Financial system of China

THE MINISTRY OF EDUCATION AND SCIENCE OF UKRAINE 

 

"KYIV NATIONAL ECONOMIC UNIVERSITY 
named after VADYM HETMAN"

 

 
International finance department 
 

 
 
Individual work  
"Financial system of China" 
 
 
 

 

Kasyanenko Sergey 
5 group 4 course  
 

 

 

Kyiv 2014

 

China, officially the People's Republic of China (PRC), is a sovereign state located in East Asia. It is the world's most populous country.The PRC is a single-party state governed by the Communist Party, with its seat of government in the capital city of Beijing. It exercises jurisdiction over 22 provinces, five autonomous regions, four direct-controlled municipalities (Beijing, Tianjin,Shanghai, and Chongqing), and two mostly self-governing special administrative regions (Hong Kong and Macau).

Total area: 9,596,960 sq km (4th place, comparison to the world), land: 9,326,410 sq km; water: 270,550 sq km

Total land boundaries - 22,457 km. Border countries: Afghanistan 91 km, Bhutan 477 km, Burma 2,129 km, India 2,659 km, Kazakhstan 1,765 km, North Korea 1,352 km, Kyrgyzstan 1,063 km, Laos 475 km, Mongolia 4,630 km, Nepal 1,389 km, Pakistan 438 km, Russia (northeast) 4,139 km, Russia (northwest) 40 km, Tajikistan 477 km, Vietnam 1,297 km

Regional borders : Hong Kong 33 km, Macau 3 km

Population: 1,355,692,576 (July 2014 est.) (1st country comparison to the world)

Total median age – 36,7 years(male – 35,8;female – 37,5)

Population growth rate:  0.44% Total fertility rate: 1.55 children born/woman
Life expectancy at birth: total population: 75.15 years (male: 73.09 years female: 77.43 years) Health expenditures: 5.2% of GDP
Literacy: total population: 95.1% ( male: 97.5% ;female: 92.7%) GDP (purchasing power parity): $13.39 trillion dollars (2013 est.) Because China's exchange rate is determine by fiat, rather than by market forces, the official exchange rate measure of GDP is not an accurate measure of China's output; GDP at the official exchange rate substantially understates the actual level of China's output vis-a-vis the rest of the world; in China's situation, GDP at purchasing power parity provides the best measure for comparing output across countries. GDP - per capita (PPP): $9,800 dollars(2013 est.) Investment in fixed capital: 46% of GDP Investment in inventories: 1.2% of GDP GDP - composition, by sector of origin: agriculture: 10% industry: 43.9% services: 46.1% Labor force: 797.6 million (1st country comparison to the world) By the end of 2012, China's population at working age (15-64 years) was 1.0040 billion (2013 est.) Unemployment: 4,1 % Labor force - by occupation: agriculture: 33.6% industry: 30.3% services: 36.1%   In 2013 year the amount of export was 2, 21 trillion, import – 1.95 trillion. The most popular things for export were electrical and other machinery, including data processing equipment, apparel, radio telephone handsets, textiles, integrated circuits, when electrical and other machinery, oil and mineral fuels; nuclear reactor, boiler, and machinery components; optical and medical equipment, metal ores, motor vehicles; soybeans were imported Debt - external: $863.2 billion (31 December 2013 est.) Stock of direct foreign investment - at home: $1.344 trillion Stock of direct foreign investment - abroad: $541 trillion

The socialist market economy of China is the world's second largest economy by nominal GDP, and the world's largest economy by purchasing power parity according to a 2014 estimate from IMF, though the accuracy of this conclusion is controversial. It is the world's fastest-growing major economy, with growth rates averaging 10% over the past 30 years.

China is a global hub for manufacturing, and is the largest manufacturing economy in the world as well as the largest exporter of goods in the world. China is also the world's fastest growing consumer market and second largest importer of goods.

China is the largest trading nation in the world and plays a vital role in international trade, and has increasingly engaged in trade organizations and treaties in recent years. China became a member of the World Trade Organization in 2001, and concluded a trade agreement with the ASEAN nations in 2010. China also has free trade agreements with several nations, including Switzerland and Pakistan. China has also been criticized for unfair trade practices, including artificial currency devaluation, intellectual property theft, protectionism, and local favoritism.

On a per capita income basis, China ranked 82nd by nominal GDP and 89th by GDP (PPP) in 2013, according to the International Monetary Fund (IMF). The provinces in the coastal regions of China tend to be more industrialized, while regions in the hinterland are less developed. As China's economic importance has grown, so has attention to the structure and health of the economy. Xi Jinping’s Chinese Dream is described as achieving the “Two 100s”: the material goal of China becoming a “moderately well-off society” by 2021, the 100th anniversary of the Chinese Communist Party, and the modernization goal of China becoming a fully developed nation by 2049, the 100th anniversary of the founding of the People’s Republic.

The internationalization of the Chinese economy continues to affect the standardized economic forecast officially launched in China by the Purchasing Managers Index in 2005. At the start of the 2010s, China remained the sole Asian nation to have a GDP (PPP) above the $10-trillion mark (along with the United States and the European Union).

Since 1980, China has established special economic zones that spread successful economic experiences to other areas. The development progress of China's infrastructure is documented in a 2009 report by KPMG

Budget system

The budget system of the PRC consists of five levels:

1) Central Government;

2) Provinces, autonomous regions and municipalities, which are in direct subordination to the Central Government;

3) Cities, which are composed of districts and autonomous prefectures;

4) Counties, autonomous counties, cities in which no division into districts and municipal areas;

5) Village, national villages and small towns.

The village, national village and small towns, where conditions do not allow to set the budget, may, by decision of the authorities of the respective provinces, autonomous regions or municipalities that are in the direct subordinate to the Central Government, temporarily set the budget.

Budgets of different levels should maintain a balance between income and expenditure.

Chinese Congress of people's representatives (ZZNP) checks the draft Central and local budgets, reports on the implementation of the Central and local budgets, approve State budget reports on the implementation of the central budget, modifies or cancels the wrongful decision of the Standing Committee (ZZNP) on the budget and the final report.

Revenues include:

Ø taxes;

Ø cash proceeds from State assets;

Ø the monetary proceeds from a particular article;

Ø cash flow from other sources.

Expenditures include:

Ø costs to develop the economy;

Ø spending on development projects in the fields of education, science, culture and health;

Ø costs of public administration;

Ø spending on national defence;

Ø subsidy;

Ø other expenses.

 

The decision to use the revenue of the State budget is accepted after careful analysis and drawing up a clear plan. The establishment of special funds must be approved by the State Council.

Budgeting Governments, departments and units at various levels is due to the State Council deadlines.

The State budget and the local budgets of different levels should consist of taking into account the real implementation of budget last year and estimates of income and expenses next year. Budget of the Central Government should be deficit-free.

Local budgets of different levels should be based on the principle not exceeding expenses over revenues, maintaining the balance between income and expenditure and without the deficit.

Preparation of budgetary revenues at various levels should correspond to the gross national product growth.

Execution of local budgets of different levels should be organized by the local authorities to appropriate levels. For specific work meet the financial departments of local authorities.

According to the State Council approved the rules of distribution of income tax revenues in China are divided into:

Ø National taxes:

1) value added tax on imports (VAT)

2) excises

3) duty

 

Ø Local taxes:

1) tax on income of individuals	9) tax on vehicles and ships;
2) tax for the use of the lands of cities and urban areas	10) charges for the use of the registration numbers of vehicles and ships;
3) tax on rented arable land	11) State duty on the sale of real estate;
4) tax on real estate investment	12) tax on the slaughter of cattle;
5) tax on transfer of real estate	13) tax on banquets;
6) tax to homeowners	14) agricultural tax
7) tax on urban property	15) tax on the owners of the animals.
8) tax on inheritance

 

Ø General taxes (shared between the Central Government and local government bodies).

1) value added tax (VAT);

2) entrepreneurial income tax;

3) income tax;

4) fee for the use of natural resources;

5) tax in support of urban construction;

6) stamp duty.

 

Value added tax (within the country): 75% of the budget of the Central Government, the 25% of local management.

There being considerable downward pressure on our economy in the first half of 2013, the growth in government revenue slowed, falling short of the figure forecasted at the beginning of the year. As the economic situation improved in the second half of the year, the increase of revenue and in particular tax revenue picked up. That, coupled with some one-time factors contributing to revenue increases, raised revenue for the year slightly above the figure budgeted in early 2013. National revenue totaled 12.91429 trillion yuan, an increase of 10.1% over 2012 (as below). Adding the 100 billion yuan from the Central Budget Stabilization Fund and 14.974 billion yuan from local government finances, utilized revenue totaled 13.029264 trillion yuan. National expenditure amounted to 13.974426 trillion yuan, up 10.9%. Including the 116.438 billion yuan used to replenish the Central Budget Stabilization Fund and the 138.4 billion yuan used to repay the principal on local government bonds, expenditure totaled 14.229264 trillion yuan. Total national expenditure therefore exceeded total national revenue by 1.2 trillion yuan.

Central government revenue amounted to 6.017377 trillion yuan, 100.2% of the budgeted figure and an increase of 7.1%. Adding the 100 billion yuan contributed by the Central Budget Stabilization Fund, total revenue used by the central government came to 6.117377 trillion yuan. Central government expenditure amounted to 6.850939 trillion yuan, 98.5% of the budgeted figure and an increase of 6.8%. (This includes 2.047175 trillion yuan in central government spending, a rise of 9.1% year on year and 101.3% of the budgeted figure. This was mainly because we reduced the subsidies for miscellaneous local projects during execution of the budget and part of the central government transfer payments to local governments for capital construction investment and sales tax revenue on motor vehicles were reallocated for increased investment in railways, with a corresponding increase of expenditure at the central level.) Adding the 116.438 billion yuan used to replenish the Central Budget Stabilization Fund, central government expenditure totaled 6.967377 trillion yuan. Total expenditure of the central government exceeded total revenue, leaving a deficit of 850 billion yuan, the same as the budgeted figure. The outstanding balance on government bonds in the central budget was 8.675046 trillion yuan at the end of 2013, which was kept within the budgeted limit of 9.120835 trillion yuan for the year. The Central Budget Stabilization Fund had a balance of 148.308 billion yuan.

The revenue of local governments came to 6.896913 trillion yuan, an increase of 12.9%. Adding the 4.803764 trillion yuan in tax rebates and transfer payments from the central government to local governments, plus the 14.974 billion yuan transferred to the central government from local governments, local government revenue totaled 11.715651 trillion yuan. Local government expenditure amounted to 11.927251 trillion yuan, up 11.3%. Adding the 138.4 billion yuan used to repay the principal on local government bonds, local government expenditure totaled 12.065651 trillion yuan. Total expenditure of local governments exceeded total revenue by 350 billion yuan.

2014 is the first year for us to thoroughly put into practice the guiding principles of the Third Plenary Session of the Eighteenth CPC Central Committee and to comprehensively deepen reforms. This is also an important year for meeting the targets set in the Twelfth Five-Year Plan. Well formulated 2014 budgets enable public finance to play a key role, and this has important implications for carrying out all the reform plans of the Party Central Committee and the State Council, accelerating the transformation of government functions, letting the market play a decisive role in allocating resources, and promoting modernization of the country's governance system and capability.

This year, the economic development environment in China remain complex. Fiscally, there is be a serious imbalance between government revenue and expenditure. As the country's potential economic growth slows down and we advance reform of the tax system, influencing factors such as those will likely lead to the slowdown in revenue growth. In addition, initiatives to deepen reform in an all-around way, adjust and optimize the economic structure, and promote development of social programs will require even more investment. Given the fiscal and economic situation, in doing the public finance work and preparing the budgets for 2014, we need to fully implement the decisions and plans of the Party Central Committee and the State Council, make progress while ensuring stability, carry out reforms and innovations, and continue to implement a proactive fiscal policy. We need to deepen reform of the fiscal and tax systems and advance reform in relevant sectors so that reform of the fiscal and tax systems will underpin the country's overall reform efforts, accelerate the change of the growth model, and raise the quality and returns of economic growth. We need to optimize the structure of government expenditures, make good use of both existing and additional monetary and financial resources in order to help improve the basic public services system, promote development of social programs, and emphatically improve the people's well-being. We need to tighten up financial discipline and strictly limit spending on official overseas visits, official vehicles, and official hospitality, as well as other regular expenditures. We also need to make budgetary work more open and transparent, strengthen local government debt management, and promote sustained, sound economic growth and social harmony and stability.

China would double its military spending to $238.2 billion by 2015, surpassing the combined defence budgets of India, Japan and 10 other countries in the Asia-Pacific a global research group has claimed, prompting defence scholars here to dismiss the report as an attempt to play up the country's military threat. 
 
China's military spending will reach $238.2 billion in 2015 compared with 119.8 billion in 2011.

Tax System

The Chinese tax administration has at the top the Ministry of Finance and the SAT (State Administration of Taxation). Three levels of taxation: customs, local and central.

STATE TAX: taxes that generate revenue for the central Government which collects them..

LOCAL TAX: taxes that generate revenue from the local Government which collects them.

With its transition to a market economy, China has bought market-based approaches. 

Into force from January 1st 2008 the Enterprise Income Tax Law (CIT): it is a law that combines two schemes of tax on business income, namely that for companies based on domestic capital - Domestic Invested Enterprises (DIE) - and one for companies based on foreign capital - Foreign Invested Enterprises (FIE). Tax incentives were high while the average EIT rate was decreased.

From January 1st 2009 we are witnessing the transformation of the production-oriented VAT system to the consumption-oriented VAT system. The Chinese tax law is not codified in a single document but scattered in different instruments referring to different taxes.

The National People's Congress and its Standing Committee, the State Council, the Ministry of Finance (MOF), the State Administration of Taxation (SAT), the Tariff and Classification Committee at the Council of State and the General Administration of customs are state bodies with power to issue tax Laws or fiscal policies. The S.A.T. is the highest tax authority in China. Because of revenue sharing, the tax authorities at the provincial and local offices are divided into the SAT and branch offices of taxes. The S.A.T. has a vertical leadership towards its field offices as regards the organization, size, staff, budgets; it assists local Governments in a sort of parallel supervision of the tax branch offices.

The "Tax System" is divided into two kinds of taxes: 

Direct Taxes:

• Income taxes for physical persons (IIT).
• Inome taxes for legal entities (CIT).

 

  2.  Non-Direct Taxes, including for example:

• Enterprise Income Tax (CIT).
• Business Tax (BT).
• Value Added Tax (VAT).
• Import Duties.
• Duty on real estate properties.
• Duty on revalutation of land.
• Stamp tax.

In China companies operating on the territory are classified into two categories:

Resident Companies or business that, legally established in China or abroad, carry out their activities of administration and control on the Chinese territory, such as companies totally based on foreign capital (Wholly Foreign Owned Enterprise - WFOE), Joint Venture (JV) and trading companies.

Non-resident Companies, i.e. companies, which, despite having income in China or abroad, do not have an office or a seat on the Chinese territory.

TAX ON THE INCOME OF PHYSICAL PERSONS - (IIT)

The tax on the income of physical persons is characterized by progressive taxation on income brackets, with increasing rates. The following categories of income make up your taxable income:

• From employee.
• From self-employment.
• From royalties.
• From income from interests and dividends.
• From rental of real estate properties.
• From the proceeds coming from the sale of real estate properties.

The Tax rates are between 5% and 45%.

Under current Chinese law, people who have domicile in China or individuals who do not have a domicile in China but live in China for a year or more, are subject to the payment of the tax on the income of physical persons in connection with the their global income, while people who do not have a domicile in China but reside in China for less than one year must pay the tax on the income of physical persons only in relation to the income generated in China.

The income earned in China by individuals who are not domiciled in China and who receive income from a foreign employer without a permanent establishment in China are excluded from the tax on the income of physical persons as long as they are not physically present in China consecutively or cumulatively for more than 90 days in a calendar year or 183 days in the case of the existence of a treaty on double taxation.

A special rule is applied to expatriates who hold the office of director, representative in representative offices of foreign companies or general manager or senior management in companies with foreign participation.

TAX ON THE INCOME OF LEGAL ENTITIES - (CIT)

The main legislation on the taxation of legal entities is represented by the Law on the taxation of corporate income, or the Enterprise Income Tax Law which came into force on January 1st 2008.

This legislation represents an important innovation for the Chinese tax system as a process of standardization of the tax treatment for the domestic-owned companies and those companies invested in by foreign entities, providing for the application of the unified rate of 25%. There are reduced rates for particular categories of companies: in particular, 15% and 20%, respectively, for companies operating in the high technology sector and for smaller companies with low profits. A subsidized style” is intended also to the businesses belonging to the fields of environmental protection and energy saving. Resident companies are taxed on worldwide income products.

The tax base follows, in general terms, the principle of derivation from the accounting records. The losses in a given tax year can be deducted for a maximum period of five years. Non-resident companies are taxed only on income earned in China.

The foreign-owned companies must register with the relevant tax offices. There will be a quarterly tax returns, in addition to the annual year-end tax returns. The related payments should be carried out on a quarterly basis, based on the corresponding declarations, and is then expected an adjustment following the submission of the Annual Statement.