Yves here. Some who are knowledgeable about China correspond with me. I sent around an article from Asia Times, China’s 25-year tax reach will cost it more than it collects. This measure seems so misguided (in terms of the 25 year part, not some collection of back taxes per se) as to seem desperate. From the top of the story:
China is now chasing decades of unpaid tax on money its wealthiest citizens moved offshore, in some cases reaching back as far as 25 years. Call it what it actually is: a state deciding, after the fact, that wealth it once let leave the country is now fair game to reclaim.
To be sure, taxing worldwide income isn’t radical policy. The United States has taxed its citizens’ global earnings for a century, and Europe has recently tightened comparable rules considerably.
Closing an offshore-trust loophole that let public-market gains dodge income tax entirely brings China roughly into line with practices already standard among major economies. Say that much for Beijing, and mean it.
But reaching back a quarter of a century after the fact is an excavation, and excavations rarely come with the kind of consistent, explainable standards that keep a tax system credible in the eyes of the people paying into it.
Wealthy families are being asked to settle gains from windows chosen with little public rationale, with their accounts based in China frozen until they pay. It’s the act of a government working backward from how much money it needs toward whoever still happens to have some.
What wealthy families fear in a moment like this is rarely the tax rate itself. Rates are negotiable and can be planned around years in advance. What can’t be planned around is a government reserving the right to rewrite the deal after the fact, which is why the response to that kind of risk is exit over negotiation.
I queried my interlocutors: “This action suggests China is in crisis. despite the denial in the article. No one would have said the US was in a crisis in late 2007 either.”
A reaction via ia e-mail:
I’m reluctant to call a potential crisis in China because obviously the government has so many levers it can pull.
But there is quite definitely something going on right now – there are lots of Chinese financial commentators putting their heads above the parapet to say things they would normally only say in code – you can interpret this as either a response to a signal that there will be a significant change in policy coming along, or that there is genuine panic building up.
It’s no secret that the banking system is very short on dollars and is withdrawing almost entirely from foreign investments – the Belt and Road Initiative has stalled at just the time you’d expect them to be trying to exploit America’s weaknesses. (Brad Setser disagrees with this – the technicalities of the arguments are beyond my pay grade. But it does seem that State banks may still be lending a lot outside China.) Chinese abroad avoid Chinese banks for a very good reason.
The real crisis is at provincial level. Local governments are now borrowing to pay interest payments – they are absolutely scraping the barrel and are desperate for Beijing to bail them out. And nearly all investment in China is orchestrated at this level, not by Beijing. There are now open calls by insider economists for Beijing to bail them out.
The domestic economy is now bad – really bad. So bad that even government-connected economists no longer bother pretending otherwise. Sometimes I think the only people who think China is doing well economically are Americans and assorted western 5- yuan commentators. The huge growth in the high tech industry and in exports cannot come close to covering the domestic financial crisis (as Pettis repeatedly points out, Japan crashed when Japanese companies seemed to be unstoppable). Even the most optimistic commentators see the property debt hole as being in the trillions of dollars, and that’s before you even begin to look at the liabilities created by massive overinvestment.
What is overlooked so often is that for every incredibly successful Chinese company, there are literally dozens of others limping along on a sea of debt and malinvestment. In the area I follow closely – energy policy – China has invested enormously in the best renewables and nuclear and class leading coal plants, but is currently wasting more energy that Germany uses, simply because of grid mismatches (and this problem has been known a long time). Numerous plants are lying idle because of gross overinvestment. But nothing is ever closed, everything is kept limping on due to local politics.
I would not rule out the possibility of a crisis caused by Xi simply refusing on ideological grounds to bail out local governments. Contrary to what is often assumed, local leaders are not directly answerable to Beijing – they see themselves as equals, with the Politburo as being to some degree answerable to them, not the other way around. To a certain degree, the way China is run is more akin to the EU than the US (I know this is stretching it, but many commentators simply assume a pyramid shaped hierarchy of power – but a graph of Chinese power relations would look closer to a complex web). To make matters worse, the most dynamic areas would oppose a bail out to what they see as the laggards, the poorer (and much more indebted) inland and northern provinces.
One blogger – Dragonometry – (https://dragonometry.substack.com) has set out what I think is a plausible scenario where China falls into a crisis. It would involve the leaders of the most powerful provinces simply refusing to supply any money or support to Beijing if Beijing finds itself forced into a bailout of weaker regions that would (as they see it) threaten their interests. In the resulting deadlock, there would be a series of bank failures in regions unable to keep the money flowing, while Shanghai, Guangzhou, etc., do their best to insulate their system from the crash, with Beijing a helpless bystander. Not unlike, to some degree, what happened in the Soviet Union in 1989, except without (I assume) an actual formal breakup as the driver of the crisis would be money, not power or ethnicity.
I’m not suggesting that China is going to break up, or even collapse. But at this stage the best case scenario is likely a very long – probably decades long period of internal consolidation, not unlike Japan for the 3 decades after 1989. But the debt levels are much higher than in Japan, and much of China still lags badly in overall development terms compared to 1980’s japan (or, for that matter, late 1990’s South Korea, after its financial crisis, or even the US after the Long Depression of the late 19th Century). A crisis will only occur if the process is mishandled. But I would consider the possibility of really bad decisions to be far more likely than many assume. There are plenty of indications that some at a very senior level (including possibly Xi himself) have a very distorted idea of the problem so there is no guarantee that even a highly technocratic response to a series of local financial crises will be sensible. There is a very strong belief within the CCP that personal sacrifice and physical toughness will allow China to pull through any crisis. It’s not clear to me that the average Chinese person agrees with this take.
By
