Skip to content

Briefings - 15. page

RFI Chinese: PwC Expects Six-Month Business Ban from Chinese Authorities

Radio France Internationale (RFI) Chinese Edition recently reported that PwC China told clients it that expects Chinese authorities to impose a six-month business ban starting as early as September. This will be part of punitive measures imposed on PwC following a PwC audit of collapsed Chinese real estate developer Evergrande. China’s securities regulator said in March that Evergrande had reported an inflated revenue of nearly US$80 billion in Mainland China in the two years prior to defaulting on its debt in 2021. The regulators charged that PwC China’s audit of Evergrande’s accounting records had been improper.

PwC’s business ban and a potential hefty fine are probably the toughest action ever taken by Chinese regulators against a Big Four accounting firm. The Chinese government has stepped up scrutiny of the role of auditors in financial scandals, this time in the crisis-ridden real estate sector, which once contributed about a quarter of China’s GDP. PwC China was China’s highest-revenue accounting firm in 2022, with revenue reaching 7.9 billion yuan (around US$1.11 billion). PwC China’s rival Deloitte China was given a US$31 million fine last year for “serious audit deficiencies” related to Deloitte’s audit of China Huarong Asset Management. As part of the penalty imposed by Beijing, Deloitte China suspended operations for three months last year.

Many of PwC’s publicly listed Chinese clients have been banned for three years from cooperating with audit firms sanctioned by the authorities. This year, PwC China lost at least two-thirds of its accounting revenue from its Chinese-listed clients. That being said, Chinese-listed companies and state-owned enterprise clients account for only a minority of PwC China’s revenue; PwC is actively reassuring its largest internationally-listed clients, including internet giants Alibaba and Tencent, that it can complete their 2024 audits work.

Source: RFI Chinese, August 22, 2024
https://tinyurl.com/zdtten7b

Briefings | | |   Government/Politics US-China Relations

RFA: Shanghai and Shenzhen Stock Exchanges Adjust Information Disclosure Mechanism

Radio Free Asia (RFA) recently reported that the Shanghai and Shenzhen Stock Exchanges have adjusted their information disclosure mechanisms, ceasing publication of daily net trading volume data and other data starting from August 19. This has cut off information on the flow of foreign funds into China’s A-shares market through the Hong Kong markets. Thus, it is now impossible to calculate the flow of foreign capital in and out of Mainland China.

Under the new reporting mechanism, the Shanghai and Shenzhen exchanges will not let investors know the net buying and selling data of the overall northbound (direction of mainland) funds or the flows for the top ten active stocks on a given day. The Hong Kong Stock Connect program has been adjusted accordingly.

The RFA quoted a scholar saying that data on foreign investment in China are critical long-term indicators that play an important role in observing the Chinese economy. The Chinese government understands that making the data regarding the country’s stock market more opaque will only lead to faster withdrawal of foreign capital from China, yet it has still taken this step, showing that there must not be much foreign investment left in the Chinese stock market. It seems that China is preparing measures to prevent the further withdrawal of foreign capital. This is just like how China stopped disclosing unemployment data when the unemployment rate was rising sharply.

The new disclosure mechanism makes it easier for the government to fabricate market data in accordance with its political and economic needs, influencing retail investors who do not have a full picture of the market.

Source: RFA, August 19, 2024
https://www.rfa.org/mandarin/yataibaodao/jingmao/ec-stockmarket-foreigncapitalwithdraws-08192024053127.html

Briefings | | |   Economy/Resources Government/Politics

CNA: TSMC Breaks Ground on German Factory

Primary Taiwanese news agency Central News Agency (CNA) recently reported that Taiwan’s TSMC recently held a groundbreaking ceremony in Germany to commence construction of its first ever wafer fab on the European continent. German Prime Minister Olaf Scholz attended the ceremony and delivered a speech. EU Executive Committee Chairman Ursula von der Leyen also attended, saying that the development represented a true win-win situation.

Earlier, the EU approved Germany’s subsidy plan for TSMC’s factory construction. Last year, TSMC announced that it would set up a joint venture with Bosch, Infineon and NXP in Dresden, Germany to jointly invest in the European Semiconductor Manufacturing Company (ESMC), with a total investment of approximately 10 billion euros. Scholz said semiconductors were key to Germany’s industrial survival and climate goals, and stressed the importance of increasing production in Germany to make Europe less dependent on other regions in global supply chains.

Germany provided a five-billion-euro subsidy plan to TSMC’s wafer fab joint venture. This is the largest amount of state subsidy currently granted under the European Chips Act, and it is also Germany’s first subsidy program. TSMC funded 70 percent of the ESMC private investment. Nearly 2,000 ESMC employees will be recruited locally.

In order to assist factory construction, hundreds of TSMC engineers will be dispatched to Dresden in the next three to five years. TSMC has launched talent training projects with universities and local governments in Germany. German students will be invited to Taiwan for training at universities and TSMC training facilities.

Source: CNA, August 20, 2024
https://www.cna.com.tw/news/afe/202408200361.aspx

Briefings | | |   Geo-Strategic Trend Information/Technology

The Impact of China’s Consumption Tax Reform

According to a Decision reached during the Third Plenary Session of the 20th Central Committee of the Chinese Communist Party, China will “move the collection stage of the country’s consumption tax to later stages,” and will also “gradually  allocate revenue from consumption tax to local governments.” Chinese media outlet The Paper reported that this decision to “delay the collection stage of the consumption tax” is meant to shift the tax source and collection point from the place of production to the place of consumption, meaning that a great part of tax revenue will be collected in the jurisdiction of the end consumer.

This policy change will have two main impacts. First, the base price for the consumption tax will increase from the factory price to the wholesale or retail price, which means that the Chinese government will collect more revenue from consumption tax. Second, the tax source will shift from the place of production to the place of consumption, resulting in a decrease in tax revenue for major production provinces (e.g. Shanghai, Guizhou, Yunnan, Hubei, Hunan) and an increase in tax revenue for provinces with large populations and large amounts of consumption (e.g. Guangdong, Shandong, Henan, Zhejiang, Sichuan).

“Allocating to local governments” means that the central government of China will no longer be the sole beneficiary of such consumption taxes; consumption tax revenue will now be shared with local governments. The northeastern, central, and western regions of China are likely to receive greater consumption tax than the eastern regions.

Sources:
1. The Paper, July 19, 2024
https://www.thepaper.cn/newsDetail_forward_28110425
2. Radio Free Asia, July 22, 2024
https://www.rfa.org/mandarin/yataibaodao/jingmao/lu-china-third-plenum-tax-policy-07222024155434.html

Briefings | | |   Economy/Resources Government/Politics

Zhou Xiao’s Harrowing Ordeal: Torture at the Mental Hospital

Zhou Xiao is from Wuxi City, Jiangsu Province. In early May 2012, he used a VPN to bypass the Chinese Communist Party’s (CCP’s) Internet blockade and came across a documentary about the Tiananmen Square massacre, which included footage of the military opening fire on the people. His neighbors heard the loud voice of the video, and one of them reported him.

The police intimidated his family, insisting that Zhou be committed to a mental hospital. The police threatened to punish his family members if they didn’t cooperate. The police chose to have Zhou committed to a mental hospital because, if Zhou were instead reported through official channels as an anti-Communist, the local police would face repercussions for having not worked effectively to prevent anti-Communist sentiment in their locality. Meanwhile, the police would not suffer any consequences from someone merely being classified as mentally ill.

Zhou’s mother arranged to get a second-degree mental disability certificate for Zhou. He was taken twice to the Wuxi Mental Health Center, also known as Wuxi No. 7 People’s Hospital. The mental hospital was terrifying. Every day he felt like he was one of the walking dead — he would just take medication, eat, and sleep. He felt drowsy after his doses of medication and always wanted to sleep. He was confined tohis floor for four months. “Patients” at the hospital were never allowed to go outside. The first-level ward held four or five people in a small room, while the large ward held 20 to 30 people per room.

Zhou was tied up multiple times. He said “as soon as you show any resistance in your words, the doctor would say: ‘He’s having an episode, tie him up!’ The restraint would last for 12 hours, with all four limbs fixed to the bed.” He was also electroshocked five times. “That is called ECT electroconvulsive therapy, which is like rebooting the brain. A headband, like a tight crown, was placed on my head, and when the switch was flipped, I lost consciousness.”

During his time in the hospital, three people died in the ward – an old man died of illness, another person was beaten to death, and one disappeared.

“The orderlies were the lowest people from society, and their job was to beat people. The nurses were young but extremely cruel; they didn’t treat us like humans at all.”

The hospital repeatedly drew blood from young people, but not from the elderly. Zhou thought that they were doing organ matching, preparing for potential live organ harvesting.

Zhou managed to escape to Japan on April 17, 2019.

Source: Epoch Times, August 16, 2024
https://www.epochtimes.com/gb/24/8/16/n14312609.htm

Briefings | |

Half of China’s Local Government Bond Issuance in the First Seven Months of the Year Was to Pay Off Old Debt

On August 5th, Yicai (China Business Network) cited public data saying that, in the first seven months of this year, China’s local governments issued approximately 4.2 trillion yuan (US$ 590 billion) worth of bonds, a year-on-year decrease of about 16 percent. Among them, refinancing bonds totaled around 2 trillion yuan, primarily used to repay the principal of maturing government bonds or existing debt. This means local governments were essentially “borrowing new debt to repay old debt.” Additionally, 2.2 trillion yuan of new bonds were issued (i.e. bonds not used to pay off old debts), comprising 1.8 trillion yuan in new special bonds and 400 billion yuan in new general bonds.

Source: Lianhe Zaobao, August 8, 2024
https://www.zaobao.com.sg/realtime/china/story20240808-4443056

Briefings | | |   Economy/Resources

China’s Growing Influence in the Middle East

German newspaper Deutsche Welle published an article that discussed the reason behind China’s growing interest in the Middle East.

The article takes note of the differences between the United States and China’s approaches and roles in the region. Last year, under China’s mediation, Iran and Saudi Arabia restored diplomatic relations. The analysis examines why Chinese leadership has concentrated so much diplomatic energy on the Middle East, arguing that the geostrategic interests centered on oil acquisition have undergone a shift.

Fifty years ago, the US and Saudi Arabia reached a “petrodollar agreement” which established the US dollar as the international reserve currency. With the maturation and widespread use of shale oil extraction technology in the US, however “the region’s (Middle East) oil has become less important to the US.” While the US still imports oil from Saudi Arabia, the volume has declined to less than a third of what it was 22 years ago. Notably, the US has risen from being one of the largest oil importers to the third largest oil exporter.

In contrast, China is now Riyadh’s largest crude oil customer, buying over 20% of Saudi Arabia’s total output. China’s energy security is heavily dependent on the Middle East, and it is also the largest buyer of Iranian oil, accounting for 37% of Iran’s oil exports. China has not joined Western sanctions on the Iranian regime and its state-owned firms have capitalized on the absence of Western companies in the Iranian market.

Amid geopolitical tensions, China is increasingly interested in trading in its own currency rather than US dollars to purchase the coveted oil. Direct RMB settlement also makes sense for many countries in the region as China has surpassed the US as the largest trade partner.

The Deutsche Welle article says that “In the past decade, Beijing has cleverly expanded its influence, filling every vacuum left by Washington. But this also means increased vulnerability, as Middle East political stability aligns with China’s interests due to robust bilateral trade and energy needs. Unlike the US, China does not view Iran as an adversary, nor does it feel a special affinity towards Israel for moral or historical reasons, opening up new operational space for Beijing in the region.”

Source: Deutsche Welle, August 19, 2024
https://p.dw.com/p/4jde8

Briefings | | |   Geo-Strategic Trend

China’s Fiscal Woes: Local Governments Tighten Belts as Land Sales Revenues Plunge

The Chinese government is facing a fiscal crisis as plummeting land sales revenue has severely strained local government budgets. To cope with this, local governments across China have implemented austerity measures, including limiting air conditioning temperatures, requiring public officials to dine in government cafeterias, and restricting use of official cars.

These “belt-tightening” policies have also led to widespread pay cuts for civil servants and other public sector workers. Public sector employees report salary reductions of 20-30%, with the most developed regions seeing the biggest cuts. Annual bonuses have also been eliminated in many cases. This is seen as the first wave, with pay cuts expected to spread to state-owned enterprises and other institutions.

Experts attribute this fiscal crunch to an over-reliance on land sales revenue by local governments, which has dried up due to the property market slump. Land sales revenue plummeted 55.7% in the first half of 2024 compared to 2019. Tax revenue has also been under pressure due to declining corporate profits.

To address this, policymakers have promised to reform the fiscal system by increasing the share of tax revenue for local governments and expanding their taxing powers, such as by potentially shifting the consumption tax to the local level. However, experts warn that this may incentivize local governments to promote polluting or unhealthy industries to boost revenues. Tackling local government debt will also be crucial to putting their finances on a sustainable footing.

More directly, some suggest that China should raise the share of fiscal revenue to GDP, which at 26% is lower than advanced economies and even other developing countries. Implementing a property tax is seen as one option to boost local government revenues.

Source: BBC, August 19, 2024
https://www.bbc.com/zhongwen/simp/chinese-news-69274197

Briefings | | |   Economy/Resources