Economic overview
The macroeconomic information coming from China is worrying. Bad debts from government, local governments and businesses are steadily increasing. Power plants are running out of fuel. The real estate market is in collapse. The Chinese Academy of Sciences has just lowered its economic growth forecasts for next year to 5.2%. It is difficult to blame the pandemic for all this: China fared much better than other countries with Covid-19 and in 2020 it was the only large economy to record GDP growth.
The most disturbing alarm was raised by the Evergrande crisis, which has not yet recovered. It is the largest real estate development company in China; its obligations to banks, bondholders, trust companies, homebuyers, suppliers and contractors amount to more than $ 300 billion; or 2% of the Chinese GDP. Evergrande represents a kind of patient on whom to carry out the vivisection of the Chinese economic model. But the gargantuan growth of this company, first, and subsequently its problems, were not caused by factors related to the market, but by the politics of Beijing.
During the entire period of the export boom, Chinese household income grew much slower than the country’s economy. However, consumption has not increased and the surpluses generated have been reintroduced into the economic system through capital goods or used to increase GDP.
When at some point Beijing decided to change its strategy, the system proved recalcitrant. Consumers could not be pushed to spend their money with the intensity predicted by planners, as low wages and a weak social system did not allow it. Banks have granted an increasing number of loans aimed not at relaunching consumption or developing new branches of production, but intended to refinance existing debt and to maintain the economic situation. Thus the investments, once again, did not bring any profit while the company profitability collapsed to 0.7%. (from 2.8% before the crisis). In light of all this and despite GDP growth, it is justified to speak of economic stagnation for China.
Main sectors of industry
The potential of the “Chinese primary sector” is impressive: of the 1.3 billion Chinese citizens, more than 900 million live in rural areas. China currently produces 70% more than the entire agricultural production of the European Union, 150% more than that of India and 205% more than that of the United States.
Agriculture accounts for about 15% of Chinese GDP and is growing on average by 8% a year. While the Chinese population and average calorie consumption continue to grow, China has suffered a severe loss of arable land in the last 20 years, mainly due to desertification and other environmental problems. As a result, China quickly went from being a net exporter of agricultural products to becoming an importer of increasing quantities of grains and other products.
Chinese agricultural technology is improving, but overall efficiency continues to lag far behind the standards of more developed countries. The Chinese authorities are making great efforts and investing heavily in the development of agricultural techniques and technologies. To achieve food self-sufficiency (or in any case approach it), China is forced to significantly and rapidly increase the use of biotechnology.
The recent growth of the “Chinese primary sector”, therefore, is not only quantitative but above all qualitative. Such growth leads to the creation of huge opportunities for foreign investors.
Some of these opportunities were discussed by the representatives of Italian and Chinese research institutes, universities and companies during a bilateral forum held at the Chinese Academy of Agricultural Sciences in Beijing on March 18th. The conclusions of this event can be summarized as follows:
– the “Chinese primary sector” is growing at a rate equal to that of the Chinese economy as a whole, and some areas in particular (eg fertilizers, wines, water efficiency) are experiencing an even more intense pace of development;
the Chinese government is making major efforts in the area of food safety and, moreover, the quality of food is receiving increasing attention from the authorities;
– Italian companies are equipped with state-of-the-art technology in both these sectors: food safety and quality;
– Italian companies and institutions have a strong interest in selling “Made in Italy” food products and technologies abroad;
– the attitude of Chinese consumers towards Italian food products can be defined in terms of curiosity rather than actual commercial interest. However, commercial opportunities for Italian food companies already exist, especially with reference to the sale and development of technologies and machinery, in particular those relating to food safety and quality. Several Italian companies already operate with excellent results in China, selling, developing and producing machinery in the agricultural and livestock fields.
Taxation for businesses in China
Corporate Income Tax
Corporate income tax is calculated on the net income of the fiscal year after deducting reasonable costs and losses of the business. It is defined on an annual basis, but is often paid quarterly with adjustments for repayment or for carry forward in the following year. The final calculation is based on the year-end tax return.
There is a single rate for all companies in China, both foreign and Chinese, and it is 25%. There are tax incentives for companies operating in high technology or advanced technologies.
Value-added tax
All companies and individuals involved in the sale of goods, the provision of work, repairs, replacement services, or the importation of goods into China are subject to VAT.
There are some exceptions, including agricultural items prepared and sold by agricultural producers, medicines and contraceptive instruments, ancient books, import of instrumentation and equipment for scientific research, experimentation and education, import of materials and equipment from foreign governments. and international organizations and articles imported directly from organizations and intended for the handicapped.
The VAT rate for ordinary taxpayers is usually 17%, while for some types of products it is 13%. For taxpayers who deal with taxable goods or services at different rates, sales at different rates will be calculated separately. If sales are not accounted for separately, the higher rate will be applied.
Non-commercial companies that typically do not conduct taxable business, or commercial companies that have a relatively small turnover, can opt for the status of a small VAT payer. The current VAT rate for small taxpayers is 3%.
Investing in China
The Chinese market is becoming a Hamletic dilemma for investors. To invest in China or not to invest in China? If you look at the performance of the last year, the 70% rise in the stock market suggests a missed opportunity. This especially for those who have not entered the full pandemic. But the new market rules imposed by the Beijing government and the Didi case suggest a slower future for the country’s most promising companies.
For BlackRock, the world’s largest manager, there is no question: China is the market to be in. So much so that the American company has just closed the collection of its first Chinese mutual fund at 6.6 billion yuan (about 1 billion dollars). For George Soros, a great old American investor with the Soros Fund as well as founder and adviser of the Quantum Group, the choice of BlackRock is a nefarious one and a tragic mistake that can damage customers and the US economy. Which side to be on?
The divergent views of two of the world’s most influential American savings managers mirror the dilemma over Asia’s largest economy. On the one hand, the Chinese government has made it easier for foreign investors to invest in the country’s shares. On the other hand, it is also imposing restrictive measures on companies and clashes with the United States over everything. Starting from cyber security to human rights violations.
The new Chinese government rules for the country’s companies lead to a more sustainable capitalism. This is in line with what is happening in Europe and the USA. The signal of an ongoing skin change is frightening the markets at the moment. According to Comgest’s analysis, the market has overreacted to recent Chinese regulations and many of the new regulations plus the expected ones are expected to have limited impact.
The best way to mitigate the effects of the new rules, according to Comgest, is to use an investment approach that includes the integration of ESG factors in order to contain the risk. According to an analysis by Raiffeisen Capital Management, the slowdown in the Chinese recovery and the reforms in Beijing have dented investor confidence. The Chinese government’s fiscal and monetary support policies should create a favorable environment for the entire emerging market sector in the long term.