Paying the China Price: The Full Price

Friday, June 20, 2008 9:05

During a recent discussion with a reporter, we were discussing how the costs of China had changed and that what we were seeing was the end of subsidized China.

It was a conversation, that like some of my posts, gave me a chance to work through a number of dynamics and build a new lens from which to view what I was seeing around me.

RMB movement aside, the discussion focused on the fact that a lot of the government back subsidies were being significantly reduce or removed and that while this was leading to increased costs, these costs were not an indication of inflation but the real price of China:

  • Corporate Tax law – gone are the days of 3 years 100% tax holiday, 2 years 50%.
  • VAT rebate reduction – Reducing the VAT rebate from 17% to in many cases 0, removed a large export subsidy
  • Labor Law – increased the protections of labor with respect to wages, contracts, and welfare – reduced the intangible subsidy that had been a lack of labor protection
  • Environmental laws – have reduce the subsidy whereby GDP came first, and now firms are being forced into compliance
  • Energy Pricing – as we just saw today, energy subsidies are being reduced and manufacturers/ consumers will be forced to absorb
  • Banking regulations – the removal of wholesale policy loans has resulted in firms being forced to shutter rather than run at a loss, and has prevented many new entrances that did little else than keep prices low through cut throat pricing
  • Real Estate regulations – aim was to give land holders more power in resisting development -which has led to a reduction of supply and thus prices have increased
  • industry specific subsidy removals

and that was just the start.

As many of these have been phased in over time, we have been fortunate that hasn’t been a huge shock to the system, and it is clear that there are still steps to be taken

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4 Responses to “Paying the China Price: The Full Price”

  1. JD says:

    June 23rd, 2008 at 6:03 am

    An optimistic perspective but a closer look reveals that subsidies are simply becoming more targeted instead of being removed. Authorities don’t wish to subsidize foreign manufacturing and capital but do wish to subsidize themselves and their state-owned businesses. They’re also working hard to reduce competition, particularly by ensuring that foreign market access and investment is limited but also through consolidation around giant state-owned players.

    Pollution is of course a big part of the story as a few in China benefit from cheap dirty energy while the vast majority suffer from widespread environmental degradation.

    No, there’s no real progress to speak of.

  2. Craig says:

    June 23rd, 2008 at 6:14 am

    Everyone seems to be forgetting the entire purpose of these regulations in the first place – to stimulate development. Now that that goal has been achieved, of course the stimuli are being rolled back. I’ve seen so many triumphal posts by both foreigners and Chinese saying things like “it’s about time this changed” and “now foreign company can no break china law, all are equal, now we will kick out foreign company and take China market”. Guys, it happened for a reason, a darn good reason, and now the training wheels aren’t needed any more.

  3. Rich says:

    June 23rd, 2008 at 6:57 am

    JD

    I would agree that the targets are being redefined, but I would not agree that they are trying to limit foreign access on the whole…..the rules themselves create national standards regardless of origin.

    An example I would use is in the banking industry where Shanghai Daily reported today Report: Local incorporation of overseas banks to triple… or you can go back to the 2007 AMCHAM report on business in China. Many firms who are failing here are failing in large part because they over estimated the market. I have spoken to people in logistics, law, and banking this week (all the historical examples of protected industries) who told me that they are having problems becuase they just can’t read the market, they are priced out, or their domestic competitors have learned faster than they thought they would and that has made selling the “international standard” difficult.

    As for who benefited from dirty industry/ energy, I would say that everyone benefited, some are definitely paying a higher cost.

    R

  4. Rich says:

    June 23rd, 2008 at 7:02 am

    Craig

    completely agree, and in previous posts I do a better job of saying that this is part of a process where the economy is maturing.

    My personal thoughts are that it is time for it to happen. china really can no longer pay the environmental costs that they have and expect to hold it all together. There is still room for maturation and growth in many areas of the economy, so of course there are things to point to as counter arguments, but everyone I speak to in an MNC, the gov’t, or academic think that if China waits much longer to do so it will only hurt worse.

    R