More tax­a­tion re­form will stop cap­i­tal flight

China Daily (Hong Kong) - - COMMENT -

That China’s largest au­to­mo­bile glass-maker Fuyao Group will in­vest $600 mil­lion to build a 2,000-worker fac­tory in Mo­raine, Ohio, should set off alarm bells, prompt­ing the Chi­nese govern­ment to lower taxes and op­er­a­tional costs for man­u­fac­tur­ing in­dus­tries to pre­vent the drain of Chi­nese cap­i­tal and jobs.

Re­spond­ing to the crit­i­cisms against his in­vest­ment abroad in a re­cent in­ter­view, Cao De­wang, chair­man and founder of Fuyao Glass In­dus­try Group in Fu­jian prov­ince, com­plained about the heavy tax bur­den in China. Cao, who started in­vest­ing small amounts in the United States in 1995, said it took him more than 20 years’ ob­ser­va­tion to make the “pru­dent” de­ci­sion two months ago, be­cause there is an ob­vi­ous gap in pro­duc­tion and op­er­a­tional costs between China and the US.

Tax on en­ter­prises, elec­tric­ity tar­iff and nat­u­ral gas costs in China are all higher than in the US, he said. And com­pared with a num­ber of fees an en­ter­prise has to pay for land-use rights in China, land is al­most free to use in the US thanks to lo­cal sub­si­dies.

The high cost of pro­duc­tion for and the heavy tax bur­den on man­u­fac­tur­ing en­ter­prises are facts many in China al­ready knew. But it is Cao who first high­lighted that in China they were not just high, but much higher than in the US.

At the re­cently con­cluded Cen­tral Eco­nomic Work Con­fer­ence, the cen­tral govern­ment pledged to lower taxes, fees and el­e­ment costs to foster the de­vel­op­ment of the real econ­omy.

So Cao’s re­marks, im­me­di­ately af­ter the con­fer­ence, should be able to spur the au­thor­i­ties in charge of re­form to put their words into ac­tion.

Although China has deep­ened eco­nomic re­form by tak­ing a se­ries of con­crete mea­sures since late 2012, the pro­duc­tion and op­er­a­tional cost for en­ter­prises, el­e­ment price, la­bor cost and in­sti­tu­tional trans­ac­tion cost have in­creased, in­stead of de­clin­ing.

All costs fi­nally go into the prod­ucts’ re­tail prices that con­sumers even­tu­ally pay. So, many en­ter­prises, in­clud­ing well-es­tab­lished ones, will ei­ther have to ac­cept the loss of their com­pet­i­tive­ness as buy­ers opt for al­ter­na­tive prod­ucts with higher cost per­for­mances, or they can choose to re­lo­cate to over­seas des­ti­na­tions where the pro­duc­tion cost is lower and the busi­ness en­vi­ron­ment bet­ter. In fact, many Chi­nese en­ter- prises have moved their pro­duc­tion bases to for­eign economies, es­pe­cially South­east Asian coun­tries, in re­cent years and this trend is likely to gather pace in the fu­ture.

Be­cause of its re-in­dus­tri­al­iza­tion strat­egy, the US govern­ment seeks to at­tract man­u­fac­tur­ing in­dus­tries, in­clud­ing for­eign ven­tures, back to the coun­try, as they are not only im­por­tant tax­pay­ers but also job gen­er­a­tors. If the cost gap Cao has talked about is true, Chi­nese peo­ple should not lament the shift­ing of Fuyao Group’s pro­duc­tion unit; in­stead, they should ap­pre­ci­ate the fact that many Chi­nese en­ter­prises have not moved to the US.

The govern­ment has made some break­throughs in the tax struc­tural re­form. But that’s far from enough. The en­ter­prise tax rate in China is still markedly higher than in de­vel­oped coun­tries. So the govern­ment should not only see how much tax it has cut, it should also see how much could still be cut.

US pres­i­dent-elect Don­ald Trump has vowed to lower en­ter­prises’ tax from 35 per­cent to 15 per­cent. The Chi­nese re­form au­thor­i­ties should show the same sense of ur­gency to pro­tect Chi­nese cap­i­tal and en­ter­prises. Be­hind the tax re­form is a deeper-level re­form of the govern­ment it­self as well as the na­tional ad­min­is­tra­tive sys­tem.

The au­thor is a Bei­jing-based fi­nan­cial colum­nist. The ar­ti­cle was first pub­lished in Bei­jing News on Thurs­day.


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