What Foreign Investors Can Take Away From this Year’s Two Sessions

With the 2020 Two Sessions meeting between the People’s Congress and the Chinese People’s Political Consultative Conference CPPCC of the People’s Republic of China came a raft of major announcements on upcoming legislation and government policy. Several of these announcements have implications for foreign investors who are looking for guidance on how to manage their investments in an environment of uncertainty caused by the current COVID-19 pandemic.

Pro-FDI Announcements:

This year’s two sessions contained several important announcements that directly affected foreign investors in China. China is set to:

  • Greatly expand the use of the Free Trade Zones in its less developed Western regions
  • Shorten the negative list for foreign investment in certain industries
  • Cut corporate and personal income taxes with aim of reducing corporate burden by 2.5 trillion Yuan
  • Continue to offer incentives to foreign investors in fields related to advanced technological applications
  • Draft the new Hainan Free Trade Port Law, Futures Law, and Export Control Law
  • Amend Chinese Patent Law, People’s Bank of China Law, Commercial Bank Law, and Insurance Law

Most of these initiatives are simply affirmations of existing legislation and policies put forward in 2019 and, in some cases, pushed back due to the COVID-19 pandemic. However, this should act as a signal to foreign investors that China is committed to improving its overall business environment despite the significant challenges imposed by the global health situation. Likewise, China’s intention to revise its banking laws and create a new Futures Law that would further open China’s futures market to qualified institutional investors, indicates that the Central Government is committed to continue to open its historically closed markets, current situation notwithstanding.

The Post-COVID 19 Chinese Economy:

The most economically significant announcement to come out of the Two Sessions was that the Central Government was dropping the GDP growth target for 2020 due to the economic difficulties caused by the global Coronavirus outbreak. Regardless if this continues to 2021, this is a critical development because these growth targets have acted as indicators as to how much credit and fiscal stimulus that the Central Government is willing to input into the economy over the coming year.

However, this does not mean that the Central Government is moving away from debt and stimulus measures as a means of supporting the domestic economy. Li Keqiang speaking on Friday March 21st, announced that central government deficits would reach 3.6 percent this year, a significant increase from 2.8 percent in 2019, including a 3 trillion Yuan economic support package. The People’s Bank of China has also set borrowing costs at multi-year lows to support domestic activity.

What is important for a foreign investor to understand is how these announcements, taken together, act as an indicator of the Central Government’s continued commitment to transitioning the economy to a consumption and innovation led model. Abandoning growth targets allows the government to channel stimulus funds away from export driven manufacturing and state-owned enterprises and towards activities like the creation of well-paying jobs, basic research, and next generation infrastructure. This theme of prioritizing living standards over raw economic growth is evidenced through the twin goals of adding 9 million urban jobs and eliminating poverty within the next year. High quality infrastructure has also emerged as a post-pandemic priority for the Chinese government during this year’s Two Sessions, demonstrated by its commitment to increasing financial and political support for the rapid deployment of 5G networks throughout the country.