On Sept 19, 2018, following his address at the Opening Ceremony of the Annual Meeting of the New Champions 2018 held in Tianjin, Premier Li Keqiang of the State Council took a question from Executive Chairman of the World Economic Forum Klaus Schwab. On Sept 20, Premier Li sat down for a dialogue with representatives of international business leaders attending the Annual Meeting. Below is a transcript of these interactions:
Professor Schwab: Premier Li Keqiang, thank you for this very comprehensive presentation of your government’s policy. I also feel there are many messages in your speech which are certainly reassuring for foreign and Chinese leaders present here. I want to thank you for taking the time to develop in such a detailed way your policies and your intentions. You developed a concept on how China will keep up reform and opening-up. Now many of the business leaders are concerned about the credit situation and the financial situation, the financial risk of the country, particularly related to the issue of deleveraging. What is your response here?
Premier Li Keqiang: True, China’s macro leverage ratio is not low by global standards, but it’s not the highest either. An important objective factor is the high savings rate in China and the lack of smooth channels of direct financing. The past few years have indeed seen a relatively fast increase in China’s leverage ratio. To ensure sustainable development in the long run, we have taken measures to stabilize the leverage ratio, which has led to a moderating increase in leverage in the first half of this year. The deleveraging we pursue is structural in nature, as the leverage ratio has become quite high in some sectors. Recent statistics have indicated the beginning of its downward trajectory in these sectors.
At the same time, though, we have taken note of the difficulties facing businesses, particularly micro and small businesses, in accessing affordable financing. We have endeavored to address this scarcity by rolling out a host of measures targeting micro and small businesses. We will also expand channels of direct financing by fostering the capital markets. For example, when we discovered inappropriate tax levies on venture capital funds recently, the State Council took swift steps to rescind these levies. We encourage the development of venture capital funds, which will offer more channels for direct financing.
Everything has both upsides and downsides. As an ancient adage cautions, one cannot have both the fish and bear’s paw, which essentially means that many decisions entail difficult trade-offs. The reason we have gone thus far is that we have made enormous efforts to minimize the trade-offs and achieve simultaneous progress of sometimes conflictual objectives. Continuing to do so would be a challenge and a test of our wisdom. We do hope distinguished guests present and insightful people around the world will contribute wisdom to us in meeting the challenges. The journey ahead may be tortuous, our goals will be achieved through steadfast efforts.
Stein Eric Hagen, Chairman of Orkla: My name is Stein Eric Hagen. I’m from Orkla, Norway. Mr. Premier, under the context of China-US trade frictions, a lot of countries such as Europe, the United States and Japan have started negotiations on bilateral free trade zones. The global trade governance system based on the WTO is facing great challenges. How does the Chinese government respond to this change and what measures will be taken to safeguard China’s status as a global trade power? Thank you.
Premier Li: Bilateral and multilateral trade talks are like two wheels, which should be complementary. It has been a long tradition of developed countries to engage in trade negotiations among themselves. They also have free trade talks with some developing countries. China, though being a developing country, has also been involved in bilateral FTA negotiations with some countries. We welcome any trade negotiations and wish them well so long as they are consistent with the trend of globalization and the basic principle of free trade.
Having said that, we cannot ignore the rising trend of protectionism in the world today, which has eroded the foundations of the multilateral trading regime. As we see it, the multilateral trading rules were negotiated and have been followed by the overwhelming majority of countries for many years. And at the heart of these rules is the principle of free trade. Bilateral trade negotiations in whatever form should serve to uphold this fundamental principle.
In the last few decades, mankind has come a long way in creating material wealth. We owe this, to a large measure, to a peaceful international environment and to free trade. As we live on the same planet, we should all abide by common precepts and agreed rules. Any action, which only benefits a small group of people at the cost of undercutting the rules formulated by the majority, will only end up hurting the interests of all. Our world is, after all, one of coexistence and interdependence.
I am not suggesting that the existing multilateral trading rules are above reform or improvement. In the process of globalization and free trade, problems of one kind or another have indeed cropped up and some countries may have complaints about them. In this case we need to sit down and discuss how to improve the multilateral trading rules to make them more responsive to the needs of world development and inclusive growth. Yet, this doesn’t mean that we should start all over again; what we need is to make improvements to the multilateral trade rules. In this process, we need to take care of the concerns and interests of all stakeholders, particularly those of developing countries and the least developed countries. The world can hardly be a tranquil place when a considerable number of people still live in abject poverty.
China takes a positive attitude toward reform of WTO rules. At this year’s China-EU Summit, the two sides agreed to set up a joint working group on WTO reform. When it comes to matters concerning all of us, the interests of all parties would be best served through discussions among all stakeholders.
The task before all countries is to both promote development and improve fairness and equity by helping those in need. The international community as a whole needs to do the same: we need to sustain the momentum of global recovery and promote development and prosperity and at the same time endeavor to narrow the North-South gap.
Jay Flatley, Executive Chairman of Illumina: I was very pleased yesterday to hear your remarks about opening up the Chinese markets. In particular, you discussed the financial markets and there’s been tremendous progress over the last few years in China opening up the financial markets. Yet many barriers remain here, and so I would appreciate if you could discuss the timetable for the opening-up of the financial markets in China and what opportunities that may provide to foreign corporations.
Premier Li: This year marks the 40th anniversary of China’s reform and opening-up. Compared with where we came from, the breadth and depth of China’s opening-up have gone far beyond our expectations, and those of our foreign friends. Since we have benefited from opening-up, we will only open wider to the world.
China is now a big trader in goods. We do run a trade surplus in goods, but that’s not our intention. What we want is more balanced trade. At the same time, China is running a deficit in trade in services, which has continued to widen year by year, including in the financial services sector.
Be it trade surplus or trade deficit, I believe the state of a country’s trade balance is mainly the result of its role in the international division of labor and position in the international industrial chain. As we do not deliberately seek surpluses or avoid deficits, we need to carefully weigh our choices: should we open up the services sector even wider or try to reduce the trade deficit in services? We have opted for the former. China will be firmly committed to opening up the services sector, even if it means a bigger deficit. Although this will present a greater challenge for our regulatory capacity, at the end of the day, opening the services sector will boost the competitiveness of Chinese companies, which is beneficial in the long run, and will provide more choices and be fairer for Chinese consumers.
The financial sector is a special case in that the level of its openness is closely linked to the development stage, economic sophistication and regulatory capacity of a country. For a major economy like China, maintaining financial stability is crucial not only to ourselves, but also to the world. That is why we will both stay firmly committed to opening up the financial sector, and at the same time ensure orderly progress.
Our goal going forward is to further open up the financial services sector. Just as we have removed foreign ownership caps in the banking sector, we plan to take similar steps in the insurance and securities sectors in the next few years and phase in full-license, full-ownership operation in an orderly way. Naturally, an important precondition for this would be qualifications, which is a must for financial service providers in any country.
That said, we are prepared to gradually introduce pre-establishment national treatment for foreign-invested companies in the financial sector. We are making preparations for such reforms. I hope in three years’ time, there will be a number of foreign ventures qualified for full-license, full-ownership operation in the financial sector.
Takeshi Niinami, President of Suntory Holdings: While China has strengthened IPR protection over the years, there are still some companies facing IPR infringement. In your opinion, how to effectively protect IPR both institutionally and legislatively? What specific measures will be taken in the future?
Premier Li: In your question you underscored the need for China to strengthen the protection of intellectual property rights (IPR) in the process of expanding reform and opening-up and attracting foreign investment. As a matter of fact, protecting IPR is our consistent policy. We are doing this not just for the sake of attracting foreign investment but also to serve our own needs of promoting innovation-driven development. Without proper IPR protection, it would be almost impossible for us to achieve economic transformation and upgrading and move from the medium-low to the medium-high level of industrial development. This is something we must do as it serves our own interests and conforms to international rules.
While strengthening IPR protection, China has toughened punishment for acts of infringement. In the past 5 years, more than 1.4 million cases of infringement were investigated and handled. Going forward, we will mete out even more severe punishment and impose even bigger fines, so that violators will face crippling penalties and find it hard to survive in their business sectors and even in the whole marketplace.
When we started to develop the market economy, we understood that property rights are the very foundation of a market economy. Likewise, protecting IPR is fundamental to the development of our innovation-driven economy. Such an understanding must be the consensus of the whole society. I have made this clear on many occasions. During meetings with foreign business leaders, I often ask them to report cases of IPR infringements directly to me or to the relevant departments. But for various reasons, they would normally not raise such issues during meetings with me. As you just pointed out, there are still some complaints in this area. I would again encourage all of you to speak up. Mishandling of complaints on the part of competent government departments would be dealt with.
On this matter, talking the talk is not as good as walking the walk. I hope and I trust that you can see China’s redoubled efforts to build a more rigorous and effective regime of IPR protection. Naturally, cooperation with various parties would be helpful. On the other hand, just like other countries, we support fair and equitable IPR transactions based on market rules. Royalties for patents and technologies paid by Chinese companies to overseas proprietors ranked high in the world last year, and may increase further in the future. Forced IPR transfer will never be allowed in China.
Sandra Wu, Chairperson and President of Kokusai Kogyo Co., Ltd: My question is about tax reform. During the “Two Sessions” in March, you mentioned further tax relief. And in early July, we witnessed the merge of state and local taxation bureaus, which strongly indicated smooth progress of China’s tax reform to promote free competition. And so in the future, what other measures will the Chinese government take to make sure this reform will move forward and lessen the burden on enterprises?
Premier Li: You seem to know quite a lot about what is happening in China. A few years ago, faced with considerable downward pressure on the economy and declining fiscal revenues, the Chinese government made the decision to substantially cut taxes. We abolished the business tax that had been in place for sixty years and adjusted the value added tax (VAT) rate to reduce tax burdens on small and medium-sized enterprises and encourage corporate R&D spending. These measures have paid off.
From the second half of last year to the first half of this year, tax revenues have increased notably and grown faster than GDP. This is mainly because of China’s steady economic performance, which has contributed to an over 15% increase in the profits of industrial companies in the first half of this year. What’s more, thanks to our reform of transforming government functions, our tax source has been expanding at a rate of 200,000 newly registered market entities every month. These factors have largely contributed to the fast increase in fiscal revenue. Given all this, our priority remains to ensure the effective delivery of tax reduction measures on the ground.
In the second half of this year, we are seeing significant decreases in both central and local government revenues as a result of further cuts in VAT and other taxes which became effective on 1 May. In view of the complicated international situation and internal challenges facing China’s development, we will enact more significant cuts in taxes and fees, including further lowering the VAT rate and implementing the personal income tax deduction scheme in a fair and expeditious way to boost household spending. As a further step of institutional reform, we will transfer the responsibility for collecting social security contributions to the taxation authorities. As taxes and contributions are two different levies, existing policies on the collection of contributions will remain unchanged for the time being, and forced payments of contributions arrears will not be allowed.
Given that the aforementioned institutional reform may lead to more efficient collection of social security contributions, we will consider meaningfully lowering the contribution rate, so that this reform will not add to business burdens, as this would be just the opposite of our intentions. The government should tighten its belt rather than shift the burdens onto businesses. Only in this way can we deliver a better life for our people.
Let me stress that all enterprises registered in China, be they foreign-invested, privately-invested or of any ownership types, will receive fair treatment in benefiting from administrative rollback and tax and fee cuts. If you encounter any case of unfair treatment, please feel free to file complaints.
Elisabet de los Pinos, Founder and CEO of Aura Biosciences: The Chinese government has set out the guidelines for innovation and entrepreneurship, which lay out the importance of innovation in the development strategy. So we are interested to know what is the progress in these programs, and more importantly, how the international business community can better address and participate in this process.
Premier Li: Innovation lies at the center of our efforts to promote economic development and foster new growth drivers. Over recent years, we have made enormous efforts in this area with effective results. For example, we have promoted the mass entrepreneurship and innovation campaign and introduced reform of government functions. These efforts have resulted in a surge of new market entities, with the number of companies registered on an average day increasing from over 1,000 to 18,000 in August this year. And the number of business entities in China has exceeded 100 million.
The nationwide entrepreneurship and innovation drive in China originated from the belief that everyone has the capability and opportunity to make innovations. If each of the 1.3 billion Chinese and every member of our 900-million-strong labor force can be incentivized to innovate, we can well imagine how powerful this wave of innovation will be. To quote the theme of this year’s Annual Meeting, “Shaping Innovative Societies in the Fourth Industrial Revolution,” I believe an innovative society is one which taps into the creativity of every individual.
Second, in promoting innovation, we need to create equal opportunities for every individual. We are advancing the reform to streamline administration, delegate powers, strengthen compliance oversight and improve government services. All these are aimed to allow every individual an equal opportunity to make innovations, which will help to make a big difference in the lives of many and to better achieve efficiency and fairness.
Third, innovation is taking place against the backdrop of globalization. As China embraces the world with open arms, we also welcome entrepreneurs, scientists and people in other sectors around the world to participate in China’s development with an open mind, so that together, we can make joint contributions to the progress of humanity. Let me reassure you that China is firmly committed to protecting IPR, as we know that innovation is supported by ideas, which generates property rights.
Here in China, you will see that hundreds of millions of people have pooled their wisdom and strengths to engage in innovation empowered by the Internet Plus model. I believe that your interactions with innovators in China will give rise to brilliant new inspirations. As entrepreneurs, you need to make profits, but I trust you also have your own career goals to pursue. I hope that your participation in China’s innovation drive will help realize your goals.