Financial system of China

The Corporate Income Tax (CIT) belongs to the category of taxes on corporate profits and is applied to the taxable income of the company which is the gross income earned in the tax year in which you deducted the tax-free income, other deductions permitted and the amount of the losses of the previous five years. Resident companies are taxed on total income received in the fiscal year, the non-resident enterprises incorporated in China are taxed on income in China or abroad directly connected to their constitution. The non-resident enterprises and unincorporated in China are taxed only on income earned in China during the same period. 

The tax rate of the tax on the income of local companies and foreign-invested firms is unified at 25%. Its payment must be made at the place where the company is registered. For companies incorporated outside China, the payment must be made in the Chinese city in which business activities are carried out.

The Value Added Tax (VAT) which is the value added tax is a consumption tax charged on the value added during the production of goods, sale and supply of taxable services. In China, VAT payers (VAT) are divided into two types according to the system of accounting and control systems and their functioning:

Small-sized contributors: those without a complex system of accounting and auditing, whose taxable value of sales is less than 500 thousand RMB to taxpayers engaged in the production of goods or the provision of services, or 800 thousand RMB to those who are engaged in the retail or wholesale.

General contributors: businesses with a rateable value of annual sales in excess of the taxpayers of small size.

The VAT is 3% for small-sized taxpayers, 13% for the general taxpayers who sell or import cereals, gas, oil, newspapers, books and agricultural products and 17% for other general taxpayers. Only the general taxpayer must issue invoices, which are prepared in accordance with pre-established forms printed by the tax from which they must be purchased.

The taxpayer is required to pay the VAT, from which, however, it is necessary to deduct the so-called: Recover Input Tax (RIT), which is the VAT paid on the purchase of raw materials and on certain fixed costs (machinery, transport vehicles and other instruments and appliances associated with the production and activity of the business). Real estate properties, houses and buildings are excluded.

The reference period of the VAT may vary from one, three, five, ten, fifteen days, a month or a quarter, and is determined by the tax according to the amount due.

The 2009 reform abolished the exemption of VAT (Free Policy), for import of equipment from abroad and the return of VAT (Returning Policy) for purchases of plants in China by the companies based on foreign capital - Foreign Invested Enterprises (FIE).

The Act states that the VAT on the export products is refundable in whole or in part. The rules vary depending on the trends of economic politics.

Since August 2008, the Central Government has revised the rates of refunds of VAT on the export of many products. The main changes regarded labour-intensive sectors such as textiles, clothing, toys and goods with high added value and technology. The rates of refund of VAT increased by:

• Textile and clothing (16%).
• Some plastic products and glass and ceramics (13%).
• Some medicines, mechanical and electrical products, optical components, bags, shoes and hats, umbrellas, furniture and toys (15%).
• Signalling equipment used for TV and sewing machines (17%).
• Some metal products, scissors, fans, some books and other goods (9%, 11% o 13%).

The Business Tax (BT) is an indirect tax complementary to VAT. It applies to those services excluded from payment of VAT, transfers of real estate and sale of intangible assets. BT is calculated on the company turnover with percentages varying from 3% to 20% depending on the type of service: 

• Transport, building, post and telecommunications, culture and sport - 3%.
• Insurance, finance, services, land transfer and sale of intangible assets - 5%.
• Entertainment and show business - from 5% to 20%.

Similarly to what reported about the VAT, the reference period can vary from five, ten, fifteen days a month or a quarter, and is determined by the tax according to the amount of BT due. Payment must be made at the place where the service provider or its receiver are. As a result, the services provided abroad in favour of individuals or Chinese companies are subject to the payment of BT.

There are special exemptions for technology transfer, technology development, for technical advisory services. These exemptions, however, are subject to assessment and authorization of the competent authorities.

The VAT and BT are mirror applying, first, to supplies of goods carried out on the territory of China and a burden, the second, on procurement of services excluded from the VAT scheme and on the transfer of real estate or intellectual property rights. The fundamental difference between the VAT and the BT is that the VAT can be deducted (compensating for the amount paid to purchase the tax rate applied to sales tax) while BT does not provide a similar mechanism resulting in only an additional cost burden on the final consumer and slows the development of the service. 
REFORM OF INDIRECT TAXES

On January 1st, 2012 only for the municipality of Shanghai has entered into force, the reform of indirect taxes which involves subjecting certain types of services, previously subject to BT, only to VAT. The reform applies to the transport sector and the services that are defined modern (i.e. research and development, information, cultural activities, activities auxiliary to logistics, certification and consulting). The goal is to unify the BT with VAT thus standardizing the Chinese system to the international one. The Reform has been hampered by local authorities to who remains the 25% of the revenue produced by the VAT, while remained 100% of BT. The Municipality of Shanghai is very sensitive to industry services and is willing to act as a pioneer in the reform process.

Major new features:

• Transaction of the companies operating in the sectors covered by a reform scheme from BT to VAT rules.
• Introduction of two new levels for VAT rates: 11% for transport rates; 6% of modern facilities.
• VAT proceeds for 100% of responsibility of the local authorities with the result that current incentives or tax benefits granted to companies will be maintained after consultation with the local Authorities.
• Issues and influence on the company, are the change from BT regime to a VAT regime due to an increase in the rate that from 5% of BT rise to 11% or 6%.
• Tax advice aimed at a useful study to identify the most advantageous tax planning (selecting the mode of business, the corporate structures and markets where you can reduce the tax burden) è is what should be done to legitimize the profits. A customized study  to specific areas of activity and according to the different local tax laws is helpful in planning: to this purpose Bright Business Consulting LLP provides the necessary support to achieve this goal.

Banking system

China's banking system has undergone significant changes in the last two decades:Banks are now functioning more like western banks than before. Nevertheless, China's banking industry has remained in the government's hands even though banks have gained more autonomy. WTO has accepted China. The central bank of China is the People's Bank of China.

The "big four" state-owned commercial banks are the Bank of China, the China Construction Bank, the Industrial and Commercial Bank of China and the Agricultural Bank of China.

People’s Bank of China:

The People's Bank of China (PBOC) is China’s central bank, which formulates and implements monetary policy. The PBOC maintains the banking sector's payment, clearing and settlement systems, and manages official foreign exchange and gold reserves. It oversees the State Administration of Foreign Exchange (SAFE) for setting foreign-exchange policies.

According to the 1995 Central Bank law, PBOC has full autonomy in applying the monetary instruments, including setting interest rate for commercial banks and trading ingovernment bonds. The State Council maintains oversight of PBOC policies.

China Banking Regulatory Commission (CBRC) was officially launched on April 28, 2003, to take over the supervisory role of the PBOC. The goal of the landmark reform is to improve the efficiency of bank supervision and to help the PBOC to further focus on the macro economy and currency policy.

According to the official Announcement by CBRC posted on its website, the CBRC is responsible for "the regulation and supervision of banks, asset management companies, trust and investment companies as well as other deposit-taking financial institutions. Its mission is to maintain a safe and sound banking system in China.

China Central Bank Balance Sheet 

Central Bank Balance Sheet in China increased to 336261.61 CNY Hundred Millions in September of 2014 from 330634.21 CNY Hundred Millions in August of 2014. Central Bank Balance Sheet in China averaged 163999.21 CNY Hundred Millions from 1999 until 2014, reaching an all time high of 336261.61 CNY Hundred Millions in September of 2014 and a record low of 34443.90 CNY Hundred Millions in February of 2000. Central Bank Balance Sheet in China is reported by the People's Bank of China.

Domestic key players:

In 1995, the Chinese Government introduced the Commercial Bank Law to commercialize the operations of the four state-owned banks, the Bank of China (BOC), the China Construction Bank (CCB), the Agricultural Bank of China (ABC), and the Industrial and Commercial Bank of China (ICBC).

The Industrial & Commercial Bank of China (ICBC) is the largest bank in China by total assets, total employees and total customers. ICBC differentiates itself from the other State Owned Commercial Banks by being second in foreign exchange business and 1st in RMB clearing business. It used to be the major supplier of funds to China's urban areas andmanufacturing sector.

The Bank of China (BOC) specializes in foreign-exchange transactions and trade finance. In 2002, BOC Hong Kong (Holdings) was successfully listed on the Hong Kong Stock Exchange. The USD2.8 billion offering was over-subscribed by 7.5 times. The deal was a significant move in the reform of China’s banking industry.

The China Construction Bank (CCB) specializes in medium to long-term credit for long term specialized projects, such as infrastructure projects and urban housing development.

The Agriculture Bank of China (ABC) specializes in providing financing to China's agricultural sector and offers wholesale and retail banking services to farmers, township and village enterprises (TVEs) and other rural institutions.

Policy banks

Three new "policy" banks, the Agricultural Development Bank of China (ADBC), China Development Bank (CDB), and the Export-Import Bank of China (Chexim), were established in 1994 to take over the government-directed spending functions of the four state-owned commercial banks. These banks are responsible for financing economic and trade development and state-invested projects.

ADBC provides funds for agricultural development projects in rural areas; the CDB specializes in infrastructure financing, and Chexim specializes in trade financing.

Second tier commercial banks

In addition to the big four state-owned commercial banks, there are smaller commercial banks. The largest ones in this group include the Bank of Communications, China CITIC Bank, China Everbright Bank, Hua Xia Bank, China Minsheng Bank, Guangdong Development Bank, Shenzhen Development Bank, China Merchants Bank, Shanghai Pudong Development Bank and Industrial Bank. The second tier banks are generally healthier in terms of asset quality and profitability and have much lower non-performing loan ratios than the big four.

City commercial banks

The third significant group in Chinese banking market is the city commercial banks. Many of them were founded on the basis of urban credit cooperatives. The first one was Shenzhen City Commercial Bank in 1995. In 1998, PBOC announced that all urban cooperative banks change their name to city commercial bank. This number has increased through additional transformations to 140 in 2009. Most city commercial banks have strong ties to their local government and are majority or wholly state owned. Since 2005 some city commercial banks diversify their shareholders, inviting Chinese and international private companies to take minority shares, merging and cross-shareholding. Some of the banks have listed their shares. The city commercial banks market orientation is towards supporting the regional economy, but also towards financing local infrastructure and other government projects. Since 2008 a strong trend has emerged for city commercial banks to extend business beyond their home region. They are also often the main shareholder behind village and township banks (VTB). Some have founded so called small loans units to serve smaller business clients better. Taizhou City Commercial Bank, Bank of Beijing and Bank of Ningbo are examples for city commercial banks.

Trust and investment corporations

In the midst of the reforms of the 1980s, the government established some new investment banks that engaged in various forms of merchant and investment banking activities. However, many of the 240 or so international trust and investment corporations (ITICs) established by government agencies and provincial authorities experienced severeliquidity problems after the bankruptcy of the Guangdong International Trust and Investment Corporation (GITIC) in late 1998. The largest surviving ITIC is China International Trust and Investment Corporation (CITIC), which has a banking subsidiary known as China CITIC Bank.

Company’s finances

When asking people to name multinational companies (MNCs) from Asia, the first examples that come to mind are numerous Japanese companies such as Toyota, Honda, Sony, Toshiba, Panasonic, Nintendo, etc. These Japanese MNCs are  well-known worldwide since they all produce products for end-consumers. Many people also think of MNCs from South Korea such as the huge conglomerates Samsung, Hyundai, and LG. Taiwanese MNCs, though to a lesser extent, are also mentioned in relation to the country’s famous high-tech and IT sectors. Examples include Asus, Acer, and HTC. Large suppliers such as Foxconn are also based in Taiwan but are not as well-known since they primarily supply the B2B markets. Japanese MNCs are older than MNCs from South Korea and Taiwan.

However, MNCs from all three nations are major competitors of those “old” MNCs which have their origins in the industrial revolution of the late 19th century and first half of the 20th century and are based in comparatively developed countries. We just have to look at the rapid success and increased competitiveness of South Korea’s Hyundai in the automotive sector or Taiwan’s HTC in the smartphone industry.

At the moment, China is home to less well-known MNCs than the other nations mentioned above. Of course, there are people who name Lenovo or Huawei as renowned global players but the level of awareness for Chinese MNCs is low compared to MNCs from Japan, South Korea or Taiwan. This has various reasons including the following points:

The majority of products exported from China (more than 50%) is produced by foreign invested companies and not by Chinese enterprises themselves. The goal of every company is the maximization of profits – a process which entails the reduction of total costs. China has historically had comparatively low wages and  many companies therefore invested in China leading to this high proportion of exports from foreign invested companies.

China’s MNCs operate within industries in which there is high competition from “old” MNCs. There is, for example, an overlap of some core industries of Germany and China. More people in Europe are familiar with Volkswagen rather than Geely or with Bosch and Siemens rather than Haier. Many Chinese MNCs are also in the B2B sector, therefore less prominent among the general public but more so among those experts within the respective industries.

Chinese companies started to internationalize later than MNCs from South Korea or Taiwan. This process of internationalization of Chinese companies has just begun and is far from over. In our recent article about Chinese OFDI we saw that Chinese OFDI was almost nonexistent until the beginning of the 21st century and experienced a boom during the financial crisis of 2007/2008.

MNCs from Asia can be grouped into three separate cycles or waves. The first wave includes the Japanese MNCs. In the second wave there are South Korean and Taiwanese MNCs. The third and last wave includes those relatively new Emerging Multinational Companies (EMNCs) from China.

Source: Bruche, Gert (2013): Chinese Emerging Multinationals. Lecture at Berlin School of Economics and Law

The reasons for these three cycles lie, amongst others, in economic policies. South Korea, Taiwan but also Hong Kong and Singapore form the group of so called Asian Tigers. Japan is left out of this group because it emerged earlier than the other four nations and the term was coined later on after the Japanese economy had already developed. However, in another such paradigm, the so-called flying geese paradigm as coined by the Japanese author Kaname Akamatsu, Japan is seen as the lead goose followed by the four Asian Tigers. In this paradigm the Asian Tigers are followed by the main ASEAN countries Indonesia, Thailand as well as Malaysia and finally by other fast developing nations in the region: China, Vietnam, Philippines etc.

China has always avoided a current account deficit and significant sovereign debt, just as the Asian Tigers have. Chinese exports were viewed as necessary because exporting was  an important way to pay for imports and so China adopted selective measures of export promotion, just as South Korea and Taiwan had exemplified before. The Chinese EMNCs, although currently less well-known, are well positioned to forge waves of economic growth in decades to come.

Household finance

Population of China 2014

Based on the total number of births, total number of deaths, net migration rates, and the population of 2013, the current population of the People’s Republic of China is estimated to be about 1,390,510,630. China’s population makes up around 19.3% of the world’s population. The current estimated population indicates a growth of 36,510,630 people or a population growth of 2.7% during 2013. As a result of the current population of China, it remains the most populous country in the entire world. China has about 130 million more people than the second largest country in the world, India. Based on the population and the total area of the country, the population density of China in 2014 is estimated to be about 145 people per square kilometer or 375 people per square mile.

One-Child Policy in China 2014

As a result of the continuously growing population of China, the government enacted a form of population control, officially known as the Family Planning Policy, otherwise known as the One-Child Policy. In 1979, the Chinese government introduced the policy as a response to the growing social, economic, and environmental issues that came due to the high population of the country. The premise of the policy is to discourage (and even sometimes prevent) families from having more than one child. There are some exceptions to the policy, however. If the first child is a girl or is disabled, the family can have another child. Also, if neither parent has siblings, two children are allowed. In fact, as of November 2014, the policy was updated to allow for a family to have two children if one of the parents is an only child. Some controversies surrounding the policy, both in China and throughout the rest of the world, include the increase in forced abortions, female infanticide, and an increased imbalance among the sexes in China.

Population growth rate:
0.44% (2014 est.) Sex ratio:
at birth: 1.11 male(s)/female 0-14 years: 1.16 male(s)/female 15-24 years: 1.13 male(s)/female 25-54 years: 1.05 male(s)/female 55-64 years: 1.06 male(s)/female 65 years and over: 0.92 male(s)/female total population: 1.06 male(s)/female (2014 est.) Total fertility rate: 1.55 children born/woman (2014 est.)

Education in China 2014

It is required that children in China attend school for at least nine years. The nine years of required schooling is completely free to the students. They start school around the age of six in a primary school system and then move to a junior middle school around age eleven. As of 2011, over 81% of Chinese students continued their education to receive a secondary education degree. In order to enter into a secondary institution, a student must take the Gaokao, which is China’s national university entrance exam. Each province determines the Gaokao, but there are three standard subjects on every test: Chinese, Mathematics, and a foreign language (typically English). Some other common subjects offered are Physics, Chemistry Biology, History, Geography, and Political Education. Also, teachers must go through a significant level of training before actually teaching in the classroom in order to uphold the high standards of education in China.

Literacy:
definition: age 15 and over can read and write total population: 95.1% male: 97.5% female: 92.7%
School life expectancy (primary to tertiary education):
total: 13 years male: 13 years female: 13 years

 

Health Care in China 2014

Beginning in the 1950s, the Chinese government worked to establish a public health program in order to combat the growing health concerns in the country. Over the years since the 1950s, most of the health care in China became mostly privatized, which, in return, resulted in an increase in the quality of the education as well. In 2009, China invested around $125 billion in a 3-year health care initiative. By 2011, as a result of the initiative, around 95% of the country has health insurance. Also, it has become the world’s third largest supplier of pharmaceuticals. Some health concerns in China include respiratory problems that come as a result of the air pollution, which caused 1.2 million premature deaths in 2010, a high portion of cigarette smokers, and lastly obesity among the youth in the urban parts of China. The average life expectancy in China is about 75 years and infant mortality is 12 infants per 1000 births.

Health expenditures:
5.2% of GDP