Quotable Decisions
Covering Chinese policy and rhetoric on external events and actors, military and security issues, economy and technology, and bilateral relations with India.
To conclude the proceedings of the Third Plenum, on July 21, the full text of the “Decision of the Central Committee of the Communist Party of China on Further Deepening Reform and Promoting Chinese-Style Modernization” was released. This is a much-anticipated document, for various reasons.
Historically, third plenums have focussed on shaping the economic agenda of the country. For instance, the Third Plenum of the 11th Central Committee in December 1978 launched the “reform and opening up” in China. Likewise, the Third Plenum of the 14th Central Committee, held in 1993, announced the goal of building China into a “socialist market economy.” Most recently, during the Third Plenum of the 18th Central Committee in 2013, unveiled the framework of comprehensively deepening reform. These reforms pertained to transforming the hukou system, reforming state-owned enterprises, loosening the one-child policy, overhauling the judicial system, bridging the urban-rural divide, and so on.
These meetings, which bring together the Party elite, have traditionally taken place in late autumn. So it was anyway rather unusual that the Third Plenum of the 20th Central Committee was being held in July. More importantly, it came at a time when the Chinese economy is facing deep structural challenges.
The document is long and comprises 15 overarching sections with a total of 60 sub-sections under these. In this edition of EoC, I wish to cover a couple aspects of the ‘Decisions’ document, that I found interesting:
Use First, Pay Later (先使用后付费)
It is no surprise that a significant component of the Decisions document pertained to deepening scientific and technological reform. As discussed previously, Chinese emphasis on S&T is enhancing amidst growing competition from the US-led West, as well as the internal economic rebalancing that requires the production and development of high-quality goods and supply chains.
Sub-section 14 on ‘Deepening scientific and technological structural reform’ makes note of a “use first, pay later” approach to enhance the S&T capabilities of Small and Medium Enterprises (SMEs). More specifically, it argues –
“To encourage sci-tech SMEs to boost their R&D spending, we will raise the rate of additional tax deductions for their R&D expenses. We will encourage and guide higher education institutions and research institutes in authorizing the use of their proprietary scientific and technological advances by micro, small, and medium enterprises on a ‘use first, pay later’ basis.”
Given that the Chinese party-state is experimenting with new and innovating ways to boost the implementation of scientific R&D across material projects and outcomes, the pay-after-use model is emerging as a method to enable academic-entrepreneurial cooperation. The method essentially directs proprietary copyright and intellectual property holders (such as research institutes) to allow for its use in projects by MSMEs without significant bureaucratic challenges.
The two most significant case studies of this method have been seen in the Shaanxi Province’s ‘Three Reforms’ pilot programme of 2023 and the new round of pilot reforms for the Zhongguancun National Independent Innovation Demonstration Zone of 2022.
As per the “Ten Measures (Trial) to Deepen the ‘Three Reforms’ of Technology Transfer in Shaanxi Province,” finalised in December 2022 and issued as an authoritative release in February 2023, the General Office of the Shaanxi Provincial People’s Government, has committed to piloting an ambitious programme by which some universities and research institutes will be selected to take the lead in experimenting with the “use first, pay later” method for technology transfer.
This arrangement will primary involve a licenser (the institute/ university) and a licensee (a micro or small enterprise; no provision for a ‘medium’ one), and the nature of the arrangement can be a combination of ‘zero upfront fee + phased payment + revenue sharing’, or simply ‘deferred payment’ to pay the licensing fee. While the former is intended to act as a partnership similar to what an enterprise may have with a shareholder and VC funder (if they do go for the revenue sharing option and avoid interest on the phased payment), the latter may simply act as a copyright “loan service” which may be paid for post-deployment. In either case, transfer of technology and IP is inevitable.
To build on this, the provincial government further recommends the creating of an open-source tech transfer system, where certain universities/ research institutes may also be required to share IP on “open information platforms” to “improve patent transaction negotiation efficiency,” and “reduce institutional transaction costs.” The open platforms are to be built jointly by the Provincial Department of Science and Technology, the Provincial Department of Education, and the Provincial Intellectual Property Office, according to “division of responsibilities.”
This is clearly a very ambitious project, and it’s hard to believe that “select pilot universities” will go along nicely. Given that exclusivity is an exceptionally important component of investment in innovation by a research institute, open sourcing IP is a governmental intervention more likely to negatively impact innovation sentiment than boost it. This particular document by Shaanxi government only makes a comment on the assignment of 20 million yuan (close to three million USD today) in funds to the entirely of the “pilot cities/ districts” programme, with no mention of specific financial guarantees for IP licensers. However, it is unclear if enrolling on the platform enables an institute for fees based on technological adoption.
However, to enable MSEs to not default on payments, the Provincial Department of Science and Technology, the Provincial Department of Finance, and the Provincial Local Financial Supervision Bureau, are tasked to jointly support “financing guarantee institutions.”
These government financial guarantee (and ‘re-guarantee’) institutions are likely to play an important role in helping the demand-side problem of MSME innovation. It wouldn’t make sense for supply of technology research to be available without a fall-back mechanism for MSEs to be able to fund its implementation without worrying about pay back. It insures licensers to a great degree, when they know that the government is behind the financial guarantee the MSEs provide.
An interesting document released just a week ago on July 24, 2024, titled the ‘Special Guarantee Plan to Support Technological Innovation’, sheds light on the larger plan to create well-functioning financial guarantee system throughout the country, in line with the spirit of the 20th CPC Congress, the Central Financial Work Conference of November 2023 and the Central Economic Work Conference of December 2023.
The document is quite thorough in assessing continued support and ‘re-guarantee’ of financial support to MSMEs based on their yearly turnover as well as technological successes. In addition to determining the one-time ceiling of financial guarantee provided to MSEs as 30 million yuan, with the re-guarantee amount determined by whether a firm receives more or less than 5 million yuan, the document also makes room for certain risk-reprieve compensation for financial guarantee funds/ institutions.
Further, as per the “Measures to Support Zhongguancun National Independent Innovation Demonstration Zone in Conducting High-Level Technology Self-Reliance and Self-Improvement Pilot Reforms” document, finalised in November 2021 and released in September 2022 for public consumption, similar pilots are to be experimented with in the Zhongguancun village in Haidian district of Beijing. This document has been approved directly by the Central Commission for Comprehensively Deepening Reforms (中央全面深化改革委员会).
This document has clear guidelines on the rewards that are likely to be won by the higher education institutes that engage in the licensing of patents to MSEs, and the ceiling for the same is set at 500,000 yuan (around 70,000 USD today). These pilots also specifically mention a focus on licensing by medical and health institutions, meaning that Beijing’s Municipal Health Commission is an involved authority in rolling the programme out, in addition to the Haidian District People’s Government, the Municipal Science and Technology Commission, and the Zhongguancun Management Committee.
Given that the ‘use first, pay later’ policy is relatively new, and yet to yield results, given its long development and risk runway. However, it does leave a lot to be desired vis-à-vis the potential rewards for licensers, reliability of the open source platform, and the supervision of MSE financial risk.
Fengqiao Experience (枫桥经验)
The ‘Decisions’ document makes an interesting reference under the section on ‘Enhancing the Social Governance System’, where it argues:
“Adhere to and develop the ‘Fengqiao Experience’ in the new era, improving the urban and rural grassroots governance system led by Party organizations that combines self-governance, rule of law, and virtue.”
Named after Fengqiao Township (枫桥镇) in the city of Zhuji in Zhejiang province, the ‘experience’ recalls Mao Zedong’s efforts in the 1960s to create a system of grassroots surveillance and ‘rectification’, where people at a community level identified and reported on ‘reactionary elements’ (四类分子) to carry on Mao’s exalted ‘class struggle’ (阶级斗争). In 1963, Mao praised the namesake township for its excellence in this regard.
Now, the Fengqiao experience has entered the “New Era.” And with that, the Third Plenum document has listed out its defining pillars:
It’s a system of ‘co-governance’
It’s meant to establish a unified national population management system
It requires strengthening public service platforms like citizen hotlines
It calls for improvement of the social psychological service system and “crisis intervention mechanism” (essentially the mechanism by which the people call on higher authorities if they recognise dissidence from a value promoted by the party-state)
It focuses on improving the “overall prevention and control system for social security” (greater surveillance), establishing a normalized mechanism for cracking down on organized crime and eliminating evil, and strictly punishing illegal and criminal activities - all of which, as the document argues, the public strongly opposes.
People responsible for developing this model within their respective townships and districts are either members of grassroots committees of the Chinese Communist Party, or are well integrated with the party-state system of social governance. As Qiushi, the Party’s authoritative journal on theory and ideology itself tells us, the “enduring vitality” of the Fengqiao experience is based on “the underlying principle of upholding CPC leadership… and the crucial concept of preemptive action…”.
As Manoj Kewalramani further argued in his testimony before the US-China Economic and Security Review Commission (USCC),
While there is no one-size-fits-all model that has been universally applied across the country, the primary approach appears to entail developing a system of mediation and dispute and conflict resolution at the local levels. This has been done by leveraging the Party’s grassroots governance mechanisms, including the establishment of conflict and dispute resolution and mediation centres, connected with the police, courts, procuratorates, industry bodies, etc.”
Going forward, it is likely that the rhetoric on innovating with the model will become entrenched in party lingo on grassroots governance. For example, the OG province of Zhejiang has now put forth an evolved model of “four proactives” and “four early and prompt actions” as part of the “Safe Zhejiang” initiative, by which grassroots officials and their networks are required to predict “problem areas” (which can range from a mine that has potential to pollute a river, to a region restive due to ethnic suppression), and then take “prompt action” by involving authorities that can “mediate” and resolve disputes. Following Zhejiang’s lead, the Mudan community in Shenyang, Liaoning Province, has created its own number soup, and has launched a “three zeroes” programme - zero accidents, zero cases, and zero disputes.
China is indeed a complex and large society to govern. In this regard, the CPC continues to hail the grassroots social governance model as innovative and bold. But the ‘Fengqiao experience’ in the digital age augurs potential for greater scrutiny for online content, where not just censors, but the proverbial neighbours are to be equally feared.
Its advantages, of course, are evident from cases such as that of Chen Yufan, a rock celebrity arrested in 2018 for drug use and possession, based on a “community tip” received by local police in Beijing on their WeChat account. Nonetheless, as the party-state’s grip on reform tightens, primary-level governance can mean greater surveillance and even the inclusion of number of reports received from the “masses” on the list of parameters judging local cadre performance.
‘Chinese-Style Modernisation’ (中国式现代化)
Not surprisingly, the Third Plenum’s overall emphasis on promoting ‘Chinese-style modernisation’ has meant one thing - enhancing the Party’s leadership in further comprehensive deepening of reform.
Over the past few years, the concept of Chinese-style modernisation has gained greater significance. Official discourse describes Chinese modernisation as “socialist modernization pursued under the leadership of the CPC.” It also outlines five core features of Chinese modernisation:
The modernisation of a huge population
The modernisation of common prosperity for all
The modernisation of the coordinated pursuit of material and cultural-ethical advancement
The modernisation of harmonious coexistence between humanity and nature (which has its own section in the ‘Decisions’ document, calling for ‘Promoting the Construction of an Ecological Civilization’)
The modernisation of peaceful development
In doing so, this concept essentially argues that China’s path to modernisation must be distinct, rooted in its particular conditions. This not only firewalls the Party against any specific criticism on policies but also emphasises building mass support for the Party-state system.
This also means that Xi’s word on comprehensively deepening reform is final, and it makes sense to hence look at what he has said about the idea. Elaborating on the idea of ‘Comprehensively Deepening Reform’, Xi has underlined three central questions: what to reform, where to reform, and how to reform.
On ‘what to reform’, Xi argued that “the overall goal of comprehensively deepening reforms is to improve and develop the socialist system with Chinese characteristics and promote the modernization of the national governance system and governance capacity.” On ‘where to reform’, he stated that “the root purpose of promoting reform and development is to make people’s lives better,” and on ‘how to reform’, he propounded that “reforms must break and establish, with the right method leading to success and the wrong method leading to failure or even adverse effects.”
One of the key takeaways from Chinese writings and discourse on reforms has been around the need to address the principal contradiction of the new era. This was redefined at the 19th Party Congress in 2017, as one between unbalanced and inadequate development and the people’s ever-growing needs for a better life.
Since 2017, economic policy has focussed on innovation-driven development, cracking down on banking and property market hazards, addressing absolute poverty, undertaking rural development, expanding the middle-income base, improving resource efficiency, addressing environmental challenges, and adapting to a changing and increasingly hostile external environment.
These efforts have yielded mixed outcomes. This is a product of several factors. Chief among them, however, is the increasingly dominant role of the Party as the key actor or the “steering force” that must drive reform. The deepening of Party control over all sectors of society has become the first principle of Chinese policy making. In addition, there has been greater top-down control, which has hindered local innovation. For instance, the Party today has far more say in the flow of capital allocation when compared to market forces. The drastic shift to “high-quality growth,” too, is inflicted by the top upon all stakeholder defining the economic trajectory of the country.
Such a politics-first environment has meant slower growth and weakened confidence. But it doesn’t indicate any particular course-correction or easing of political control over capital and enterprises.
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