china economic quarterly q4 2017...goods and services contributed 9.1% to total economic growth,...
TRANSCRIPT
China Economic Quarterly Q4 2017
Better than expected growth in 2017 might guarantee a good year in 2018
February 2018
Major economic indicators p1/Policy updates p10 /Hot topic analysis p13
www.pwccn.com/ceq
ContentI. Major economic indicators 1
II. Policy updates
China’s top leadership mapped out economic plans for 2018
New policies in boosting China’s private investment
10
10
12
III. Hot topic analysis
China’s response to the US tax reforms
What is the impact of real estate macro control on China’s economy?
13
13
18
Quarterly GDP values and quarterly and annual GDP growth rate
1.70%
1.80%
1.80%
1.80%
2.00%
1.70%
1.80%
1.50%
1.30%
1.90%
1.80%
1.70%
1.40%
1.90%
1.80%
1.60%
7.30%6.90% 6.70% 6.90%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
0.00
5.00
10.00
15.00
20.00
25.00
Quarterly GDP value Quarterly growth Annual GDP growth
GD
P (
Trilli
ons o
f R
MB
)
Major economic indicators
I
China’s GDP growth for the fourth
quarter has increased 6.8% year-on-year
again, following the same rate for the
third quarter. As a result, total GDP
reached to 82.71 trillion yuan (about
US$12.84 trillion), with an annual
growth of 6.9% for the whole year, the
first pickup in GDP growth rate since
2011. This is much better than the
market expectation. We believe that the
steady growth in 2017 might guarantee a
relatively good year in 2018.
The International Monetary Fund
expects China’s GDP growth to reach
6.6% in 2018, up from the 6.5%
prediction made last October, according
to its World Economic Outlook released
on 23 January 2018. This is the fifth time
for the IMF to raise its Chinese economic
growth prospects in two years. In 2017,
China’s contribution to world’s economic
growth has surpassed 30%.
China’s economic performance is much
in line with an upbeat outlook for the
global recovery. The IMF also revised
upward its global growth forecast for
2018 by 0.2% to 3.9% due to increased
global growth momentum and the
expected positive impact of the recently
approved U.S. tax policy changes.
In addition to GDP growth rate, China’s
other three macro economic
measurements also performed well. 13
million new jobs were created in urban
areas in 2017, and unemployment rate
stood at 4.98% by the end of December.
Consumer Price Index (CPI) for the
whole year only increased by 1.6%, lower
than official estimate. For the balance of
payments, China’s foreign exchange
reserves rose from US$3.01 trillion in
2016 to US$3.14 trillion by the end
of 2017.
PwC 1
Source of data: Unless otherwise stated, economic data is from the National Bureau of Statistics,
Wind and financial data from the People’s Bank of China.
Source: National Bureau of Statistics of China; Wind
13%
12%
12%
12%
12%
12%
12%
12%
11%
10%
10%
46%
46%
47%
46%
45%
44%
43%
41%
41%
41%
41%
41%
41%
41%
42%
43%
44%
45%
48%
48%
49%
49%
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
primary secondary services
Perc
enta
ge
For the whole of 2017, the output of
primary, secondary and tertiary
industry was 6.55, 33.46, and 42.70
trillion yuan respectively. The tertiary
industry or services, accounting for
51.6% of total GDP, grew by an
impressive rate of 8.0% year-on-year,
while the growth rate for the primary
and secondary industry registered 3.9%
and 6.1% respectively.
More specifically, the tertiary industry
or services (consumption) has
contributed 58.8% to total economic
growth in 2017, increasing by 1.3%
compared to last year. In the meantime,
gross fixed capital formation
contributed 32.1%, and net imports of
goods and services contributed 9.1% to
total economic growth, compared to a
negative figure in 2016.
Obviously, services (consumption) plays
a leading role in driving China’s
economic growth, and fixed asset
investment, amounting to 76.4% of
GDP, remains a vital force.
GDP composition
2 China Economic Quarterly Q4 2017
Fixed Asset Investment: Accumulated Growth
13.50%
11.40%
10.30%10.00%
10.70%
9.00%
8.20% 8.10%
9.20%
8.60%
7.50%7.20%
Perc
enta
ge
Total fixed asset investment reached
63.17 trillion yuan, expanding by 7.2%
year-on-year in 2017, 0.9% less
compared to the same period last year.
However, on monthly basis, total fixed
asset investment increased by 0.53%
in December.
State sector investment rose to 23.29
trillion yuan in 2017, an increase of
10.1% year-on-year. Thanks to the
government’s favorable policy measures,
private investment, accounting for
60.4% of total investment, went up to
38.15 trillion yuan, increasing by 6%
year-on-year, much better than 3.2%
registered in 2016.
For the whole year, by sectors, fixed
asset investment of the primary,
secondary and tertiary industry went up
by 11.8%, 3.2% and 9.5% respectively.
As industrial investment went up by
3.2% year-on-year to 23.58 trillion yuan,
manufacturing investment increased by
4.8% to 19.36 trillion yuan and
contributed 21% to total investment.
High-tech manufacturing (17.0%),
equipment manufacturing (8.6%) and
technological upgrading recorded high
growth (16%), while investment in high
energy-intensive industries fell by 1.8%
from last year, paving the way for further
green growth.
On the other hand, fixed asset
investment in service sectors,
accounting for 59% (37.50 trillion yuan)
of the total investment, rose by 9.5%
year-on-year, while infrastructure
investment went up by 19.0% to 14.0
trillion yuan in 2017, 1.6% more than
in 2016.
On the external front, China’s outbound
investment reached US$120 billion in
2017, falling by 29.4% over a year ago
due to government’s increased scrutiny
over investment deals. Investment in
Belt & Road countries registered at
US$14.4 billion, declining by only 1.2%
over 2016. In contrast, foreign direct
investment into China reached a record
level of US$144 billion in 2017, making
China the second most popular
destination for FDI after the US. FDI
value stood at US$126 billion in 2016.
PwC 3
Growth rates in real estate
-33.8%-33.1%
-31.7%
-19.4%
-11.7%
-6.5%-5.9%
-3.0%
-7.8%-8.5%-6.1%
-5.5%-4.3% -3.4%
6.2% 5.7%
8.1%
5.3%
8.8%
11.1%10.1%
12.2%
15.8%
1.3%
2.2% 2.6%
-1.0%
14.7%16.8%16.8%
15.6%15.3%14.8%15.5%15.5%15.0%15.2%
7.0%
11.5%11.4%9.9%
11.2%
9.7% 9.0%
8.0%
8.2%
2.0%
1.3% 1.0%
3.0%
6.2%7.2% 7.0% 6.1% 5.3% 5.4% 5.8% 6.6% 6.5%
6.9%
8.9%
9.1%
9.3%
8.8% 8.5%7.9% 7.9%
8.1%
7.0%
-40.0%
-35.0%
-30.0%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
Growth rate of land purchased Growth rate of resources of funds Growth rate of investment
Despite strengthening macro control
and tightening regulations, the overall
real estate market in 2017 remained
relatively stable, with investment
growing by 7.0% (nominal growth)
year-on-year to 10.98 trillion yuan.
Investment in residential building,
accounting for 68.4% of the total real
estate investment, stood at 7.51 trillion
yuan, an increase of 9.4% from last year.
In 2017, floor space sold and sales
volume of the commercial buildings
went up by 7.7% and 13.7% (or 13.37
trillion yuan), and residential housing
sales rose by 11.3% from last year.
Ironically, housing prices did not go
down following macro control, since
sales increased more than floor
space sold.
In terms of sources of funds, 15.61
trillion yuan were made available in
2017, rising by 8.2% year-on-year. Of
the total funds, domestic loans
accounted for 16.1%, growing by 17.3%;
self-financing constituted 32.6% (5.09
trillion), growing by 3.5%; other funds
including deposit and advance payment,
personal mortgage loans (7.98 trillion
yuan) accounted for 51%, growing
by 8.6%.
As regulation and control over house
purchasing stepped up, personal
mortgage decreased by 2% year-on-year.
Growth rate of land purchased reached
15.8% in 2017, while space of land
purchased stood at 2.55 trillion square
meters. Obviously, increase in sales
volume has brought up developers’
confidence to reserve more land.
Since the national and local
governments are likely to continue their
restrictive policies to further curb
market speculations, however, the
property market will face greater
uncertainties in 2018 and the years
ahead.
4 China Economic Quarterly Q4 2017
PMI hit a new high of 52.4% in
September (since May 2012), China’s
Purchasing Managers’ Index
(PMI) for manufacturing sector in the
past three months has returned to an
annual average level of 51.6% in 2017.
PMI dropped to 51.6% in October from
52.4% in September, then kept at 51.8%
and 51.6% in November and December.
However, it is a positive indication that
PMI stayed above the 50 level that
marks expansion and contraction.
Production index and new order index
remained high at 53.3% and 53.2%
respectively in December. But main raw
materials inventory index and employed
person index kept below the threshold
at 48.0% and 48.9%. This means that
the raw material inventory and the
number of employees of manufacturing
sector continued to decrease.
Furthermore, as trading volume had
increased, new export orders index and
import index reached to new high of
51.9% and 51.2% in December.
Purchase quantity index, main raw
material purchase price index and
producer price index also kept a high
level of 53.6%, 62.2% and 54.4%
respectively in December,
demonstrating a strong willingness
to purchase.
Non-manufacturing PMI remained at a
higher level than manufacturing, with
business activity index reaching 55.0%
in December. Non-manufacturing PMI
of services sector fell 0.2 percentage
points to 53.4% in December, slightly
lower than last year.
PMI of post and express delivery,
telecommunication, internet, software
and IT, financial services, insurance
stayed at high level in December, while
index of catering services, capital
market services, real estate were lower
than the threshold. It is worth noting
that PMI of construction industry
reached to 63.9%, the highest among all
other sectors.
Overall, the stable trend of
manufacturing PMI is likely to continue
in 2018. Most of the non-
manufacturing PMI is also expected to
maintain at a high level.
Purchasing Managers’ Index
PwC 5
53.8%53.4%
54.4%
53.8% 53.7% 53.7%
54.5%
55.1%54.9%
55.4%55.0%
50.2%49.8% 49.7%
50.2%50.0%
50.4%
51.4%51.8% 51.7%
52.4%
51.6%
46.0%
48.0%
50.0%
52.0%
54.0%
56.0%
Perc
enta
ge
Non-manufacturing Manufacturing 50% breaking point
Growth of Industrial Added Values (for companies over certain scales)
6.80%
5.70%5.90%
6.80%
6.20% 6.10% 6.00%
7.60% 7.60%
6.60%
6.20%
Perc
enta
ge
The growth of Industrial Added
Values for companies over certain
scales went up by 6.2% (in real terms)
year-on-year in December, 0.1% higher
than November. For the whole year of
2017, it increased by 6.6%, 0.6% higher
than that of 2016.
By sectors, manufacturing went up by
6.5% year-on-year in December, utilities
sector went up by 8.2%, and mining
sector fell by 0.9%. For the whole year,
manufacturing went up by 7.2%
year-on-year, utilities sector went up by
8.1%, and mining sector fell by 1.5%.
On the other hand, in 2017, profits of
industrial enterprises over certain scales
rose to 7.52 trillion yuan, an increase of
21.9% year-on-year. They have reached a
record high level since 2012, or 12.5%
more than 2016, thanks to supply side
reforms, rising commodity prices and
improving demand from domestic and
overseas markets. The main business
profit margin from industrial enterprises
over certain scales reached 6.46%, or
0.54% more than in 2016.
Profits of the mining sector increased 2.6
times, or 459 billion yuan year-on-year
in 2017. While a relatively small amount,
it shows that the mining sector has
turned around after making losses in
2016. Profits for manufacturing grew by
18.2% year-on-year to 6.65 trillion yuan
in 2017, while profits for power, heat, gas
and water declined by 10.7% over 2016.
We expect the growth of industrial added
values and profits would continue in
2018.
6 China Economic Quarterly Q4 2017
Retail Sales of Consumer Goods: Accumulated Growth Rate
10.56%
10.41%
10.50%
10.70%
10.30% 10.30%
10.40% 10.40%
10.00%
10.40% 10.40%
10.20%
Perc
enta
ge
Consumption continued to be the largest
driver of economic growth, contributing
58.5% to China’s GDP in 2017.
Total retail sales of consumer goods
went up by 10.2% year-on-year to 36.62
trillion yuan in 2017, which is 0.2% less
than in 2016. Catering consumption
(3.96 trillion yuan) grew by 10.7%
year-on-year, while the goods retail sales
(32.66 trillion yuan) went up by 10.2%.
Among it, sale of sports and recreational
articles increased by 15.6%, cosmetics up
by 13.5% and telecommunication
equipment/devices grew by 11.7% year-
on-year.
In addition, China’s online sales reached
7.18 trillion yuan in 2017, growing by
32.2% year-on-year. The growth rate is
6% higher than that of 2016.
Among the online sales, material goods,
accounting for 15% of total retail sales
(2.4% more than in 2016), stood at 5.48
trillion yuan, up by 28.0%. Meanwhile
sales of non-material goods reached 1.69
trillion yuan, increasing by 48.1%
year-on-year.
Growth of population, income and
overall economy are the backbone of a
steady and strong consumption. In 2017,
China’s GDP per capita reached
US$9,237, a step closer to entering the
group of high-income countries (above
US$12,476). In 2017, China’s per capita
disposable income (in real terms)
increased by 7.3%, 1% higher than in
2016. Total population in mainland
China reached 1.39 trillion or 7.37 million
more than in 2016, which contributed
0.5% to total consumption.
PwC 7
¥100
¥200
¥300
¥400
¥500
¥600
¥700
¥800
¥900
¥1,000
¥1,100
¥1,200
-25.00%
-20.00%
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
Net Export (RMB billion) Export Growth Import Growth
Gro
wth
(Billion)
526.62 918.01 861.22 1118.34 933.93 898.77 838.16 880.05
0.06% -1.50% -13.93% -8.62% -1.17% 8.99% 20.83% 9.74%
3.36% 8.64% -2.31% -1.59% 1.25% 0.80% 12.46% 7.08%
101.92 788.11 755.53 1007.20 810.26 967.14 458.51 800.70
-1.07% 0.95% -17.46% -13.83% -7.89% 1.95% 30.27% 16.43%
-6.05% 12.71% 4.90% -5.44% -4.26% 0.34% 10.47% 7.66%
Quarterly Balance of Trade
China’s imports and exports
performed fairly well in 2017, thanks to
recovery of global economy and
domestic demand. After a two-year
negative growth, total imports and
exports reached 27.79 trillion yuan,
increasing by 14.2% over 2016.
Among them, exports went up by 10.8%
year-on-year to 15.33 trillion yuan, and
imports grew by 18.7% year-on-year to
12.46 trillion yuan. As a result, net
surplus in 2017 was 2.87 trillion yuan.
As usual, general trade accounted for
56.4% of the total trade, which increased
by 16.8% in 2017 or 1.3% more than in
2016. Machinery products continued to
dominate China’s exports (accounting
for 58.4%), growing by 12.1% year-on-
year in 2017.
As the Ministry of Commerce pointed
out, according to WTO data, China has
possibly been the world’s largest
exporter on goods trade for nine
consecutive years since 2009. China’s
exports constituted 13% of the world’s
total in 2016, and is expected to grow
again in 2017.
During the first three quarters, China’s
imports accounted for 10.2%of global
imports, contributing 17% to its growth.
In order to deepen economic
globalisation and reduce tensions with
China’s major trading partners over
trade surplus issue, the first China
International Import Expo will be held
in Shanghai from 5-10 November, 2018,
following the announcement by Chinese
President Xi Jinping in May 2017. The
expo will include exhibitions and
forums, providing a new platform for
China to increase its imports of goods
and services.
For 2018, we expect China’s total trade is
likely to continue to grow at a higher
pace. However, a trade war with the US,
the major source of China’s trade
surplus, cannot be ruled out as President
Trump has announced a plan of
imposing higher tariffs against Chinese
exports. Trade tensions with the EU may
also escalate. Under this scenario
China’s imports and exports will be
severely disrupted, though the likelihood
is relatively low as both the US and the
EU would face Chinese retaliations and
their economies could be adversely
affected.
8 China Economic Quarterly Q4 2017
1.38% 1.39% 1.60% 1.60%2.30%
1.88% 1.92% 2.08%
0.90%1.50% 1.60% 1.80%
-4.56%-4.81%
-5.95% -5.90%
-4.30%
-2.60%
0.10%
5.50%
7.60%
5.50%
6.90%
4.90%
-8.00%
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
CPI PPI
Gro
wth
(contr
actio
n)
rate
Producer Price Index and Consumer Price Index
Producer Price Index (PPI) went up
by 6.9%, 5.8% and 4.9% year-on-year in
October, November and December
respectively, maintaining a high level
while in general decline. For the whole
year of 2017, PPI increased by 6.3%, which
guaranteed that the negative PPI growths
over the past five years would not reoccur
in the near future.
There are a few reasons why PPI grew
more than 6% in 2017. Firstly, PPI
suffered negative growth from 2012 to
2016 for nearly five years, leaving a lot of
room to grow in 2017. Secondly, recovery
of the global economy and commodity
prices has pushed up PPI levels. Thirdly,
China’s supply side reform restructuring
measures, such as cutting the capacity of
steel and coal, have triggered price-hiking
in some major commodities.
For 2018, PPI is unlikely to grow further,
and may maintain at a reasonable level.
Compared to high levels of PPI, growth in
consumer price index (CPI) was
fairly low. CPI increased by 1.9%, 1.7%
and 1.8% year-on-year in October,
November and December respectively.
For 2017, CPI grew by 1.6% year-on-year.
More specifically, food prices dropped by
0.4%, price of healthcare went up by
6.0%, prices of residential housing,
education, culture and recreation all
increased by more than 2%.
In 2018, CPI could remain stable. The 6%
growth for price of healthcare is unlikely
to last long, especially when it would
affect the affordability of health care for
low income families and the government
has put lowering the cost of healthcare as
one of its priorities for 2018.
PwC 9
● China’s top leadership mapped out economic plans for 2018
IIPolicy Updates
The Annual Central Economic Work
Conference, which usually sets the tone
for China’s economic policies for the
following year, was held in Beijing from
18-20 December 2017.
The meeting, led by President Xi
Jinping, adopted a new development
concept represented by “Xi Jinping
Thought on Socialist Economy with
Chinese Characteristics for a New Era”,
and stressed the Party’s leadership in
economic management, people-oriented
development, the new economic normal,
the market’s role in resource allocation
and supply-side structural reform. In
tandem with the new concept, China will
take steps to reconstruct its systems of
development indicators, policies,
standards, statistics and performance
assessment.
The meeting called for China to develop
a modernised economy focused on
quality and performance in order to raise
China’s capacity for innovation and
competitiveness. It emphasised that
high-quality development is the
fundamental requirement for
determining the development path,
therefore economic policies and
macroeconomic regulations must be
consistent with this objective.
According to the statement of the
conference, eight priorities were
highlighted for 2018. They include
deepening supply-side structural reform
to eradicate ineffective supplies and
resolve overcapacity through innovation;
invigorating the vitality of different
market forces; pushing ahead with rural
prosperity program; implementing
coordinated strategies for regional
development; promoting all-round
opening-up policies; improving people’s
livelihood and social welfare; speeding
up the set-up of a long-term mechanism
for a stable, healthy housing market; and
further promoting ecological civilisation.
The conference decided to keep a neutral
monetary policy, control money supply,
keep a reasonable growth of credit, and
maintain the RMB exchange rate at a
reasonable equilibrium level. It proposed
to promote a virtuous cycle between
finance, the real economy and the
property market. For preventing and
defusing major risks, China will contain
the overall leverage ratio while raising
the financial sector's ability to serve the
real economy.
To promote direct foreign investment,
China will push for nationwide
implementation of a pre-establishment
national treatment system for foreign
companies as well as a negative list,
which determines where foreign
participation is prohibited or limited.
The country will also improve laws and
regulations, enhance protection of
intellectual property rights, increase
imports and cut tariffs, and expand free
trade zone pilot areas.
10 China Economic Quarterly Q4 2017
In 2018, housing system reform will be
prioritised in China's economic work by
developing a house rental market,
particularly long-term rental, and by
ensuring supply through multiple
sources and encouraging both housing
purchases and rentals. This means
China’s housing supply model that has
heavily relied on commercial housing
sales will shift to one based on both
house purchases and rentals.
As decided in the 19th Party Congress,
China will step up its efforts to ensure
significant progress in the winning of the
“three tough battles” in 2018, which
include the prevention of major financial
risks, poverty alleviation and pollution
control.
Similar messages were delivered by Mr.
Liu He, China’s economic policy
mastermind, at the Davos Economic
Forum, where he emphasised that China
would remain open to the world, further
integrate with international trade rules,
ease market access, and substantially
open up the services sector (the financial
sector in particular), so as to create a
more attractive investment
environment.
While all these measures are sound
policies in the right direction, a lot more
effort would be needed to put these new
policies into real practice. And it requires
high level of skills to properly manage the
process, in which a few policy goals may
conflict with each other. The seemingly
imminent trade war with the US may
force China to take more bold measures
in liberalising its trade regime and
reforming its industrial policies and state
subsidy system, but things won’t change
easily due to vested interests of interest
groups. It will not be an easy ride.
PwC 11
● New policies in boosting China’s private investment
On November 20, 2017, the Ministry of
Industry and Information Technology
(MIIT), together with 15 other central
government agencies including the
National Development Reform
Commission, the Ministry of Commerce,
the Ministry of Science and Technology
and the Ministry of Finance, released the
“Guidelines on Exerting the Function of
Private Investment and Promoting the
Implementation of the Manufacturing
Power Strategy” that aims to break the
systemic investment barriers and
revitalise China’s dwindling private
investment.
While highlighting the central role of the
market in resources allocation, the
Guidelines proposed eight tasks to
enhance the capacity of private
manufacturing. The tasks include
improving the capacity of innovation
development; enhancing the fusion of
informatisation and industrialisation;
participating in upgrading basic
industrial capacity; improving quality and
brand; promoting green manufacturing;
optimising industrial structure and
participating in mixed-ownership reform
of the state-owned enterprises (SOEs);
promoting transformation of services;
and fostering international development
and overseas investment.
Five supporting measures covering
systemic supply, public services, talent
incentives, corporate management and
financial support were also offered. The
Guidelines encouraged private investors
to invest in emerging industries such as
information technology, Internet,
intelligent manufacturing, high-end
equipment manufacturing, and
telecommunications. Private investors
are also encouraged to take part in core
government projects previously kept for
SOEs, and benefit from government
financial support. Specifically the
Guidelines called on government and
financial institutions to help private
sector develop a variety of private
investment funds, utilise the existing
industrial transformation and upgrade
funds, and develop new financial
products to support overseas
investment.
The Guidelines comes at a time when
China’s private sector has faced various
challenges in business growth due to
deteriorating investment environment,
and the Made in China 2025 initiative
has attracted doubts and criticism from
foreign companies for lack of clarity and
discrimination against foreign players.
China’s private investment, accounting
for over 60% of China’s total fixed
investment, remained sluggish, rising by
only 6% year-on-year in 2017, slightly
better than the annual rate of 3.2% in
2016.
Inadequate protection of intellectual
property rights had contributed to the
decline in private investment.
Recognising the problem, Chinese
premier Li Keqiang vowed to improve
regulations to enhance protection of
intellectual property rights at a cabinet
meeting in November 2017. He also
promised to make private businesses
enjoy equal rights similar to SOEs and
introduce punitive fines for IPR
infringements.
Going forward, it remains to be seen how
effective these new policies will be.
Private companies in China are
increasingly getting frustrated with the
prospect of trade and investment
liberalisation measures never being fully
materialised. In 2005, the State Council
announced its famous 36-points
guidelines to give the private sector better
treatment and wider market access, but
most of those policies haven’t been fully
implemented till today.
12 China Economic Quarterly Q4 2017
IIIHot topic analysis
● China’s response to the US tax reforms
Overview of the US tax reform
With the aim to re-gain its global
attractiveness and competitiveness, the
US law makers recently enacted the
most comprehensive tax reform since
19861, effective from 1 January 2018.
The US tax reform is framed literally as
the “Tax Cut and Jobs Act (TCJA)”, and
so Corporate Income Tax rate (CIT) is
unified at 21% (from the progressive
rates with top rate at 35%) and Personal
Tax rate is slightly reduced (the top
progressive rate is reduced from 39.5%
to 37%). However, it is effectively a
structural overhaul of its existing tax
system, rather than merely a tax cut.
When reducing the tax rates for
businesses and individuals, it at the
same time expands the tax base and
repeals certain reliefs, so different
industries, families and investors may be
feeling the impact differently.
The US tax reform is expected not only
to affect US domestic economy and US-
based multinational corporations (US
MNCs), but also has awakened the
attention and concerns of other
economies and international
organisations, in light of the large swath
of new international tax rules introduced
and its spillover effects. Among other
provisions, the following in particular
are attracting debates and controversies
in the international arena:
• Transitional tax — It taxes a US
shareholder’s pro rata share of
certain foreign subsidiaries’
previously un-taxed earnings and
profits residing outside the US since
1986 at 15.5% for cash and other
liquid assets and 8% for non-cash
assets (as opposed to the original rate
of 35%). It serves as a one-off
measure to clear up all the legacy
issues and move over to the new US
tax regime;
• Tax exemption for post-2017 foreign
dividends — It is a transformation to
partial territorial system to encourage
repatriation of US MNCs’ overseas
profits back to the US
in future;
• Foreign Derived Intangible Income
(FDII) provision — It effectively
allows US businesses to enjoy a
preferential tax rate (13.125% from
2018 to 2025 and 16.406% for 2026
and beyond as opposed to the
original rate of 35%) to high-return
income derived from export sales of
US-made goods or services to
overseas. It is seen as a policy to
encourage US-made goods and
services for overseas markets;
• Global Intangible Low-Taxed Income
(GILTI) provision — It effectively
captures overseas low-taxed
high-return intangible income into
the US tax net in a more mechanical
and efficient manner. It is a kind of
anti-tax avoidance measure to
discourage US MNCs leaving profits
overseas untaxed or low-taxed;
PwC 13
1 In 1986, the Tax Reform Act of 1986 was
passed as the significant tax reform pushed
forward by the Reagan Administration.
• Base Erosion and Anti-avoidance Tax
(BEAT) — It in general denies the
deduction of certain payments (for
non-tangible goods) to non-US related
parties by imposing effectively a
minimum tax. It is an anti-tax
avoidance measure, but also seen as a
discouragement of purchases of non-
tangible goods and services from
overseas.
Taken together, these policies and
measures are expected to have significant
impact on the cross-border investment,
business model, intellectual property
arrangement, capital flow, and trade of
international businesses. Nevertheless, it
is important to note that most of the
policies and measures under this round
of tax reform are temporary, i.e. expiring
at the end of 2025. In light of this, it is
hard to assess the long-term impact of
the US tax reform at this stage.
Meanwhile the US law makers and
administrations are currently still
preparing the detailed implementation
rules, making it difficult to conduct a
concise prediction and analysis of
the impact.
14 China Economic Quarterly Q4 2017
Possible impact of the US tax reform
According to the estimation of the Joint
Committee on Taxation (JCT)2, the net
revenue effect caused by the US tax
reform would increase the on-budget
federal deficit by $1.456 trillion over 10
years. However, this has not taken into
account the dynamic effects (i.e. the tax
revenue would increase as the tax rate
reduction would boost the economy and
lead to a stimulus effect).
From a dynamic view, the International
Monetary Fund (IMF)3 expects that the
US tax reform (especially the reduction
in CIT rate and the temporary allowance
for full expensing of investment) and
associated fiscal stimulus would
temporarily raise the economic growth
of the US, with favorable demand
spillovers for its trading partners
(especially Canada and Mexico). The
IMF also made an upward revision on
the prediction of the global growth;
around one-half of upward adjustment is
contributed by the expected global
macroeconomic effects of the US
tax reform.
Though tax is definitely not the sole
factor for investment and treasury
decisions, some MNCs have already
taken actions in response to the US tax
reform. For example, Apple plans to
invest over $30 billion in US capital
expenditures, creating over 20,000 new
jobs at existing campuses and a new
campus to house technical support for
customers4. Broadcom, the global
semiconductor leader, announces its
plan to move its headquarters from
Singapore back to the US5. Meanwhile,
many more US MNCs are calculating
their deferred tax liabilities and planning
for the payment of the Transition Tax.
Facing the anxiety that capitals may flow
back to the US, some countries are
reviewing or revising their tax systems to
make sure they are competitive in the
global markets and appealing to
international investors. Meanwhile,
some international tax provisions under
the US tax reform are regarded as
aggressive and disturbing the
international tax standards (e.g. base
erosion and profit-shifting (BEPS)
project), which are already agreed by
G20/OECD platforms in recent years. In
a joint letter to the US Treasury
Secretary6, the finance ministers from
the five biggest EU economies expressed
their concerns over GILTI, BEAT and
other US tax reform provisions, which
may be out of step with the WTO rules
and the OECD’s BEPS project. It is yet
certain how the US would respond to
these challenges and interact with the
global tax reforms at large.
Overall, this round of US tax reform is
very comprehensive and next to the last
significant tax reform about 30 years
ago. Given the US’s influential position
in the international economy, the
spillover effects to the other economies
should not be under-estimated.
2 The Joint Committee on Taxation (JCT) is a nonpartisan committee of the United States
Congress, which assists Members of the majority and minority parties in both houses of Congress
on tax legislation. For details of the JCT estimation, please refer to
https://www.jct.gov/publications.html?func=startdown&id=5053
3 IMF World Economic Outlook Update (January 2018)
http://www.imf.org/en/Publications/WEO/Issues/2018/01/11/world-economic-outlook-update-
january-2018
4 No surprise: Apple’s repatriation Bill is huge: http://www.taxanalysts.org/content/no-surprise-
apples-repatriation-bill-huge
5 Broadcom lays plans for US arrival: https://www.taxnotes.com/tax-notes-international/tax-
reform/broadcom-lays-plans-us-arrival/2018/01/29/26t84
6 EU Finance Ministers fire warning shot on US tax reform: http://www.taxanalysts.org/content/eu-
finance-ministers-fire-warning-shot-us-tax-reform
PwC 15
China’s responses to US tax reform
As the biggest developing country and
second largest economy in the world,
China would face new challenges brought
by the US tax reform. Among others, two
key questions were constantly raised to
Chinese policy makers.
1. Will the US tax reform diminish the
attractiveness of China to
international investors? China’s
Ministry of Commerce spokesman
did not think so. In a press
conference7, he pointed out that tax
policy is a key factor but not the
only factor to be considered when
businesses choose investment
locations. They should consider all
relevant factors such as economic
stability, market potential,
production costs, business
environment, etc., based on their
own long-term development
strategies. Meanwhile, China will
continue to improve its business
and investment environment and
ease market access for foreign
investors. It is believed that China
will continue to be an attractive
investment destination.
2. Will China also cut its taxes? The
Deputy Commissioner of China’s
Ministry of Finance8 responded in a
conservative way, indicating that
China will study the spillover effects
of the US tax reform and review its
own tax policies to make sure they
would help boost China’s
productivity and competitiveness,
and benefit the people. In fact,
China has been dedicated to
reducing the tax burden for years.
The Value-Added Tax (VAT)
Transformation Reform has cut
taxes by more than one trillion
yuan. According to the head of the
Chinese Academy of Fiscal
Sciences9, unlike the US tax regime
which relies on income (direct) taxes
as the main source of tax revenues,
China has turnover (indirect) taxes
as the main source of tax. Hence,
instead of income taxes, China
should further focus on the reform of
turnover taxes, especially VAT as a
follow-up step.
7 商务部回应美国税改对中国吸引外资影响:
http://www.xinhuanet.com/fortune/2017-
12/14/c_1122111952.htm
8 美国税改为何成为“全球话题”:
http://www.xinhuanet.com/world/2017-
12/04/c_129755533.htm
9 美国税改为何成为“全球话题”:
http://www.xinhuanet.com/world/2017-
12/04/c_129755533.htm
16 China Economic Quarterly Q4 2017
Chinese tax authorities’
pro-business initiatives
China has been devoted to improving its
business environment for foreign
investors in recent years, e.g. the
issuance of “20 Measures” and “22
Measures”10, the new version of Industry
Catalogue Guide for Foreign Investment,
etc. to further relax the access restriction
on foreign capital and encourage capital
inflow. At the end of 2017, the State
Administration on Taxes (SAT) issued a
long-awaited policy, allowing foreign
investors to enjoy withholding tax
deferral treatment on the profits
distributed from Chinese subsidiaries to
their foreign parents, as long as they are
directly re-invested into China’s
“encouraged projects”, so as to retain the
foreign capital in China. It is expected
that more business-friendly tax policies
and administrative measures like this
will be released in 2018 and beyond.
Meanwhile, China is expanding its
influence in international taxation policy
making process and strengthening
global collaboration to better serve
Chinese enterprises’ “going abroad”.
Supporting the “Belt & Road Initiative”
is one of the key tasks of Chinese tax
authorities. As noted by Mr. Liao
Tizhong, Director General of the SAT’s
International Taxation Department11,
China will keep on improving tax
collaboration with the countries along
the “Belt & Road”, including facilitating
the tax dispute resolution, signing more
tax treaties, helping the enterprises
“going abroad” and managing
cross-border investment risk.
What to expect for the next step
There is widespread consensus that this
round of the US tax reform is a must for
the US as its tax burdens (in particular
reflected by its CIT headline rates) and
systems are out of step with the rest of
the world and not supportive of the US
economic developments and US MNCs’
international competitiveness. The TCJA
is badly needed for the US to catch up
with many developed and developing
economies, move to a modernised tax
system, and fuel up the US economy and
US MNCs.
Unlike the pressing need for the tax
reform in the US, China has been
constantly moving forward at its own
pace to further open up its markets and
enhance its competitiveness in the world
through various means. Taxation is one
of them. We do not believe it is
necessary for China to cut its taxes
simply to match the US tax cut or even
the tax reforms of other jurisdictions.
We believe China shall continue
pursuing its own national goals through
its own tax strategy at its own pace. We
expect that China would continue to
improve its tax systems and
administration efficiency, and even roll
out some types of tax incentive measures
with specific targets (e.g. encouraging
high-tech developments) in due course.
However, such actions will be carried
out in a balanced manner, benefiting all
domestic and international factors. In
addition, China has publicly stated that
it is keen to take the lead in the revamp
of international tax rules along the BEPS
project backed by G20.
(For enquiries or questions, please
contact Matthew Mui, Partner of
National Tax Policy Services at
[email protected]; Bo Yu,
Partner of China Investment Business
Advisory at [email protected]; Peter
Kao, Partner of US Tax Consulting Team
10 Pls refer to Guofa [2017] No.5 and Guofa [2017] No. 39 for “20 Measures” and “22 Measures”
respectively.
11 推动全面开放新格局开创国际税收新局面:
http://www.bjsat.gov.cn/bjsat/qxfj/zsefj/zcqqy/gzdt/201801/t20180118_353462.html
PwC 17
● What is the impact of real estate macro control on
China’s economy?
In the past two years, China’s central
and local governments had issued
probably some of the strictest macro
control and regulation policies on the
real estate market. For instance, some
local governments not only
implemented property-purchasing
limitations, but also placed restrictions
and controls that prohibit selling new
properties to the first buyers within two
to five years. In many major cities, it has
become almost impossible to buy an
apartment without local household
registration system (hukou) or
registered permanent residence or for
an individual not paying income tax and
social insurances in that city for certain
number of years.
The main theme of China’s macro
control on property market can be
summarised largely by the words of
President Xi Jinping that “housing
should be for living, not for
speculation”. This theme had been
further adopted as the guiding principle
for real estate sector reform at the 19th
National Congress of the Communist
Party of China held last October.
There is no doubt that preventing
speculation on the property market is the
right approach to curb real estate
bubbles. However, what is the impact of
real estate macro control and regulation
on China’s economy? Is China ready to
face the consequence of these measures?
China GDP and Completed Investment in Real Estate Development (1998-2017)
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
14.0%
15.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
Completed Investment in Real Estate Development (YOY Growth) GDP (YOY Growth)
Completed Investment in
Real Estate Development
GDP
Source: Wind
18 China Economic Quarterly Q4 2017
It is widely believed that the rapid
growth of the real estate market and its
related sectors has been and still is one
of the most important drivers of China’s
economic prosperity, especially since the
reform of China’s housing system in 1998.
As shown in Chart 1, the growth rate of
China’s gross domestic product and
investment in real estate development in
the past twenty years are closely linked,
as both rates shared a similar growth
path.
Some might argue that before China’s
real estate boom, the GDP growth rates
had already sustained a high level for
nearly two decades. It is true that
economic reform and opening up,
expansion of foreign trade, especially
China’s accession to the World Trade
Organisation, large scale fixed asset
investment in industrial production and
infrastructure projects are all important
factors that contributed to China’s
economic miracle. But very few would
ignore the importance of the property
market in the process.
Furthermore, in addition to GDP growth,
China’s boom in real estate market has
also created enormous wealth for the
property owners, including individuals
and institutions. For example, a decent
100 square meter apartment in the
centre of Beijing or Shanghai would be
worth at least 10 million yuan today. But
twenty years ago, the purchasing price
would be merely around 200,000 yuan.
In fact, for the majority of Chinese urban
families, property has already become
the main part of their fortunes.
There is a popular joke on China’s
publicly listed companies. In the face of
financial troubles, a company could
immediately become profitable on its
balance sheet by selling a large
apartment from tier one cities (Beijing,
Shanghai, Shenzhen and Guangzhou).
Indeed, a healthy and stable property
market is extremely critical in preserving
China’s economic achievement and
sustaining its growth in the future.
PwC 19
China Real Estate Industry YOY Growth (1998-2017)
-40.0%
-20.0%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
the Total Investment in Real Estate Development This Year (YOY Growth)
Sales of Commercial Buildings (YOY Growth)
Floor Space of Commercial Buildings Sold (YOY Growth)
Nonetheless, how serious is the impact
of real estate macro control and
regulation on China’s economy,
especially when policies have become
stricter in the last two years?
In a longer perspective, the total sales of
housing increased from 250 billion yuan
in 1998 to 13.37 trillion yuan by the end
of 2017, expanding by 53 times. Over the
past twenty years, the average annual
growth rate of housing sales was nearly
26%, a very high rate compared to
average GDP growth rate of 9.1% in the
same period.
For the last two years, real estate
investment had dropped to less than
10%, but sales of housing (measured by
price) still increased by 35% in 2016 and
14% year-on-year in 2017, while housing
sales and floor space sold went up by
22% and 8% respectively.
By comparing 35% growth of housing
sales to 22% of floor space sold,
obviously, macro control policies had
almost no effect on nationwide housing
prices in 2016. But the effect started to
kick in after entering 2017 as both
figures fell to 14% and 8%. As a mix of
stricter macro control measures has been
gradually adopted by central and local
governments, the property market is
expected to cool down further in 2018.
20 China Economic Quarterly Q4 2017
1997-2017 Sales of Commercial Buildings in China (CNY billion)
0.00
2,000.00
4,000.00
6,000.00
8,000.00
10,000.00
12,000.00
14,000.00
Sales of Commercial Buildings (CNY billion)
For the impact of real estate industry on
China’s overall economy, according to
Professor Chen Jie, director of the Institute
of Real Estate Research at Shanghai
University of Finance and Economics,
investment in real estate sector accounts
for about 10% of China GDP. His research
suggests that when real estate investment
drops by 1% in China, GDP growth rate
would be 0.1% less.
Furthermore, according to official data, real
estate industry accounted for about 6.5% of
China’s GDP in 2016 and 2017. If the most
related construction sector is included, the
two industries would account for about 13%
of China’s GDP.
By tracking the relationship between real
estate development and GDP growth for
the last twenty years, it might not be
enough to draw a sensible conclusion on
how much China’s macro control would
affect the overall economy. Besides, it is
complicated to estimate the impact of
macro control of real estate on construction
industry, home appliances, furniture and
other related sectors.
Many believe that when the growth of real
estate market starts to decline, it would
bring significant influence over the
economy. More specifically, a decline in
real estate investment would bring down
GDP growth, and directly and indirectly
affect other sectors.
However, it needs to be recognised that
about half of China’s 1.39 billion population
live in rural areas, and in the longer term
urbanisation will continue to drive
domestic demand for housing.
Finally, the macro control policies are likely
to reshape China’s property market and
substantially reduce speculations. They
would help the market return to an
equilibrium of normal supply and demand,
and eventually build up a property market
which mainly serve people’s needs for
comfortable living, instead of speculation.
In any case, the macro control policies may
adversely affect China’s economic
performance in the short term, but a
reasonable and affordable (for the majority
household) property market will be more
beneficial for China’s long term economic
prosperity.
Source: Wind
PwC 21
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Authors
Allan Zhang Chief EconomistPwC China+86 (10) 6533 [email protected]
G. Bin ZhaoSenior Economist PwC China+86 (21) 2323 [email protected]
Acknowledgements
Special thanks to Sanjukta Mukherjee, Lan Lan and Shan Liang for their contributions to the report.