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1. Smooth transition from 3rd to 4th generation leaders completed

China's top legislature elected a younger generation of leaders, the last major step in a sweeping transition that has been in the making for some time. The election of the president and vice-president of the People's Republic of China, the chairman of the Central Military Commission, the chairman and vice-chairpersons of the NPC Standing Committee followed the single-candidate system. All the newly elected top leaders received landslide votes from the legislators.

2. Government Reorganization for improved efficiency

A restructuring aimed at streamlining decision-making and taking government further out of micromanaging the economy was the most significant nonpersonnel decision approved by the NPC. It is the second such government revamp in five years and reflects China's continuing efforts to adapt its state planning apparatus to an economy in which private and foreign companies play an increasingly important role. The planned changes mainly clarify bureaucratic responsibilities. Nonetheless China is keeping a level of economic planning that is far greater than the norm in most market economies. Also, the restructuring does not represent a challenge to the political control of the ruling Communist Party. Some of the most important changes concern the following agencies:

3. 2003 Budget and Economic Performance Targets

China's deficit for 2003 is budgeted to be CNY10 billion more than in 2002. The total receipt of the central finance is budgeted to be CNY1.194 trillion, up 5.1%, and the total expenditure is budgeted at CNY1.5138 trillion, up 4.7%, leaving a deficit of CNY319.8 billion. The deficit, plus the domestic and foreign debts overdue, will bring the total debts of the central finance up to RMB 640.4 billion. Putting the budgets of the central and local finances together, the total national receipt in 2003 will be CNY2.0501 trillion, up 8.4%, and the national total expenditure will be CNY2.3699 trillion, up 7.7%. The government clearly declared its intention to continue supporting economic growth by deficit deepening fixed asset investment. Meanwhile the budget also signifies a slight shift toward creating a welfare net to ensure social stability in the face of worsening unemployment. While a rein has been put on the deficit, the spending mix has also been altered with major allocations to poverty alleviation rather than big-ticket construction projects. Budget allocations for poverty relief includes CNY43.5 billion for projects such as rural tax burden reform as well as benefit rises for both retiring state firm employees and urban welfare recipients.

Although the government's debt ratio stands at about 30% of GDP, considered low among developing countries, the real debt ratio could be as much as 70% to 100% of GDP according to a World Bank report. Taking into account the sum the government owes to retired workers in the form of social security benefits, together with the burden of non-performing loans at state banks, the nation's debt is likely to be at least 50% of GDP. The Asian Development Bank estimates China's implicit pension debt to be as high as USD1.5 trillion or 150% of GDP.

The outgoing Government announced the macroeconomic regulatory targets for 2003. Nevertheless, they will be the basis for the new team's policies and the yardstick for their success:

4. New Government underlines need for balanced development

In their reports, members of the outgoing government mentioned the challenges they had left behind for the next administration: weak domestic demand, irrational supply structure, insufficient growth in rural incomes, rise in unemployment, delayed expansion of the consumer market, income inequalities, tough reforms for state-owned industries, chaotic order of the market economy, industrial accidents, degradation of the environment and waste, red tape and "extravagance" by officials. Observers would add to the list the looming crisis in China's banking sector, the lacking security system and the fiscal revenue gap.

Newly elected Premier Wen Jiabao confirmed that his government would continue the strategic restructuring of the economy and the opening up to the outside world. In order to maintain a sustainable and comparatively rapid development of the national economy, the government will stick to the policy of expanding domestic demand through proactive fiscal policy. Wen Jiabao also stressed the necessity of giving priority to the development of the rural economy, and of promoting a coordinated and well-balanced development between urban and rural areas. China will strive for a proper balance among development speed, dimension of reform and social bearing capacity in order to realize the perfect integration of reform, development and stability, he said. Furthermore, he pledged to support the growth of enterprises in the non-public sectors. Private enterprises shall be treated like enterprises in the public sector with regard to market access, taxation, bank loans and import and export, said Wen.

5. Analysis

In November of last year, the 16th Congress of the Chinese Communist Party already decided all the important questions with regard to the impending leadership change. This year's NPC session merely confirmed the remarkable fact that the People's Republic accomplished the first orderly transfer of authority since its inception in 1949. Stability remains the paramount principle, much to the satisfaction of a majority of the Chinese people, many of who have suffered terribly during the PRC's more tumultuous past. The fact that the outgoing President retains potentially strong influence does not necessarily challenge the new leadership's authority, but may be seen as an additional guarantee for continuity.

During the NPC sessions, it became clear that the economy remains the priority of the new central government. While they will basically continue the policies of their predecessors, they may refocus on a more balanced development in order to ensure social stability. Following the logic of stability, the new government will hardly resort to drastic measures of reform, and we may see a slow-down in economic restructuring to allow more time for the government to rollout an adequate social safety net. Naturally, the declarations of the new Premier remained very general so far, and it remains to be seen what kind of measures the new leadership will take to implement its policies and tackle the challenges ahead.

The new government accepts the importance of the private sector, which currently contributes an estimated 30% of GDP, and of small and medium-sized enterprises as the main source of job creation. In spite of the governments proclaimed good intentions to improve the business environment of the private sector, it remains to be seen how successful it will be in creating a level playing field for private and State owned enterprises. The reorganization of various government agencies looks like a step into the right direction. Away from multiple layers of badly coordinated and often contradicting regulating bodies to a more streamlined bureaucracy which should facilitate administrative procedures for the market players. In an immediate future companies may experience even more uncertainties and delays, as the bureaucrats scramble for position and influence within the new set-up. Eventually, we may see a more decentralized and efficient bureaucracy excluded from economic micromanagement and restrained to regulatory functions.

By and large, the results of the 2003 NPC sessions are good news for foreign companies doing business in China. The government stands for political continuity, pursues social stability and pledges continued reform and opening up of the economy, all of that is important for the development of a foreign business in China. Just like the local entrepreneurs, foreign companies will enjoy the government's increasing respect for the private sector as well as any improvement of the bureaucracy's efficiency and predictability. Meanwhile, some foreign investors may be disappointed about temporary setbacks in the reform process, induced by the government's new focus on balanced development. Furthermore, the end to discrimination of foreign market players may still be a long way off, in particular when dealing with local governments and courts of law.