Provincial rivals

The wealthiest local government is…


Engine of reform: Shenzhen

“China can learn a lesson or two from US misjudgements and Trump’s shortsightedness,” reckons the China Daily. But one area where the state-backed newspaper admits the new US president might be onto something is tax.

The Trump administration wants to halve corporate tax rates and persuade US companies to bring their manufacturing operations back onshore. In China’s case, there has been growing pressure from business leaders to reduce corporate tax burdens too and prevent Chinese companies from repeating the US experience that in past decades saw its manufacturers quit the country for cheaper alternatives abroad.

As we wrote in WiC353, 90% of Chinese taxes are paid by enterprises and only 10% by individuals. Mainland-based firms are also burdened by many non-tax ‘fees’ (up to 13% of revenues), which pay for programmes like urban construction, education and flood control at the local government level.

Since 2013, the central government has scrapped 496 types of fee while local governments have abolished 600 more. However, CCTV says the main problem is that local government charges are still arbitrarily applied. The broadcaster says the State Council is now drawing up a clear-cut list of allowable fees and will dispatch audit and inspection teams to different provinces to make sure they stick to it.

This is bad news for some of the more cash-strapped municipalities, which have already lost revenue thanks to the recent switch from business taxes to VAT. Whereas 100% of business taxes were paid to local governments, 70% of VAT goes to central coffers, although this figure is being adjusted to 50% over the next two to three years.

In response the central government is providing more subsidies to struggling, debt-laden provinces. While undoubtedly welcome, the support is a double-edged sword, since increasing financial control gives Beijing far more leverage to make sure supply-side reforms are implemented at ailing state-owned firms (which local bureaucrats often have a vested interest in propping up).

The provinces’ 2016 public revenue figures demonstrate the problem very clearly. Nationally, the year-on-year growth of provincial tax revenues fell from 9.4% in 2015 to just 4.2% in 2016 (largely because of the transition to VAT).

Unsurprisingly, the provinces struggling to diversify away from a reliance on heavy industries rank worst in terms of tax take. The bottom two (Shanxi and Heilongjiang) both recorded negative growth in their public revenue figures – Shanxi’s the worst on -5.2%.

At the other end of the scale was Tibet, up 17.4% in tax take – although its 2016 revenue increase comes off a very low base of less than Rmb100 billion. Nevertheless, local officials have been quick to point out that the jump was not due to a greater tax burden but to higher economic growth stemming from business services, transportation and IT industries.

Guangdong is singled out by newspaper CBN as a star performer. The province saw public revenue rise 10.9% in 2016, topping Rmb1 trillion ($145.2 billion) for the first time. Feng Qiaobin from the China National School of Administration tells CBN that Guangdong’s success is the result of structural reforms, which have pushed its industries up the value chain. In 2016, for instance, production of industrial robots rose 45.2% and electric car production 76.3%.

Likewise, Shanghai’s tax revenues rose 16.1% to Rmb640.6 billion, overtaking Shandong (though still someway behind second-place Jiangsu on Rmb812 billion).

The figures also show how the six eastern seaboard provinces have increased their economic sway, despite government efforts to diversify the economy to the nation’s west and central areas. They now account for 47.1% of the tax total, up 1.3 percentage points compared to 2015.

Shanxi’s troubles also show few signs of abating. Over the next three to five years, the province has been told to cut 100 million tonnes of coal production per annum (mtpa) from a 709 mtpa national total.

Many believe the government is preparing to widen its supply-side reforms to the aluminium sector. Here the biggest impact will be on Shandong province, China’s largest producer of the metal, and now fourth in the annual public revenue rankings.

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