China’s major political meetings – the ‘Two Sessions’ or ‘Lianghui’ – closed on Thursday. This year’s National People’s Congress – four days shorter than normal and delayed until May due to the pandemic – had two big items on the agenda: the new Civil Code and the decision to enact national security laws for Hong Kong.
The latter move has attracted most attention in the foreign media, owing to its unpredictable impact on the tense situation in Hong Kong and China’s relationship with the US. The former step, though, could have a far bigger impact on the business environment in China.
The Civil Code, which will take effect on 1 January 2021, is China’s first comprehensive legal framework for personal and private property rights, and includes laws regulating contracts and torts. The Chinese government has tried to establish a civil code since the 1950s: the current legislation, which was first introduced in 2014, is its fifth attempt.
During the six-year-long process, the code attracted widespread attention and lawmakers received over 900,000 public comments.
Although it is largely based on existing laws, eg the 1986 General Principles of Civil Law, and does not cover disputes between private parties and state entities, the new code removes inconsistencies and establishes a common legal terminology. It also clarifies contractual obligations and liabilities, especially for non-incorporated businesses, thus enhancing their legal protections.
While there might be few immediate consequences, the passing of the code itself marks a milestone in China’s legal development. It firmly entrenches individual and property rights in the country’s legal system.
Li Keqiang: Economic recovery is top priority
As in previous years, the Two Sessions ended with a press conference given by Chinese Premier Li Keqiang. Li defended the government’s decision not to set a fixed economic growth target for this year, adding that to do so would have been unrealistic given that the global economy is expected to shrink by 3 percent in 2019. Nonetheless, he was optimistic that China would achieve positive growth by the end of 2020.
Li announced that the government would inject a total of RMB 6 trillion (£680 billion) into the economy. One-third of that would be in the form of special bonds, whereas the rest would be achieved via tax cuts and other cost reductions. In total, these cuts should free up around 10 percent of Chinese aggregate annual income of RMB 40 trillion (£4.55 trillion).
The Premier repeated that this stimulus effort would be more targeted than the indiscriminate post-GFC stimulus effort which China launched in 2008, and which led to massive infrastructure spending, as well as multiple asset bubbles. Instead, most of the money will be used to safeguard jobs, and to broaden China’s social security net, he said.
Li made special mention of the 8.57 million graduates who are expected to enter China’s job market this year, as well as the country’s 200 million migrant workers. He also expects that the number of people relying on basic social transfer payments – currently estimated at around 60 million – will probably increase. Local governments should therefore use the additional funds to protect these vulnerable groups, he said.
Boost private businesses
The premier also stressed the importance of China’s private sector and the role of Chinese SMEs. According to Li, these firms provide 90 percent of total employment in China and should receive 70 percent of the government’s additional funding.
Pointing again to the difference with previous stimuli, Li said the extra money injected by the government would be aimed primarily at keeping these 120 million businesses afloat and at creating a fertile ground for new business ventures. The ultimate objective, Li said, is to create 20,000 newly registered companies per day this year.
On foreign trade and investment
Finally, Li highlighted the importance of foreign trade and investment. He stressed that the Chinese government remains committed to further opening up its economy and to collaborating with neighbours – South Korea and Japan in particular – to deepen economic integration. He indicated that China remains committed to its goal of concluding the Regional Comprehensive Economic Partnership this year, which would establish a free trade agreement between 15 regional countries, including Australia and New Zealand.
Li’s reassurance to foreign business follows an article published on Monday by the economic editor-in-chief of the People’s Daily, Lu Yanan, who emphasised the importance of FDI for the Chinese economy. Lu noted that big-ticket investments, such as energy projects and advanced manufacturing, are a significant part of China’s recovery strategy.
The outcome of this year’s Two Sessions highlights, above all, the seriousness of the economic impact of COVID-19. The government’s main concern clearly lies with protecting local businesses and shielding the Chinese economy and vulnerable economic groups from the looming global recession.
While there is disappointment among some China watchers about the lack of market-based reforms, the government’s cautious attitude is probably warranted, given the high degree of uncertainty. Chinese leaders want to play safe before committing themselves to new growth targets.
Li’s restraint with regard to a large monetary stimulus also reflects both the split attitude within the Chinese leadership (CBBC has written about this before) as well as the painful lessons learnt from previous rounds of economic stimulus, which have led to major misallocations of capital and numerous asset bubbles.
Nonetheless, Li’s particular emphasis on the private sector and China’s social welfare safety net are positive signs because they address two major structural problems: the persistent bias of local governments and banks towards favouring state-owned enterprises, and China’s insufficient social protections, which suppresses consumption. If the short-term measures announced during the ‘Lianghui’ are followed-up by a general and long-term policy shift, the government’s prudent approach could indeed succeed in setting China’s economy on much more sustainable path.