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In the Economic Downturn, Local Governments Increase Tax and Fines

According to Xinhua, the Ministry of Finance recently released statistics showing that China’s national revenue increased by 8.8 percent in the first 6 months of 2014, as compared to the same period in 2013. Of the national revenue increase, tax revenue grew by 8.5 percent and non-tax revenue by 11.1 percent. The national GDP increased by 7.4 percent. 

According to Zhou Tianyong, an official from the Chinese Communist Party Central Party School, the tax rate was 36 percent in 2013, but was increased to 44 percent in the first 6 months of 2014, an increase of 8 percentage points. This increase occurred in spite of slower GDP growth, slower consumption and investment growth, and a negative growth in exports. 
Zhou asked, “What does this tell us? Local governments are increasing taxes and fees right in the middle of the economic downturn. It is, in fact, a fiscal mechanism of local governments based on fines and tax increases.” 
 Source: Xinhua, July 30, 2014 
http://www.js.xinhuanet.com/2014-07/30/c_1111858664.htm
Briefings | | |   Economy/Resources

Tough Issues for Balance Sheets of Local Governments

In a recent article in China Finance, which Xinhua then reprinted, Ma Jun, the chief economist for China’s central bank, the Bank of China, wrote about the balance sheets of local governments and related issues. 

In their preliminary work, most of the local governments completed the balance sheets in accordance with generally accepted international principles. Yet, the process also presented problems unique to China in terms of the scope, valuation methods, and accounting standards. Ma stated that in dealing with these issues, one should first consider the major objective for compiling the balance sheets, which is to help evaluate the debt risks that the local governments face and their future ability to repay these debts. 
Specifically, there are three major questions. First, should State-own enterprises be included in the balance sheets and how? Second, should special assets be included in the balance sheets? Special assets include debt-free public infrastructure (such as roads, bridges, and parks), minerals and other natural resources, and cultural assets. Third, should the balance sheets include pension liabilities? 
Source: China Finance reprinted by Xinhua, July 18, 2014 
http://news.xinhuanet.com/fortune/2014-07/18/c_126768371.htm
Briefings | | |   Economy/Resources

In the Second Half, China’s Economy Faces Three Big Risks

According to Economic Information Daily [under Xinhua], in the second half, China’s economic performance needs to be alert to the following three risks, as the economy is still facing downward pressure. The first risk is "deflation" in the industrial and manufacturing sectors. As of June this year, China’s PPI showed 28 months of continuous negative growth. The second risk is increased pressure due to the policy adjustments in the real estate market. The adjustments in the real estate market are expected to continue into the second half. The third risk is the number of defaults in market debt. 

Source: Xinhua, July 22, 2014 
http://news.xinhuanet.com/fortune/2014-07/22/c_1111727356.htm
Briefings | | |   Economy/Resources

China’s Junk Bond Crisis Is Looming

On July 22, the Chinese media wallstreetcn.com reported that, with the frequent defaults on debt in China, 2014 is becoming the year of defaults for the Chinese financial market. 

It has been 26 months since June 2012, when the Chinese version of junk bonds (bonds issued by mid and small businesses) were first introduced in the capital market. With a typical two year maturity, 46 junk bonds, with a total value of 4.143 billion yuan (US$670 million) and an average yield of 8.79 percent, are about to reach maturity. 
In April of this year, "13 Zhong Sen" was about to default on 180 million yuan (US$29.05 million) of its interest payments when its guarantor stepped in to commit to making the payments. When it was unable to make payments on its bonds, Zhejiang Huatesi Polymer Technical Co Ltd., the issuer of “12 Huatesi” went bankrupt. The court ordered it to restructure. 
In July, “12 Kim Tae” failed to meet its July 10 obligation to make its principal and interest payments. The issuer of another junk bond “12 Jin BBDO,” with a nne percent yield, is expected to default on the payments of principal and interest due on July 28. Its State-owned guarantor, Tianjin Hi-tech Investment Management Co., Ltd., is in the middle of its own crisis. In 2013, it had issued a guarantee for a total of 7.592 billion yuan (US$1.23 billion), which was 13 times the amount of its security deposits at the bank. 
Source: wallstreetcon.com, July 22, 2014 
http://wallstreetcn.com/node/100649 http://wallstreetcn.com/node/100657
Briefings | | |   Economy/Resources

The State Council Approved the Pearl River West River Economic Belt Development Plan

China Review News carried an article that was originally published in People’s Daily about the development plan for the “Pearl River West River Economic Belt.” According to the article, the Guangdong Development and Reform Commission has received approval from the State Council to proceed with the development plan. The plan makes eco-environmental protection a prerequisite, while focusing on the development of infrastructure, urbanization, and public services in the Pearl River and West River regions. According to the article, the plan will help to increase the effort of environmental protection while promoting economic exchanges in the inland region. According to the approval that the State Council issued, the municipal governments of Guangdong and Guangxi provinces will collaborate in carrying out the execution of the development plan. The Guangdong Development and Reform Commission will also be responsible for supervision and inspection.

Source: China Review News, July 20, 2014
http://hk.crntt.com/doc/1032/9/5/8/103295866.html?coluid=151&kindid=11511&docid=103295866&mdate=0720115937

Briefings | | |   Economy/Resources

Local Governments Are Increasing Their Investments

China Enterprise News reported that, in spite of the central government’s efforts, local governments are increasing their expenditures and banks are funding the local governments through financial management products. 

According to the National Bureau of Statistics, none of the provinces, except Anhui, reached their GDP goals in the first quarter of 2014. Heilongjiang Province had the lowest GDP growth rate. At 4.1 percent the rate was less than half of the estimate. As of the present, the provinces of Guangdong, Hainan, Hebei, Heilongjiang, and Guizhou, as well as Tianjin City, have announced grand investment plans. When added together, local government investments total more than 10 trillion yuan. 
With few local projects eligible for central government funding, the sources of funds for these grand investment plans remains to be resolved. Tight bank credit and a sluggish land market do not offer any hope. Even the recent pilot program that allows local governments to issue and service their own bonds cannot cover the gap. The 14 billion yuan in bonds that Guangdong plans to issue is miniscule compared to the investment plan of 3.67 trillion yuan it announced on April 9, 2014. 
However, according to sources from banks, the banks have been funneling funds to local governments through financial management products such as loan trusts. For the local governments, the cost of these funds is higher than regular bank loans. However, the approval process is not subject to policy changes and, once approved, the proceeds are transferred promptly to the local governments. 
Source: China Enterprise News reprinted by Xinhua, July 15, 2014 
http://jjckb.xinhuanet.com/invest/2014-07/15/content_512790.htm
Briefings | | |   Economy/Resources

Government Think Tank: China Faces Extended Slow Growth

Cai Fang, Director of the Institute of Population and Labor Economics under the Chinese Academy of Social Sciences, published to rebuttal to the prediction that the bubble of the Chinese economy may burst. He also admitted that China’s economy is in for a period of slow growth. 

Cai wrote that, over the years, there have been significant changes in the demographic structure of China’s population. After the growth rate of the population between 15 and 59 peaked in 2010, it then slowed down and has since fallen. On the other hand, the dependency ratio is increasing. This fundamental demographic change has led to a general shortage of workers, persistent wage increases, a substantial surge in manufacturing costs, and the disappearance of China’s traditional competitive advantage. More importantly, because there is no unlimited supply of labor, the returns on capital have been decreasing. The returns on investment have fallen considerably. The gradual reduction of surplus agricultural labor will also slow the labor reallocation of resources, thereby reducing any improvement in productivity. Therefore, China is expected to experience a period of slow growth in its economy. 
Source: Qiushi, July 15, 2014 
http://www.qstheory.cn/dukan/qs/2014-07/15/c_1111595037.htm
Briefings | | |   Economy/Resources

Tencent: Seven Ways to Transfer Funds Out of China

According to Tencent Financial, the wealthy in China use a number of means to transfer large amounts of money out of China.

Underground banks conduct the largest share of this type of business. When funds are deposited into an account in an underground bank in China, the client can withdraw the foreign equivalent from an overseas account at the same bank. A second method is currency exchange agents. They secure enough people who will lend their residence cards to exchange up to $50,000 per residence card. Therefore, for one large transfer, it may take days or even weeks to locate enough people.

Other methods include import and export trading companies that engage in money laundering as a side business. Gambling in Macao provides another channel to transfer funds out of China. Some people set up an offshore company and transfer funds little by little through an intermediary. This approach takes a long time and requires expertise in international accounting principles. 
A lesser known method is to purchase U.S. real estate investment funds. Then at the end of the investment period, the funds remain in the U.S. Some people in Southern China purchase insurance policies from the Hong Kong market. The high premium insurance allows the policy holder to cancel and to change the beneficiary. Once the insured or the beneficiary arrives in Hong Kong, they cancel the insurance and receive a refund of the premium. 
Source: Tencent Financial, July 10, 2014 
http://finance.qq.com/a/20140710/013803.htm
Briefings | | |   Economy/Resources