on foreign media
and NGOs.
The Role of the Private Sector
The private sector generates over 60% of China’s GDP, over 50% of tax
revenues and is responsible for over 80% of employment. It also
accounted for 63% of total urban fixed asset investments in China in 2013,
demonstrating a growing appetite for investment. The government knows it
must support private enterprise in order to ensure economic growth.

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The meeting of China’s senior
leadershipwiththecountry’slegislative
bodies, the Third Session of the 12th
National People’s Congress (NPC)
and the Chinese People’s Political
Consultative Congress (CPPCC)
concluded on Sunday 15th March.
The lianghui, as the two meetings
are commonly known, are one of the
most important annual events on the
Chinese political calendar. This year’s
lianghui provided important details
on how the government will respond
to changing economic trends and the
reform programmes announced at
theThird Plenum and Fourth Plenum
of the Central Committee of the
Communist Party of China (CPC)
held in the last two years. Because
2015 is the last year for implementing
the 12th Five-Year Plan, the coming
months are critical to ensuring that
the current Plan’s goals are achieved
and the goals of the 13th Five-Year
Plan (2016-2020) are set.
Policies laid out in Premier Li
Keqiang’s address reaffirm many of
the ideas in last year’s report while
providing more detailed action plans.
Though facing increased pressure
from slowing growth, authorities
are confident they can offset the
downturnwithpoliciesthatencourage
innovation and entrepreneurship. In
addition to further opening up the
economy and granting the market
a more decisive role in resource
allocationandpricing,thegovernment
is giving weight to policies that seek to
ease public concerns about education,
healthcare, housing, pollution, and
social security.
Despite a fresh round of predictions
of the imminent collapse of the
Chinese system from some China
observers, from our vantage point
on the ground, we believe that the
policies put in place by the authorities
in the last three years—including
the anti-corruption campaign—have
strengthened the government and, if
anything, reduced the likelihood of a
political crisis capable of threatening
Party control. As economic
researcher Arthur Kroeber writes,
Xi’s government is “not weak and
desperate, but forceful and adaptable,”
and has demonstrated remarkable
confidence in the continued relevance
of the authoritarian capitalist system
that has helped engineer thirty years
of growth.
We see all of the policy directives
that have been outlined since the
beginning of this administration as
building toward a common goal.
President Xi Jinping’s reform agenda
is aimed at remaking China’s system
of governance to ensure more stable
economic growth. Grasping the
nettle of corruption is essential for
a root-and-branch overhaul of the
mechanisms of government that can
tackle vested interests and ensure that
reforms flow from the centre to the
localities.
To achieve this goal, we see reforms
as broadly falling under three
interconnected themes. First,
improving governance through
legal reform; second, creating
stable sources of growth in a slower
economic environment; and third,
addressing public concerns in order
to shore up support for the reform
agenda.
Improving Governance
and Administration
Legal reforms
At this year’s NPC, the government
continued to give the right signals
on legal and governance reform.
This stems from recognition that the
stakes for legal reform are very high.
As Xi Jinping has noted, ‘the judicial
system is the last line of defence for
social justice’ and ‘if it fails, people
will widely question (the country’s
ability to realise) social justice, and
stability will be hard to maintain’.
Underscoring the importance of
legal reform, China’s top judge
publicly apologised at the lianghui for
wrongful convictions, which led to
more than 1,300 revised sentences
in 2014, underscoring Li’s statement
that‘no government body may assume
any power which is not provided for
by law’.
One key plank of cleaner government
is a more transparent and efficient
Lianghui 2015 in Detail

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court system. This year’s NPC
builds on the theme of a stronger
legal system laid out at the Party’s
Fourth Plenum in October. While
the plenum fell far short of Western
expectations because it affirmed
the Party’s position above the law, it
remains a potentially significant step
toward a more predictable rules-based
system. Despite the fact that judicial
reform has failed to move forward
in the past following promising
statements, we have seen some
encouraging steps since October. The
Supreme People’s Court has set a five-
year timetable for reforms that will
increase the transparency of trials and
create committees at the central and
provincial levels with the power to
punish judges who flout judicial rules.
The cornerstone of this reform is the
amendment of China’s Legislation
Law, which was adopted on Sunday
15th March at the close of the National
People’s Congress and expands the
power of local legislatures to pass
legislation. The revised Law grants
legislative power to 288 cities in China
from the previous 49 cities. The Law
also clarifies important principals
related to setting tax—a tax can
only be levied and a tax rate set if it
is endorsed by law. Of the country’s
18 existing taxes,only three are levied
through legislation (individual income
tax,corporate income tax,and vehicle
and vessel tax)—the remaining
taxes are imposed through formal or
provisional regulations issued by the
State Council. All taxes in breach of
the revised Law are to be compliant
by 2020.
Meanwhile, a first batch of seven
provinces and cities have already been
nominated for various pilot reforms
aimed at increasing professionalism,
accountability and job security among
judges. A second batch is due to be
selected this year.
Other longstanding policies that
disincentivised impartiality, such
as arrest and conviction targets
for law enforcement officials and
lax courtroom rules allowing for
defendants to stand trial wearing
prison garb, have also been abolished.
There is,however,a wide gap between
the letter and implementation of
the law. It remains to be seen how
well the government’s legal reforms
are implemented at a local level.
Nevertheless, because the judiciary
has been a large source of public
grievance, the government has made
genuine progress in pure policy terms
through a raft of policies designed to
improve transparency and oversight.
Among these is a commitment to a
three-year review of State Council
regulations, after which those deemed
lacking in legal legitimacy or to be
contrary to the public interest will
be amended. Other areas slated for
legal reform include science and
technology, advertising, Internet
security, food safety, anti-terrorism,
elections and philanthropy.
Anti-corruption
Some have opined that the anti-
corruption campaign has been
driven by Xi Jinping’s desire to
consolidate power by removing
factional opponents; we believe this
is a fundamental misunderstanding
of a campaign which aims to address
an unsustainable problem impacting
long-term development and to
address a genuine societal grievance.
Authorities will no longer turn a
blind eye to officials, corporations,
or individuals that conduct illegal
and corrupt activities. In the past the
central authorities may have tolerated
officials profiteering as they delivered
local growth targets. This is no longer
the case. In 2014 the number of
officials—including both tigers and
flies—disciplined for corruption
jumped 30% to over 230,000.
The corruption drive has proved
enormously popular with ordinary
Chinese people who have borne the
brunt of official rapacity.
While the rhetoric of this campaign
has often been dramatic, Premier
Li Keqiang’s comments this year at
the lianghui on corruption were far
milder. Instead of urging China to
‘break mental shackles and vested
interests with great determination,’ as
he did in last year’s report, this year
he simply lamented that “shocking
cases of corruption still exist”. As a
solution, Li called for introducing
“third-party evaluations and public
appraisals and establishing permanent

7. © BRUNSWICK | 2015 | 7
mechanisms” to deal with graft. He
also vowed to eradicate “the breeding
grounds of corruption”.
To cope with the larger number
of arrests of officials netted in the
campaign, a new vice-ministerial
level anti-graft bureau is being set
up within the Supreme People’s
Procuratorate,China’s top prosecutor.
The new bureau merges three existing
bodies—the Anti-Corruption and
Anti-Bribery Bureau, the Prevention
of Duty-Related Crimes Department,
and the Investigation of Dereliction of
Duty and PowerAbuse Department.
Reducing
administrative burden
In the last two years, the government
has slashed back 700 business approval
processes, removing channels for
backhanders at the same time. Having
begun streamlining and decentralising
administrative approvals over the
last year, the government is now
moving to clarify the regulations for
investment approvals, simplifying the
process and defining the timeframes.
This will help decouple decision-
making power from those who control
access to resources, as well as pruning
individual officials’ power.
Such reforms aim to lay out the
government’s responsibilities and
supervisory powers more clearly,
while outlining the areas where
business is permitted to operate.
They will also clarify the ‘negative
list’ of industries subject to heavier
regulations, which are likely to
include telecoms, the Internet,
pharmaceuticals and food. Broadly
speaking, the government intends to
withdraw from the direct provision
of many social services, allowing
NGOs to step into the gap. However,
foreign NGOs’ operations will likely
be subject to far greater control once
the new foreign NGO law is passed.
Changes to the administrative system,
continued equalisation of investment
policies, and adjustments to the
broader operating environment are
designed to create a more predictable
business environment for all those
that operate in China—be they local
Chinese firms or foreign investors.
Transitioning to
a Slower Growth
Environment
As economic growth stutters, policy
makers face an uneasy balancing act:
how to deliver sufficient growth to
ensuresocialstabilityandpushreform,
while also easing public distress over
health, education, food safety and
pollution. This delicate dynamic can
be seen as a national discussion that
erupted following the release of the
environmental documentary Under
the Dome, in the days before this
year’s lianghui. The environment has
been a key priority for the current
administration over the last three
years and in this year’s session the
authorities pledged to further reduce
emissions of major pollutants and cut
energy intensity by 3.1%.
Beijing is taking a two-pronged
approach to finding new sources of
economic growth. One prong is
encouraging entrepreneurialism and
innovation. Premier Li Keqiang’s
policy address this year mentioned
the Internet eight times versus
twice in 2014, while mentions of
entrepreneurship rose from eight
to 13, and innovation from 27 to
37. New business start-ups will
be supported by improved legal
protections for private property and
other measures. The other prong is to
increase the provision of public goods
such as education and healthcare
via third parties contracted by
government procurement. Industries
to be encouraged include elderly
care, clean energy, ICT, machine and
machine tools and financial services.
SOE reform
The government must also tread a
tightrope by reforming the country’s
state sector while remaining in control
of one of the key levers of economic
and political power. The role of the
state-owned sector is changing, and
virtually all provinces have published
plans for mixed-ownership state
enterprises,paving the way for further
SOE reform.
However, the current government
work report, which lays out the
vision for policy directives in 2015,
tones down the language of reform
and focuses more on a progressive
reform programme. The language
this year has shifted from calling
for an accelerated introduction of
mixed ownership to the systematic
and orderly introduction of mixed
ownership. Many of the directives are
designed to strengthen the regulation
of state owned enterprises, guarding
againstloss,andensuringperformance
is maximised. The message is clear
that while SOE reform remains
paramount, the authorities will not
eliminate the SOE sector via this
reform drive, but actually use reform
to reinforce the role of the sector as a
key pillar of China’s future.
The government particularly aims
to accelerate structural reform
of the oil, electricity, and natural
gas industries. Consolidation is
planned in strategically-important
Under the Dome
A documentary about China’s
worsening air pollution by
former state television reporter
Chai Jing, hit the headlines as the
National People’s Congress was
opening. After the documentary
sparked a nationwide debate
about pollution online, the
authorities pulled it off the web;
but not before it had garnered
more than 200 million views.

8. 8 | 2015 | BRUNSWICK ©
industries such as nuclear energy, rail
technology and telecommunications
to improve efficiency and prepare
Chinese companies to compete with
multinationals at home and abroad.
To increase the influence of market
forces, projects led by SOEs will
be opened to private investment,
though it remains unclear whether
outside investors will gain any say in
the management of those projects.
To further help SOEs operate more
efficiently and compete with local
competitors and international
peers, SOEs will be relieved of
the requirement to run social
programmes, dovetailing with the
goal of allowing NGOs to step in to
fill the gap.
Given that government statements
on reforming the sector have
become more conservative, SOEs
in key sectors can be expected to
maintain their favoured status for the
foreseeable future.
Nevertheless, there is a recognition
that the state needs to step back
from its dominant role in parts of the
economy. Public-private partnership
in infrastructure and public utility
projects will be encouraged following
the Railway Development Fund’s
pilot PPP project, which will direct
RMB 800 billion (USD 128 billion)
and open over 8,000 km of railway
to traffic. The government wants to
channel private investment into areas
where state-owned enterprises used
to be the only investors.
There is also a growing recognition
the bloated state sector has gobbled up
so much of the country’s capital that
small and medium-sized enterprises
(SMEs) have been starved of funding.
The government knows that more
must be done to encourage start-ups,
boost innovation and increase private
sector provision for public goods such
as healthcare and education.
FreeTrade Zones and
liberalisation
Last year Premier Li praised the
establishment of the Shanghai Free
Trade Zone and called on the
expansion of the free trade zone
model into new parts of the country.
In the year since the Shanghai Free
Trade Zone has expanded and new
zones have been established in
Guangdong, Fujian and Tianjin. The
free trade zone model was considered
a potential modern day equivalent of
the special economic zones that were
critical in the 1980s as a test bed for
reform policies and being a catalyst
for economic transformation. So
far the new model has yet to prove
a transformative rival to the special
economic zones.
While the success of the free trade
zone model has yet to be proven,
there are a number of important
reform policies being rolled out in the
zones. The free trade zone model will
play an important role in liberalising
RMB trade under the capital account
and boosting overseas investment,
which still lags inbound investment by
USD 17 billion.
Financial and market
reform
Pricing reform is key to unlocking
the power of the market in resource
allocation. As authorities strengthen
price supervision, however, this
process is liable to fuel more anti-
trust investigations over the next year.
The government will remove price
controls on most pharmaceuticals and
liberalise prices on commodities and
services where there is a competitive
market,including electricity,oil and gas.
Financial and capital market reform
will also continue. Private investors
will be allowed to set up small banks
and financial institutions without
quotas or caps as long as they meet
conditions for approval. Additional
capital market reforms include
regional bourses for SME equity
exchange, reform of the IPO regime
to encourage more listings while
stripping the government’s power to
review, and the launch of the Hong
Kong-Shanghai Stock Connect on a
trial basis last year. Authorities also
intend to expand the pilot project on
cross-border e-commerce.
The government understands that
local government debt, which stands
at nearly 40% of GDP, is a serious
issue and needs to be controlled. A
proposal by the Ministry of Finance
aims to allow local governments
to RMB 1 trillion of high-interest
debt for longer term, lower-interest
government bonds, though this only
covers one tranche of debt.
Made in China 2025
At the end of last year a new plan was unveiled called‘Made in China 2025’
that took inspiration from the German Industry 4.0 initiative, a forward
looking project designed to prepare Germany’s domestic industry for the
future—or the‘fourth industrial revolution’.
Made in China 2025 has been developed by the Ministry of Industry and
InformationTechnology and the Chinese Academy of Engineering with
important input from the State-ownedAssets Supervision and Administration
Commission.The plan is designed to support the transformation and
upgrade of China’s manufacturing industry from being the world’s factory
to a globally competitive value-added manufacturing industry driven by
innovation, integrated information technology, smart technologies, the
Internet ofThings, and environmentally friendly technologies. The ten-
year plan is an important initiative to ensure the country and key industries
remain globally competitive tomorrow.

9. © BRUNSWICK | 2015 | 9
The government aims to adjust
the taxation system to reduce local
government’s revenue shortfalls,
encourage them to promote
consumer services and tax resource
consumption more broadly. Taken
with the replacement of land-
based local government financing
with provincial bond issues and the
publication of local government
finances for public oversight, these
moves add up to an overhaul of the
nation’s tax system.
In addition, efforts to cool an
overbuilt and overheated real estate
sector resulted in a small drop in
prices in 2014 (4.5%), but will still
need urgent attention. More than 60
million apartments across the country
stand empty, creating a significant
overhang.
The banking sector will also see sig-
nificant reform. Longstanding tightly-
controlled caps on the interest rates
banks can offer consumers may be lifted
this year, and a new deposit insurance
scheme is expected to be unveiled.
Foreign investors will still play a
crucial role in China’s economic
development. Inbound investment
in China’s economy hit USD 120
billion last year. However, the
need for articulating a local value
proposition—and the complexity of
doing so—will increase as regulators
strip away investment incentives
and try to put foreign investors on a
more equal footing with their local
rivals. In cases where there is a
clear national interest, local players
will get preferential treatment.
Improving the supervision system
for foreign investment and creating
a fair, transparent and predictable
operational environment for foreign
investors remains a priority.
Internet policy
Highlighting the complexity of the
reform agenda is the role of the
Internet. Authorities see the Internet
as central to promoting innovation
and fuelling economic growth, but
continuetohavetobalancethiswithan
ideological desire to manage content.
Premier Li Keqiang mentioned the
Internet no less than eight times in
his speech, versus twice the previous
year. He also scattered his speech
with Internet jargon such as“renxing,”
a frequent hashtag on social media
meaning “capricious”.
Having complained publically on
the opening day of the lianghui that
“some developing countries have
faster internet speeds than Beijing,”
Li Keqiang outlined a number of
measures to support the country’s
Internet and the internet related
economy. A new strategy called
“Internet Plus” is designed to
“integrate the mobile Internet, cloud
computing, big data and the Internet
of things with modern manufacturing,
to encourage the healthy
development of e-commerce” while
also encouraging China’s internet
companies to increase their presence
in international markets. In parallel,
the authorities will continue to push
convergence to deliver telecom,
radio,television,and Internet services
over a single broadband connection.
And to address speed concerns,
the authorities will accelerate the
development of fibre-optic networks
and significantly increase broadband
speed—last year national Internet
backbone access points were built
in seven more cities and fibre-optic
broadband was expanded to more
than 30 million additional households.
Innovation
Innovation driven development
remains a core pillar in the authorities’
vision for driving the country’s
economic growth forward. This year
thePremierfocusedontheimportance
of creating policies that allow market
forces to spur new innovation and
reforming the management of science
and technology plans funded by
the central government. To further
motivate and incentivise innovation,
Premier Li also called on the creation
oflegislationtoensurethatresearchers
in government-funded projects are
able to share the profits from their on-
the-job innovations. Furthermore,
authorities committed to providing
open access to the country’s major
science and research infrastructure
facilities.

10. 10 | 2015 | BRUNSWICK ©
China on theWorld
stage
Expanding
geopolitical influence
Last year Premier Li spoke at the
lianghui of the importance of building
new economic routes connecting
China with its neighbours—this
included the building of a new
Silk Road Economic Belt and a
21st Century Maritime Silk Road
in addition to the building of the
Bangladesh-China-India-Myanmar
Economic Corridor and the China-
Pakistan Economic Corridor. These
initiatives are designed to build
economic insurance that balances the
perceived risks in western economies
that could undermine China’s own
economy, while also creating a new
set of strategic partnerships to balance
traditional US and European power
bases in the region.
In the year since there has been a lot
of discussion related to these new
routes and investments are already
starting to flow along them—in
particular along the Silk Road related
routes. During this year’s lianghui
Premier Li committed to moving
faster to strengthen infrastructure
connectivity with China’s neighbours.
The commitment to the Silk Road
initiatives was reinforced with the
creation at the end of December last
year of the USD 40 billion Silk Road
Fund to boost business and support
infrastructure investment in the
countries and regions along the road.
This been designed as a PE fund,
rather than a sovereign wealth fund.
China’s desire to play a constructive
role in the region is also highlighted
by its push to create the Asian
InfrastructureInvestmentBank,which
was formally established in October
2014. The creation of the bank has
sparked significant international
discussion with concerns over its soft
power role in regional geopolitics.
The debate made headlines during
the lianghui as the UK became the
first G7 nation to apply to become a
founding member followed in quick
succession by France, Germany and
Italy indicating they will also apply
to become founding members.
While Chinese authorities bristle at
comparisons to the Marshall Plan and
emphasis that the focus of these plans
is on infrastructure, not geopolitics,
the effect of China’s engagement with
the region and with the rest of the
world should not be underestimated.
Responding to Public
Concerns
As the economy slows, winning
goodwill becomes even more
important for the government to
maintain legitimacy. Pollution,
corruption, public dissatisfaction
with healthcare, elderly care, housing,
transportation, income inequality,
food safety, and lingering official
corruption and misbehaviour pose
formidable challenges.
The government recognises that the
foundation of reforms must be public
support, and in turn, social stability.
Thus a number of policies are not
simply about economic reform,
but also about building consensus.
Acknowledgingthisreality,LiKeqiang
listed China’s great challenges as
including:
• “Many problems of public concern
in medical services, elderly care,
housing, transport, education,
income distribution, food safety;
and law and order. Environmental
pollution is serious in some
localities, and major accidents in
the workplace are not uncommon.”

11. © BRUNSWICK | 2015 | 11
• “There is still much to be improved
in the work of the government,
with some policies and
measures not being satisfactorily
implemented. A small number
of government employees behave
irresponsibly; shocking cases of
corruption still exist; and some
government officials are neglectful
of their duties, holding onto their
jobs while failing to fulfil their
responsibilities.”
Reaction to Under the Dome
highlighted the degree to which
environmental issues are also a
source of serious public discontent.
Authorities understand this risk, and
while no easy solution lies in sight,
they are expanding commitments
to cut emissions and reduce energy
intensity. In addition, high-emission
commercial vehicles registered before
the end of 2005 will be banned from
the road, and some 667,000 hectares
of marginal farmland will be set
aside to return to forest or grassland.
Premier Li also said China will begin
to hammer out legislation for a long
rumoured ‘environmental protection
tax’. He also proposed raising the
cost for non-compliance by stepping
up enforcement, making ‘those guilty
of creating illegal emissions’ pay ‘a
heavy price’.
Education is likewise a serious
concern. While national spending on
education has come to 4% of GDP,
concerns over quality, fairness, and
access to education are widespread.
Restrictions on hukou, or household
registration, mean that many children
of migrant workers are locked out of
public education systems. Though 28
provincial-level areas will allow such
children to take the college entrance
exam in their cities of residence, it
remains a sore spot for many Chinese
who feel the education system both
produces and reflects social inequality.
In this year’s work report, Li called
for authorities to implement a policy
“enabling children of migrant workers
to receive compulsory education” in
the city where their parents live.
The government’s broad push to
accelerate urbanisation as a means
of boosting the consumer economy
and develop rural areas also resulted
in several new policies. Beijing
reaffirmed that the three main goals
of urbanisation remain to grant
urban residency to 100 million
rural migrants to cities; to rebuild
rundown areas and shantytowns; and
to “guide the process of urbanisation”
for 100 million residents of western
and central China. Premier Li
pledged to redouble efforts to repair
rundown buildings, and said that 3.66
million units of rural housing would
be renovated.
Spotlight on Healthcare
The state of the healthcare sector remains a critical concern of citizens and as a result a priority of the authorities. In
March 2013—soon after taking office—the new administration restructured the healthcare authorities and created the
National Health and Family Planning Commission as a part of a plan to optimise the allocation of resources to medical
care, public health and family planning services, and improve the health of the population as a whole.
The months that followed witnessed the launch of investigations into those operating in the sector and in parallel the
authorities invested significant attention on the challenges—ranging from the funding of healthcare facilities to the
safety of doctors.
This latest lianghui reiterated Li Keqiang’s comments that he made last year where he committed to abolish “the practice
of compensating low medical service charges with high drug prices”, adjusting the price of medical care and drugs, and
creating a mechanism for running hospitals with non-government capital.
Premier Li went further this year by stating that the authorities will accelerate price reform to ensure “the market plays
the decisive role in allocating resources” and that they will “stop setting prices for most pharmaceuticals”. In addition,
he stated that they will “put a stop to the practice of charging more for medicines to make up for low prices for medical
services, lower extortionate prices on medicines, make appropriate adjustments to medical service prices, and take
measures such as reforming medical insurance payouts to control costs of medical services, thereby lightening the
burden that medical expenses place on people”. In the last year the authorities have lifted price controls on more than
700 low-priced medicines covered by medical insurance. In addition, key healthcare commitments this year included:
• Improving basic medical insurance for rural and non-working urban residents and increasing the annual government
subsidy for this insurance from RMB 320 to RMB 380 per person.
• Completing the task of enabling on-the-spot settlement of medical expenses incurred anywhere within the
provincial-level administrative areas where one’s insurance is registered.
• Fully implementing major disease insurance for rural and non-working urban residents.
• Deepening reform of community-level medical and healthcare institutions, strengthening the general practitioner
system, and improve the system of tiered diagnosis and treatment

12. 12 | 2015 | BRUNSWICK ©
The Lianghui
The “lianghui” (两会), or two meetings, as the annual gathering of the National People’s Congress (全国人民代表大会)
and the Chinese People’s Political Consultative Conference (中国人民政治协商会议) is commonly referred, is typically
held during the first two weeks in March.
National People’s Congress
The National People’s Congress (“NPC”) is the highest legislative body in China and has sole responsibility
for enacting legislation in the country. The NPC, which meets once a year in March, enacts and amends
basic laws relating to the Constitution, criminal offences, civil affairs, state organs and other relevant
matters. When the NPC is not in session each March,the Standing Committee of the NPC is tasked with
enacting and amending laws except basic laws that must be enacted by the NPC.
The NPC is also responsible for electing and appointing members to central state organs – including the Standing Committee
of the NPC, the President of the People’s Republic of China (now Xi Jinping) and the Premier of the State Council (now
Li Keqiang). Based on nominations by the Premier, the NPC is also responsible for appointing China’s Vice Premiers,
State Councillors, Ministers (in charge of ministries or commissions), the Governor of the People’s Bank of China, and the
Auditor-General and the Secretary-General of the State Council. It also elects the Chairman of the PRC Central Military
Commission and appoints all other members of the PRC Central Military Commission. It also elects the President of the
Supreme People’s Court and the Procurator-General of the Supreme People’s Procuratorate.
The 12th NPC was formed in March 2013 and will serve a five year term. Third Session of 12th NPC:
• Date: 5th March to 15th March, 2015
• Participants: 2,907 deputies (elected in March 2013)
Chinese People’s Political Consultative Conference
The Chinese People’s Political Consultative Conference (“CPPCC”) is a political advisory body that
consists of representatives from a range of political organisation, academia, business leaders, celebrities,
and other experts. The National Committee of the Chinese People’s Political Consultative Conference
(中国人民政治协商会议全国委员会) typically meets on an annual basis at the same time as the
NPC.
Third Session of 12th CPPCC:
• Date: 3rd March to 13th March, 2015
• Participants: 2,153 members (elected in March 2013)
Political Backgrounder

13. © BRUNSWICK | 2015 | 13
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MeiYan
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ymei@brunswickgroup.com
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+86 (10) 5960-8603
smoore@brunswickgroup.com
Gordon Guo
Director
+86 (10) 5960-8661
gguo@brunswickgroup.com
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