Other Briefings2023 Two Sessions in China: How the State Council Has Been Restructured and Why
During the 2023 Two Sessions, China’s State Council released its quintennial restructuring plan, which will see major changes made to several government bodies, the establishment of new ministries, and a major overhaul of the financial system, among other changes. The restructuring helps to consolidate duties and responsibilities for various ministries while giving a higher status to certain state organs to strengthen and standardize regulatory oversight and policymaking. We discuss the latest restructuring and the factors driving the changes.
China’s State Council has released its widely anticipated restructuring plan. The State Council Institutional Reform Plan (the “reform plan”), which was approved by the National People’s Congress (NPC) during the 2023 Two Sessions makes several major changes to various government bodies and implements a major overhaul of the financial system.
The restructuring of China’s State Council is customary at the beginning of each five-year session of the NPC – this year marks the first session of the 14th NPC.
The last institutional overhaul happened in 2018, which cut the total number of ministerial-level entities by eight and vice-ministerial-level entities by seven while creating seven new ministries and a number of new agencies.
In addition to the restructuring of China’s State Council, the Chinese Communist Party (CCP) is also expected to announce a reorganization plan, but this has not yet been planned.
Below we look at some of the main changes to the structures of State Council institutions and discuss why these changes have been made.
Reorganization of the Ministry of Science and Technology
The Ministry of Science and Technology (MOST) will be restructured to consolidate its powers and responsibilities while transferring certain responsibilities to other ministries and departments.
The restructuring includes the creation of the Central Science and Technology Committee (中央科技委员会), whose responsibilities will be overseen by MOST. The restructuring will also strengthen MOST’s macro-management responsibilities, such as strategy and planning, system reform, resource planning, and policy and regulatory work, as well as supervisory and inspection responsibilities.
MOST will also transfer some of its responsibilities to other ministries. This includes transferring responsibilities relating to science and technology in rural development and agriculture to the Ministry of Agriculture and Rural Affairs (MARA) and transferring duties related to science and technology industry development to the Ministry of Industry and Information Technology (MIIT), among others.
After restructuring, MOST will also no longer participate in the review and management of specific scientific research projects. Instead, it will mainly be responsible for guiding and supervising the operation and management of professional institutions for scientific research management, strengthening supervision and inspection of the implementation of scientific research projects, and evaluating the results. All the duties in this field that MOST is no longer responsible for will also be transferred to other ministries.
Big picture
China’s science and technology capabilities has been a top priority for the government for a long time. The government sees its ability to upgrade its traditional industries and become a leader in emerging and high-end technologies as key to the country’s future success and longevity. As stated in the reform plan, “scientific and technological innovation occupies a core position in the overall situation of China’s modernization drive.”
This endeavor has become ever more pressing in recent years as competition with other countries heats up in the space, and especially since the US began intensifying its efforts to contain China’s scientific and technological progress. In order to address these issues, the reform plan stated that “it is necessary to further rationalize the scientific and technological leadership and management system, better coordinate scientific and technological forces to overcome difficulties in key core technologies, and accelerate the realization of high-level technological self-reliance and strength.”
It is not completely clear how the restructuring will serve to achieve these targets, but it is possible that by giving the ministry more powers and responsibilities to conduct core work, such as strategy and regulatory work, while delegating less important responsibilities to other ministries, it will have more bandwidth to focus on expanding and supporting the industry’s growth and more power to enact policies.
Overhaul of the financial regulatory system
The China Banking and Insurance Regulatory Commission (CBIRC), hitherto the top government agency regulating banking and finance, will be dissolved and absorbed into the newly established National Financial Regulatory Administration (NFRA).
The NFRA will be responsible for the supervision of the entire financial industry, except securities, which will remain under the jurisdiction of the China Securities Regulatory Commission (CSRC). As with the CSRC, this new body’s main function will be as a regulator and supervisor and responsible for strengthening supervision, protecting the rights and interests of financial consumers, improving risk management and prevention, and investigating and pursuing legal violations, among other responsibilities.
However, its scope of regulatory jurisdiction has been expanded to incorporate some of the responsibilities of the People’s Bank of China (PBOC), China’s central bank, and the CSRC. These are the PBOC’s day-to-day regulatory responsibilities for financial groups, such as financial holding companies, as well as relevant financial consumer protection responsibilities, and the CSRC’s investor protection responsibilities.
The official position of the NFRA and CSRC will also be adjusted to become directly administered by the State Council, instead of being public institutions under the State Council as they have hitherto been. The main difference between these statuses is that a public institution under the State Council is not an administrative organ, but rather an institution that is authorized by the State Council to exercise certain administrative functions. This change raises the hierarchy of these organs and is supposed to help strengthen their supervisory power and functions.
Finally, the reviewal of corporate bond issuance, which was previously under the jurisdiction of the NDRC, will now be assigned to the CSRC.
Why this is being done
The changes serve to further consolidate the financial regulatory and supervisory responsibilities of the institutions, thereby giving them more power and oversight to carry out the work. At the same time, consolidating the regulatory work under these two institutions (the NFRA and CSRC) will also help to standardize regulations and their implementation, and eliminate duplications or redundancies in the system. According to the reform plan, the NFRA was established “in order to solve the long-standing contradictions and problems in the financial field”.
The reform plan also states that some of the PBOC’s and CSRC’s duties were transferred to the NFRA in order to “strengthen the protection of the legitimate rights and interests of financial consumers, and uniformly standardize financial products and service behavior”.
Establishment of a national data bureau
A new bureau, called the National Data Bureau, will be established to coordinate and promote the development and utilization of digital resources and the digital economy.
The new bureau, which will be under the administration of the NDRC, will be responsible for managing data resources, coordinating the development of digital infrastructure, and promoting digital society and economy plans. The bureau will absorb the responsibilities of the Office of the Central Cybersecurity Commission, a policy formulation body under the Central Committee of the Chinese Communist Party (CCCCP), including coordinating the development and sharing of important information resources and promoting the interconnection of information resources across industries and departments.
It will also undertake some of the responsibilities previously assigned to the NDRC, such as promoting the development of the basic system of “data elements” and advancing the construction of digital infrastructure.
Alignment with core state objectives
As with its science and technology ambitions, digital transformation is one of China’s core development goals. Recent years have seen the rapid modernization and digitization of China’s traditional industries and expansion of its digital infrastructure, such as the advancement of 5G networks. As stated in the reform plan, “digital resources and the digital economy play a fundamental role in economic and social development”.
As recently as December 2022, the CCCCP published a formal statement on how China is to develop its basic data systems and better utilize the country’s data resources. Moreover, the Chinese government has also officially classified data as a “factor of production”, meaning that it is considered an essential resource for generating economic value. The country has also been experimenting with ways to develop a domestic data trading market in order to capitalize on the intrinsic value of data.
The establishment of the National Data Bureau is therefore another signal of how important the government believes data and digitalization is to economic and social development. The consolidation of responsibilities under one bureau may help to facilitate policy formulation and implementation.
Other changes to China’s State Council institutions
Restructuring of institutions related to addressing the aging population
China’s aging-related institutions will be restructured slightly to better address issues surrounding the rapidly aging population and develop elderly care services and industries.
As such, the responsibilities for formulating and coordinating policies to address aging that were previously the responsibility of the NHC will be transferred to the Ministry of Civil Affairs.
In addition, the Office of the National Working Committee on Aging will be transferred to the Ministry of Civil Affairs to strengthen its responsibilities for comprehensive coordination, supervision and guidance, and organization and promotion of the development of aging-related causes. The China Association for the Elderly was also transferred to the Ministry of Civil Affairs.
In the previous restructuring in 2018, all aging-related work was transferred to the NHC but has now been transferred back to the Ministry of Civil Affairs.
Improving the intellectual property management system
The State Intellectual Property Office (SIPO) will be moved from being a national bureau managed by the State Administration for Market Regulation (SAMR) to an institution directly under the State Council. This is in essence a promotion in the standing of the SIPO, and will serve to, among other things, “expand high-level opening up to the outside world, accelerate the construction of an intellectual property power, and comprehensively improve the level of intellectual property creation, use, protection, management, and service”.
Law enforcement duties in areas such as trademarks and patents will remain under the jurisdiction of the comprehensive law enforcement team for market supervision (under SAMR) while receiving professional guidance from the SIPO.
Reduction of staffing in central state organs
According to the reform plan, all departments of the central state organs will have their headcounts reduced by 5 percent. The staff members that are cut will be mainly transferred to “strengthen key areas and important tasks”. For the problem of overstaffing in a small number of departments after streamlining, a five-year transition period will be given to gradually reduce the headcount.
How will the changes affect business and investment?
The restructuring is supposed to enable China’s State Council to better achieve its tasks and goals set under other policy agendas, such as the 2023 Government Work Report. As such, it is hoped that the changes will make each of the bodies become more efficient and effective in their strategies, planning, policymaking, and regulatory duties.
In the short term, there will be an adjustment period as all of the different organs implement the requirements of the restructuring plan, which could mean less time spent on policy- and decision-making over the coming months. In the longer term, however, we may see strengthened regulatory oversight in key areas, in particular the financial sector, which has seen the deepest level of reform. This could lead to higher compliance requirements for companies, but could also help to ensure fairer and more consistent implementation of the regulations.
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China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at china@dezshira.com.
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