Monthly Archives: June 2011

Beijing-Shanghai High-Speed Trains Start Service

High-speed trains start commercial service on Beijing-Shanghai run

Finally, a short respite from safety concerns and scandal. High-speed trains have started commercial service between Beijing and Shanghai. The picture above shows the first train nosing its way from Beijing South Railway Station, carrying prime minister Wen Jiabao, who inaugurated the service on the 1,318-kilometer now five-hour journey. A sister train left Shanghai for Beijing at the same time.

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China Cuts Income Tax For Low Earners

The reconsideration of income tax on low earners has resulted in the threshold for the tax to be applied being raised by 1,500 yuan ($232), 500 yuan more than originally proposed, and taking an estimated 60 million wage earners out of the tax system. From Sept. 1, tax will start being due on incomes of above 3,500 yuan a month, up from 2,000 yuan a month. In addition the number of tax bands is being cut to seven from nine, with the rate on the first band being cut to 3% from 5%.

The changes lift the threshold above the average monthly wage for salaried workers. The percentage of earners liable for tax will fall to 7.7% from 28%, costing the government 160 billion yuan, according to Wang Jianfan, vice director of the Ministry of Finance’s taxation department. Some of that will be recovered by raising taxes on higher earners. More than 82,000 members of the pubic commented on the original tax cut proposal with two our of three wanting an even higher threshold than finally agreed on.

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China’s Diplomatic Push For Its Foreign Direct Investors

Prime Minister Wen Jiabao’s European tour provides a foretaste for the sort of diplomatic push in support of Chinese investment in developed countries that is only likely to increase over the next decade in line with Beijing’s extortion to Chinese companies to “go global”. While the headlines of Wen’s visit to Germany in particular were taken by the deal intended to grow two-way trade to $280 billion by 2015, it is the mostly overlooked agreements on growing investment, struck on the other two stops on his trip, Britain and Hungary, as well, that matter more to Beijing.

Access to natural resources is the driving force behind Chinese companies’ foreign direct investment (FDI) in developing economies, but in developed nations they are looking to buy commercial assets, particularly those that can provide value-added services, brands, management and technological expertise, raising local concerns about the influx and calls for more controls to regulate it. In the U.S. in particular, where protectionist sentiment is ever lurking in the legislature, there are competitiveness concerns about technology transfer, especially if it has military application, subsidies to state-owned banks, noncommercial motivations of state-owned companies, and the routing of Chinese FDI via third countries such as Hong Kong and tax havens to disguise its origin.

China’s outward FDI , at 1% of the world’s total, lags its share of global trade (8%), but its annual flows are growing rapidly. It hit $59 billion last year, up from an average of $3.8 billion in 1995-2005. Given the size of China’s foreign exchange reserves and the growth rates of its economy, $1 trillion of FDI could come out of China over the next 10 years. Hence the diplomatic push to forestall the erection of further barriers to Chinese trade and investment and to dismantle those that already exist. Some of this is done by signing bilateral trade and investment treaties like the ones struck on Wen’s visit, and some through multilateral organizations such as the G20. It seems inevitable that Wen’s successor will be doing a lot of globetrotting to pave the way for more Chinese investment in developed economies. There is going to be a lot of it.

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China’s Local Government Debt Is Large But Manageable–For Now

The audit of China’s local government debt paints a reasonably reassuring picture. The question is how complete that picture is.

The National Audit Office put the debt at 10.7 trillion yuan ($1.7 trillion) at the end of 2010. That is 27% of GDP, far lower than the worst expectations (this is the first time the numbers have been made public). It is also much higher than the central government’s debt of 17% of GDP. Add in all the usual liabilities that goes into a country’s public debt number and China is looking at an overall number  of 80-90% of GDP, not particularly high by international standards but in such a state-centric economy, it will all come back to central government one way or another.

Much of Beijing’s stimulus package in response to the 2008 global financial crisis flowed through local government spending on public works. Local government debt rose by 62% in 2009 over the previous year, as local authorities laded up with bank debt (and the banks, state owned, with potential bad debt). The borrowing increased by a further 19% in 2010.

It also encouraged the widespread use of special investment vehicles to get round restrictions on borrowing. The audit says that there were 6,576 such vehicles, with a combined debt of $5 trillion. Yet this shadow financing system is only partially accounted for by the audit. Only loans explicitly guaranteed by local governments has been included.  Beijing is already reported to be planning to shore up local government finances with a 2 trillion-3 trillion bailout to cover the 23% of the lending to projects with neither collateral nor viable cash-flow to cover their debt service (this bailout could include some securitization of loans for resale to private investors or through the bond market). In addition, the central bank has told banks to increase their capital reserves against similar projects that are only generating sufficient cash flow to service part of their debt.

The situation seems manageable for now, though central policy makers’ concern remains acute as they work on defusing the debt bomb. Most local-government debt has long maturities and fiscal and land revenues have been strong, even if land sale revenues are now softening. The risk of a local government debt default remains low–as long as economic growth remains brisk and the state-owned banks can be made to absorb some of the worst bad debts. The tick-tock of the debt bomb may be getting a bit less audible but it is still there.

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Beijing And Tokyo Take Their Rivalry Into Football Administration

Even in the world of international football administration, Beijing and Tokyo don’t let their rivalry drop. Candidates hoping to replace the scandal-tainted Mohamed Bin Hammam as president of the Asian Football Confederation are already jockeying for position. Zhang Jilong, who is filling the position in an acting capacity following bin Hamman’s suspension by dint of being the AFC’s senior vice-president, is a candidate, but far from the favorite to head the 46 nation confederation permanently.

Although he can count on the support of the majority of the 10 members of the East Asian Football Federation (EAFF), he won’t be able to rely on that of Japan, which already thinks China has too much influence over the EAFF though itself, South Korea (and Australia) are the region’s leading soccer powers on the field. Japan’s own candidate is likely to be Kohzo Tashima, general secretary of the Japanese FA. If he runs he can expect South Korea’s support but not that of China and its EAFF allies. Beijing sees little chance of Tokyo being helpful to its push to secure a FIFA World Cup, and vice versa. Beyond that lies the bigger rivalry.

The internal regional bickering is likely to mean that a candidate from West Asia such as the Bahraini Sheikh Salman Bin Ebrahim Al Khalifa will emerge victorious. East Asia’s football federations will be left bewailing the continuing shift of power from East to West to the detriment of the growth of the sport in what should be some of its most dynamic countries.

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Two More Rail Officials Said Snagged In Corruption Probe

The corruption investigation into China’s railways has reportedly snared two more senior officials. Caixin says that Shao Liping, chief of the Nanchang Railways Bureau Chief, and Lin Fenqiang, his counterpart at the Hohhot Railways Bureau, have been detained by authorities for questioning and removed from their posts.

What remains to be seen is whether Shao and Lin are connected to Liu Zhijun, the former rail minister who was the driving force behind the rapid expansion of China’s high-speed rail network and who was sacked in February, the first domino to fall as a result of the corruption probe. Liu is still under investigation, according to a senior Party official from the Central Commission for Discipline Inspection, as safety concerns about the high-speed lines persist.

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China Said To Cut Luxe Tariffs To Boost Domestic Consumption

Here, if true, is a drop of bad news for luxury goods retailers in London, Paris and Hong Kong: China is planning to cut the taxes on high-end watches, shoes, clothes, bags, cosmetics and the like to encourage more domestic consumption, according to a report last week in the 21st Century Business Herald. (Update: Finance ministry officials have denied the report which was based on statements by Commerce ministry officials. That probably means the two ministries are still arguing over the details of how much the luxury tax and import duties will be trimmed, in what mix, on which products and how the change will be phased in. )

Duties of 65% on fine wines, 50% on cosmetics and 30% on watches have driven many wealthy Chinese to pick up such luxuries duty free on foreign shopping binges, a trend further encouraged by the spread of China Union Pay terminals abroad; Harrod’s department store in London now has 40, giving Chinese visitors ready access to their bank accounts back home. With a forecast 65 million tourists coming from China this year, up from 57.4 million last year, it is perhaps not surprising that Burberry’s says that Chinese account for half of its sales in London.

A Commerce ministry study found that prices of a sampling of 20 luxury goods were 51% higher in China than in the U.S. and 72% higher than in France, the most popular European destination for Chinese shoppers and where they spent an estimated 650 million euros ($1 billion) on duty free items in 2010, according to a survey by Global Blue, a tax-free-shopping group. The World Luxury Association, a trade organization, estimated that Chinese consumers bought a total of $10.7 billion worth of luxury goods (exceeding transport–planes, yachts, cars) in 2010 with four out of five of those dollars being spent outside China.

Even though China has lowered its average import tariffs to 9.8% from 15.3% since joining the World Trade Organization, it still has some of the world’s highest tariffs on luxury goods. The 21st Century Business Herald says that some import duties may be scrapped altogether, with the National Day holiday in October the target date for the change. (That assumes the commerce and finance ministries have resolved their trade balances vs tax revenues dispute by then; it will probably have to be refereed at State Council level.)

Most top international luxury goods retailers, including LVMH, Gucci and Hermes, have dozens of stores in China already to cash in on the fast growing ranks of China’s wealthy. Coach, a high-end U.S. leather accessories manufacturer, for example, has said it plans to increase its sales within China to $500 million from $100m within three years. Such foreign luxe retailers won’t necessarily lose sales overall because of tariff cuts; indeed they will continue to have the twin winds of growing Chinese international travel and rising wealth in their sales, but they could feel an inelegant pinch to their profit margins.

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