'Government restructuring is the most immediate outcome of the "Two Sessions" - the Chinese People's Political Consultative Conference followed by the National People's Congress - this March,' Andrew Polk of Trivium China told in our recent conversation.

'We're talking about basically a total overhaul of the government. It's huge. It's momentous. And it's just started.'

'With government restructuring, the biggest thing is the creation of an entirely new branch of government: the National Supervisory Commission. Its entire job is to overlook every single public official in China. It is an institutionalization and deepening of the corruption crackdown that we've seen over the past few years.'

'The NSC not only institutionalizes the corruption crackdown, but it also makes sure that the discipline inspectors are now more and more involved in policy implementation. And, when the discipline inspectors get involved, lo and behold, things happen quickly.'

1. What you missed while waiting for the U.S.-China trade war

Taking term limits off President Xi wasn't the only big change that came out of China's annual lianghui or 'Two Sessions' - the advisory Chinese People's Political Consultative Conference followed by the rubber-stamp National People's Congress - in March.

'With 'Trump and a looming trade war sucking all the oxygen out of China news in March,' as Andrew Polk of Trivium put it, you may well have overlooked four of the actions coming out of the Two Sessions.

• These four actions massively advance Xi Jinping's efforts to assert the Communist Party’s control over economic and foreign affairs, cultural policies, and the appointment and training of cadres.
• And, are of 'momentous importance for both markets and businesses, especially foreign businesses operating in China,' according to Andrew.

Andrew Polk: 'The four important things that came out of the Two Sessions':

1. Chinese government restructuring. 'We're talking about basically a total overhaul of the government. It's huge. It's momentous. And it's just started.
2. 'The policy roadmap. 'The Party and the government are clearer than they've been in many years on exactly what their priorities are.
3. 'Personnel. 'Important people were put in important places.
4. 'The legislative agenda + the constitutional amendments. 'These are hugely important over the long term for how the economy operates, and how the political system operates, as well.'

What follows is Andrew's analysis of the first action, 'government restructuring,' as well as its most important outcome, the new, super-agency: the National Supervision Commission.

2. Biggest Chinese government restructuring since the 1980s reform era

'Government restructuring is the most immediate outcome of the two sessions. We're talking about basically a total overhaul of the government,' says Andrew Polk. The biggest restructuring since the Deng Xiaoping reform era of the 1980s.

 

From Bloomberg:

• The restructuring will 'solidify Communist Party control over key functions of government, further centralizing power.
• 'This 'represents China’s most decisive shift yet from 1980s reforms led by Deng Xiaoping aimed at professionalizing the government after Mao Zedong’s disruptive party-led political movements led to famine and bloodshed.'
• 'At the time, Deng had said “the separation of the party and government” was necessary to unleash an economic boom that continues to endure.'
• 'Yet Xi has gone in the opposite direction, arguing that China’s centralized system provides an alternative model for countries to get rich without embracing Western democracy.'

And, from the Wall Street Journal:

• “Xi is telling everyone that not only is the party in charge (it always has been) but also now that the party must be seen as running the government,” said Ryan Manuel, an expert on Chinese politics at the University of Hong Kong.
• “He wants to use more party methods to rule the government, as opposed to the traditional method of having two separate trains running in parallel, with cadres forced to leap back and forth across the tracks.”

Why it matters. 'If you're a markets person, you don't have time to think about Chinese government restructuring, because you're worried about whether global trade is going to collapse in the next month,' says Andrew Polk.

• 'So, I understand why people are focused on the trade war, but this stuff is arguably more important in terms of how China's economy is going to evolve.'

An overview from the Wall Street Journal.  'A look at China’s restructuring of government agencies.'

• 'COMBINED: Separate banking and insurance regulators will be merged into a single agency to better fend off risks in the country’s financial system.'
• 'SETUP: A national market regulatory administration with sweeping responsibilities will incorporate functions of a half-dozen offices to oversee business competition and practices, from corporate and antitrust regulation to pricing and food safety.'
• 'RETOOLED: A National Health Commission, with responsibilities over public health issues, is replacing the National Health and Family Planning Commission, de-emphasizing government-set birth limits and refocusing policy for an aging society.'
• 'REVAMPED: A beefed-up environment ministry will add to its environmental-protection mission, taking on antipollution and conservation functions currently spread across six other agencies.'
• 'MERGED: Merging the Culture Ministry with the national tourism administration, in a push to develop and promote Chinese culture, and enhance China’s soft power.'

From the same WSJ article. 'Given the plan’s emphasis on control, foreign businesses—which have complained about unfair and selective regulation—are likely to face more formidable government agencies.'

• 'The newnational market regulatory administration in particular brings under one roof separate bureaus that handled pricing regulation and antimonopoly enforcement, which have in the past pursued high-profile cases against foreign companies.'

Notably absent from the WSJ and other lists in the western media is the new, super-agency: the National Supervisory Commission. Andrew calls this the 'biggest thing' to come out of government restructuring. More on the NSC follows.

3. Biggest big brother: the National Supervisory Commission

Xi Jinping owes much of his public support to his anti-corruption campaign.

• He also owes much of his consolidation of power to the campaign's rooting out some rivals and striking fear into the rest. 
• Xi has now streamlined and expanded the reach several notches through the creation of the new, super-agency: the National Supervisory Commission.

'With government restructuring, the biggest thing is the creation of an entirely new branch of government: National Supervisory Commission,' says Andrew Polk

• 'Its entire job is to overlook every single public official in China.'
• 'It is an institutionalization and deepening of the corruption crackdown that we've seen over the past few years.
• ''These trends have been in train for a while - and, were just officially canonized in March.'

The National Supervisory Commission replaces the Party’s Central Commission for Discipline Inspection. 

• The NSC is independent of the State Council, the Supreme People’s Court and the Supreme People's Procuratorate (see the chart above).
• And, it reports directly to the China's highest legislative body in China, the National People’s Congress.  

'Some people compare this to the establishment of the Department of Homeland Security after 9/11, but it's way bigger than that.'

• 'It's as if you took the FBI and made it coequal to the executive branch, the legislative branch, and the judicial branch in the U.S.
• ''The National Supervisory Commission is a brand new branch of government on par with the National People's Congress, the State Council, the Chinese People's Political Consultative Conference.'

For more on the National Supervisory Commission and its impact, there two short videos below. 

4. The National Supervisory Commission: the stick to ensure that policies are implemented

The National Supervisory Commission is also a stick that helps persuade laggards to implement policy.

• 'The NSC not only institutionalizes the corruption crackdown, but it also makes sure that the discipline inspectors are now more and more involved in policy implementation,' says Andrew

'We've seen this, for example, in the implementation of financial derisking.'

• 'One reason the financial derisking was initially successful in 2017: when the CBRC, and the CIRC, the CSRC, and the PBOC were going out to do their inspections, the discipline inspectors were going with them.'
• 'When the discipline inspectors get involved, lo and behold, things happen quickly.'

That could be good or bad. 'So, we've got two scenarios.

• 'One is potentially having better, more consistent implementation of policy, like we've seen so far in the financial derisking.'
• ''The other is overzealous policy implementation.'
• 'For overall policymaking and implementation, these two outcomes are what you have to watch for.'

'If we get more consistent implementation, that's important for foreign investment.'

• 'Everyone complains that Chinese rules are inconsistently applied from city to city, province to province, day to day, and month to month.'
• 'If we could get more consistency, then that would be a huge improvement in the environment not only for strategic investors like multinational companies.'
• 'And, also for portfolio investors, because then they will know when they can get their money out, in what channels they can get their money out, what legal avenues they have to make complaints, and what asset classes they can legally invest in. If you've got consistency in those rules, it would be a huge improvement in the market environment.'

The flipside is over-zealous implementation.

• 'As we all know, the history of China has been that the center makes policy, but it never gets implemented very well locally.'
• 'Now the pendulum's swinging all the way to the other side, where policy is sometimes being implemented too zealously.'

'We've seen this in a number of cases,' says Andrew. 'One example is in the push to switch from coal to gas heat.'

• 'The Central Government said, "You've got to stop using X amount of coal, and start using X amount of gas."'
• 'It set targets for the northeast of China.'
• 'The discipline inspectors were out making sure that local governments were hitting it.'
• 'So, the local leadership in Dongbei, in the northeast part of China, said, "We're going to hit these targets no matter what."
• ''They ended up shutting down businesses because there wasn't enough gas supply to offset the reduction in coal.'
• 'And, homes were left out in the cold.' 

'After many such cases, the Central Government has moved to mitigate the problem.'

• 'For example, the latest environmental regulations clearly state, "Cadres need to carry these out in a way that isn't disruptive to business and people's lives,"
• 'This is a pretty straightforward acknowledgement that last time they implemented these rules, it was chaotic, and done in a blind fashion.' 

'Given all this, it's hard to predict where the next case of over-zealousness may come from, but I think it's going to play out case-by-case.'

• 'As investors or people doing business in China, you need to be on the lookout for exactly the pace and rationale of policy implementation.'
• 'And, after a policy is put forth, you need to track the people implementing it to see if they are going overboard.'
• 'If they are, you need to watch out for the unintended consequences.'