What Really Scares China’s Leaders

Trump’s “Double Whammy” Spreads Fear in Beijing

There has been a lot of nervous speculation in Beijing over the “single whammy,” Trump’s tax plan which reduces corporate taxes in the US, and makes it much easier for international companies to “repatriate” capital to the US. After this “single whammy,” the US suddenly seems a more attractive place to invest — both for domestic US companies and for foreign companies, such as those in China.

Chinese analysts sometimes refer to Trump’s “single whammy” as “the gray rhino.” A gray rhino is a genuine problem which smart people should see coming, but which bureaucracies often find it difficult to adequately deal with.

Gray Rhino

An official involved in Beijing’s deliberations called Washington’s tax plan a “gray rhino” an obvious danger in China’s economy that shouldn’t be ignored. “We’ll likely have some tough battles in the first quarter,” the official said. __ WSJ quoted in Mishtalk

Why is the tax plan a threat to China? Obviously anything that makes it easier for businesses to operate profitably inside the world’s largest and most competitive marketplace is good for US business and potentially bad for business in countries which compete directly with the US for investment.

What is the Double Whammy?

… officials are putting in place a contingency plan to combat consequences for China of U.S. tax changes as well as expected interest-rate increases by the Federal Reserve, according to people with knowledge of the matter. What they fear is a double whammy sapping money out of China by making the U.S. a more attractive place to invest. __ Lingling Wei

According to the lovely Lingling, China’s economy is presently at a precarious point, with anticipated slowdowns in property and infrastructure investments, compounded by steeply rising debt — much of it bad debt never to be repaid.

In this case, the known but overlooked threat has been a disconcerting buildup of debt in China’s banks and firms via its shadow banking system. Over the past few years, Beijing has made a concerted effort to lessen leverage and excessive speculation in its banking system. But as the second largest economy in the world, this can lead to ugly spillovers beyond China. __ China More Fragile Than Commonly Acknowledged

Debt piled on top of debt weighs an economy down. If the business climate is further cooled down by high tax burdens and unfair regulations and borrowing practises, trouble is coming to that nation’s real economy — as opposed to its “shadow economy.”

World Bank figures for 2016 show that total tax burden on Chinese businesses are among the highest of major economies: 68% of profits, compared with 44% in the U.S. and 40.6% on average world-wide. The figures include national and local income taxes, value-added or sales taxes and any mandatory employer contributions for welfare and social security. __ Lingling Wei

We have seen in past postings here that GDP growth in China’s economy has been closer to 3% annually than to the 6 or 7% claimed by Beijing. That anemic growth rate, given China’s persistent high levels of poverty for hundreds of millions of its people, may grow even worse if significant amounts of international capital swing away from the dragon, back to more credit-worthy business environments.

China cannot afford to lose any more of its hard-won momentum. Yet China’s economy faces threats on every side. This is only to be expected in an economy that still contains too many “corrupt command” aspects, and not enough “market evolution” discipline.

China’s Small Companies at Risk

China’s small companies provide most of the overall employment inside China, yet most of the tax breaks and favorable loan conditions go to the huge and unwieldy state owned enterprises, and to big tech companies with insider connections. The small company “natives” are growing restless.

Smaller, private businesses provide most of the jobs, but struggle to get access to tax breaks and lower interest loans, which generally go to larger state-owned companies and tech firms.

… The overall tax burden “is a crisis for enterprises,” said Mr. Zhou of the Zhejiang private business association, which represents over 100 private companies in eastern China. “I’ve heard a lot of complaints from small to medium-size enterprises. It’s really very difficult for them to survive.” __ http://www.followcn.com/us/2017/05/02/china-fears-trump-tax-cuts/

If China’s small businesses go down under a flood of taxes, red tape, and government corruption, the outlook for China’s economy as a whole will grow even more dim.

More on Gray Rhino Concept


A little background on Lingling Wei, China correspondent for the WSJ:

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One Response to What Really Scares China’s Leaders

  1. 罗臻 says:

    The Logic of Strategy: Yuan Devaluation and the Road to Trade War

    The U.S. wants to contain China. China’s greatest vulnerability is its economy. If China responds to U.S. provocation on the economy, China loses even more. It’s a matter of flicking the first domino, and Trump looks ready to flick two (taxes and tariffs) and possibly a third (DPRK related).

    As for small businesses, the Chinese press has no shortage of horror stories the past few years. This headline, from 2014 sums it up: SMEs Wonder Not How to Live, But How To Die As Borrowing Costs Spike.

    If China follows through on the deleveraging talk there will be a replay of the 2014 and 2015 trouble for small business, if not a crisis. Every time they try to slow credit growth they risk a full blown recession.

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