driving the day
1. Xi’s last chat with Merkel?
On Wednesday, Xi Jinping jumped on the phone with long-time pal German Chancellor Angela Merkel for some geopolitical chit chat.
Xi acknowledged relations have been a bit rocky of late, and offered some wise words for getting things back on track (Xinhua):
- “The key is to firmly keep to the general direction…of China-EU relations from a strategic perspective, respect each other, and remove distractions.”
Xi also pushed the EU to be more independent on the global stage (Xinhua 2):
- “Xi said China’s development has been an opportunity for the EU and urged the EU to make correct judgment independently and truly achieve strategic autonomy.”
Merkel had a few thoughts of her own (Reuters):
- “[Merkel] stressed the importance of dialogue on the full range of ties, including issues on which there are different opinions.”
Get smart: The most significant development from this call was what didn’t come up – the recent EU-China spat over human rights issues in Xinjiang.
- Also NOT on the agenda, how it might affect ratification of the EU-China Comprehensive Agreement on Investment (see January 4 Tip Sheet).
Our question: Merkel has been a staunch supporter of deepened EU-China cooperation during her time in power. After she steps down, who will be the voice on China in Europe?
2. MoF’s lays out fiscal priorities through 2025
On Wednesday, the Ministry of Finance (MoF) held a press conference introducing its fiscal priorities for the next five years.
High up on MoF’s to-do list: Rejiggering China’s taxation system.
Deputy Finance Minister Ou Wenhan kicked off the presser by hailing the scale of tax cuts over the past five years, noting that:
- The scale of tax and fee reductions has exceeded RMB 7.6 trillion, including RMB 4.7 trillion of tax cuts and RMB 2.9 trillion of fee reductions.
- For context, the State Administration of Taxation estimates the country’s overall tax burden dropped from 18.13% in 2015 to 15.2% in 2020.
But Ou then indicated that the tax slashing is about to come to an end (SCIO):
- “During the 14th Five Year Plan period, in order to ensure the realization of major strategies and key tasks, it is necessary to maintain the overall stability of the macro tax burden.”
Don’t panic! There will still be targeted tax breaks to support:
- Small and medium enterprises
- Manufacturing upgrades
Get smart: Beijing’s increasingly tight fiscal constraints mean that continued massive tax cuts are no longer a viable option.
- After all, funding for the 14th Five-Year Plan’s ambitious goals needs to come from somewhere.
Speaking of which, check this: At the presser, Wang Jianfan, chief of MoF’s taxation department, also said the ministry would look to bring in new revenue by reforming China’s property tax system.
Get smarter: Property tax reform has long been seen as a potential game changer for stabilizing government coffers, rationalizing the housing market, and improving wealth equality.
But, but, but: It’s also long been a non-starter, since so many government officials stash their wealth in property.
- That said, under Xi Jinping, a lot of things that seemed impossible on the economic regulatory front have been pushed through.
The upshot: We’ll be watching this area closely, but won’t be holding our breath.
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3. State Council has logged on
Tip Sheet Pop Quiz: What happens on Wednesdays?
- The State Council’s weekly executive meeting, of course!
Once again, this week, Premier Li Keqiang delivered some great news for companies:
- The State Council wants to make the internet cheaper and faster.
Some context: This isn’t the first time the government has cut internet costs – there have been a series of cost reductions as part of broader digitization efforts since 2015.
The State Council set some specific goals for the internet upgrade, including:
- Boosting internet speed for at least 200 million households
- Reducing internet service fees for small and medium-sized enterprises by 10%
- Lowering market access barriers for private companies accessing commercial broadband services
- Ensuring that businesses operating in commercial office buildings are not forced into contracts with a specific internet provider by building management
Get smart: China’s 5G rollout makes for flashier headlines, but improving basic broadband infrastructure is just as important to Beijing.
4. It’s good for what ails you
The State Council doesn’t just want to upgrade your internet (see previous entry).
The weekly executive meeting also took some time to discuss improvements to the employee medical insurance scheme.
Some context: This medical insurance scheme is mandatory – and it covers all current and retired workers from urban areas. Employers and employees co-pay the insurance premium.
More context: As of 2020, the scheme covered 340 million people.
The State Council wants to adjust the way funds can be used – and allow reimbursement of more medical costs (Gov.cn).
- Half of employees’ individual funds will be redirected to a broader slush fund, allowing participants with chronic diseases to reimburse more outpatient costs.
So individuals will lose some of their funds, but get more flexibility on how to spend the remainder – including the ability to reimburse:
- Out-of-pocket costs of drugs and medical consumables in retail pharmacies
- Insurance premiums for unemployed dependents who participate in other public medical insurance schemes
Provincial governments have three years to implement the changes.
Get smart: While more and more insurance funds have been sitting idle in individual accounts – nearing RMB 1 trillion in 2020 – the overall insurance scheme has been under financial pressure.
Get smarter: These changes will hopefully kill two birds with one stone:
- addressing the high outpatient costs of chronic disease treatment
- and reducing the inefficient use of funds in individual accounts
5. (Darude plays softly in the distance)
Premier Li Keqiang doesn’t like sand. It’s coarse, it’s rough, it’s irritating…and it gets everywhere.
That’s why on Wednesday, Li called up Mongolian Prime Minister Luvsannamsrai Oyun-Erdene to talk about bolstering cooperation on environmental issues.
Some context: In the past month, two gigantic sandstorms that began in Mongolia’s Gobi Desert swept through northern China, and turned Beijing’s skies orange.
Li said that Beijing has Ulaanbaatar’s back (Gov.cn 2)
- “Environment issues have no borders.”
- “China is willing to work with Mongolia in environment protection and sand control and management.”
He also touted Sino-Mongolian economic cooperation:
- “China will build a better business environment and further vitalize market entities to keep its economy stably running.”
- “[T]he two sides should strengthen cooperation in epidemic prevention and control, and work toward faster recovery of border port shipments.”
More context: Mongolia has recently supplanted Australia as China’s largest coal supplier amid a Chinese verbal ban on imports of Australian coking coal (see October 29 Tip Sheet).
Get smart: Chinese leaders know that mitigating environmental damage requires transnational action.
- They’re going to start by addressing issues in their own neighborhood.
Get smarter: If Beijing can also boost trade ties with a key coal supplier in the same phone call, so much the better.