The unorthodox foreign policy views of incoming US president Donald Trump may have unsettled Chinese leaders who are still trying to make sense of the billionaire’s true intentions. But the mainland’s obsession with Trump’s presidency is not just about politics or bilateral trade.
His domestic economic agenda, in which he champions tax cuts and deregulation to boost the economy and create jobs, has inadvertently fuelled an already intense debate in China over the state and direction of the Chinese economy.
More specifically, the issue is about how to help the manufacturing industries. Those industries once gained China a reputation as the world’s workshop and helped turn it into the world’s second largest economy, but are now weighed down by suffocating taxes and fees, soaring land prices and other operating costs.
The latest to enter the fray is Cao Dewang, one of China’s richest tycoons and a leading philanthropist. Over the past 10 days, his interview with a mainland newspaper in which he suggested the investment climate was more favourable in the US than in China has become the talk of the town.
Cao certainly speaks with authority. The founder of Fuyao Glass, the car glass manufacturer which supplies the world’s leading automakers from BMW to GM, has invested nearly US$1 billion in the United States including a US$600 million car glass manufacturer in Ohio.
In the interview, he said manufacturing costs in the US were much lower than in China because electricity cost half as much, natural gas a quarter, and transport even less (because US highways are free).
Although he said an American blue collar worker’s salary was at least eight times higher than that of a Chinese worker, he also said US corporate income tax was much more favourable than that of China. The official American corporate income tax rate is 35 per cent, rising to about 40 per cent when state taxes and other fees are added.
By comparison, China’s corporate income tax rate is 25 per cent but the overall tax burden is much higher due to the 17 per cent value added tax (VAT) and a litany of other taxes on vehicle use, urban construction, education and stamp duty.
By Cao’s estimates, a Chinese firm needs to pay 35 per cent more in taxes.
As far as manufacturing is concerned, according to Cao, everything is cheaper in America apart from manpower.
Moreover, Cao argued China’s labour costs were no longer a competitive advantage. Although they were lower than in the US, costs were rising and were already comparable to those in Russia and Eastern European countries.
More importantly, Cao said he had seen a greater determination in American officials to rejuvenate the US manufacturing industry as Trump had promised to bring the American corporate income tax rate down to 15 per cent.
Cao’s remarks have touched a nerve. There are rising concerns that as the Chinese leadership urges greater efforts to upgrade its industrial mix and encourage e-commerce, the country’s manufacturing industries are being sidelined, as exemplified by the raging debate over the real economy and virtual economy.
In particular, the economic slowdown has further squeezed the thin profit margin of manufacturing industries already struggling under rising operating costs.
As a result, investment from the private sector, which accounts for about 60 per cent of China’s GDP, has been falling sharply in the past few years.
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To be fair, the Chinese leadership has repeatedly expressed worries that the manufacturing industries, the key components of the real economy, are being neglected as massive amounts of speculative funding flow into the stock and property markets and local authorities prioritise spending on e-commerce.
At a recent national economic work conference, leaders promised more steps to help the real economy through lending and lowering the overall tax burden next year. But this is easier said than done.
In fact, since Li Keqiang (李克強) became premier in 2013, deregulation and cost cutting for businesses have been among his top priorities. He has sought to cut administrative approval procedures and eliminate unnecessary and arbitrary fees imposed by central and local authorities. But the results have been mixed, to say the least.
Over the past four years, the central government has cut or streamlined 618 administrative approval procedures, more than one third of the total, and has abolished arbitrary fees worth several hundred million yuan.
But Xinhua admitted in a recent report that gaining bureaucratic approval on projects was still very much a lengthy and costly process, citing an example that investors in an industrial project in Shandong ( 山東 ) had needed to submit 160 types of documents from beginning to completion.
One of Li’s biggest achievements so far has been to replace business tax with VAT. This began in May this year and is expected to have resulted in tax savings of at least 500 billion yuan for businesses by January.
Business tax refers to a levy on the gross revenue of a business while VAT refers to a tax levied on the difference between a commodity’s price before taxes and its cost of production, a tax code from which enterprises can claim deductibles.
Despite propaganda regarding the scheme’s success, its impact on the bottom lines of enterprises has appeared minimal, not least because local authorities, strapped for revenues, seem to have imposed other fees such as greater levies for environmental protection.
Zong Qinghou, founder of China’s soft drink maker Wahaha, recently told a forum that by his own estimates, the fees and taxes imposed on enterprises this year were greater than last.
In addition, Zong said soaring real estate prices meant local authorities were unwilling to earmark land for the manufacturing sector as they preferred to sell the land at much higher premiums to property developers.
Noting Trump’s tax cut pledge, he urged the mainland leadership to take effective steps to lower taxes and fees.
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In fact, on top of corporate income tax, there have been increasing calls for authorities to reform China’s individual income tax regime. This is widely considered excessive and unreasonable, with the top tax bracket set at 45 per cent. Zong and other entrepreneurs have long urged the authorities to reduce those tax rates to encourage consumption and retain talent.
In today’s political climate in China, most rich Chinese tycoons are reticent to directly criticise failings of the government but the blunt warnings from two of the country’s wealthiest men reflect growing frustrations in the private sector.
It is time for the mainland leadership to take heed. ■
Wang Xiangwei is the former editor-in-chief of the South China Morning Post. He is now based in Beijing as editorial adviser to the paper