A brief introduction to China's subsidies system

Tuesday, 20 February 2007 15:36:40 (GMT+3)   |  
       

Due to the US complaint lodged with the WTO in early February against China's industrial subsidies, the current state subsidy system or mechanism in China is attracting widespread attention both inside China and overseas. It is not easy to comprehensively sum up all the different subsidies currently in effect in China because the situation is complicated by regional variations. A great variety of subsidies really does exist in China. In some industries and provinces, the subsidies situation is certainly serious. This can be accounted for by the Chinese state's industrial policies and the complicated state management system. Some subsidies are offered by the state with the purpose of encouraging the rapid development of certain industries and enterprises. Other subsidies are not allowed by the state but are implemented in practice by all levels of government in order to attract investment and achieve the goal of rapid local economic growth. The Chinese central government prefers to focus on the development of large-scale state-owned enterprises, high-tech industries, export-oriented industries and foreign investment-backed enterprises, and offers various subsidies to this end. All local governments in China, on the other hand, are willing to offer subsidies and favors to local industries, and even offer subsidies which lie beyond the bounds of their responsibilities - namely illegal subsidies to industries located in their areas. Currently, the major subsidies may be divided into the following categories: Land In China, all land belongs to the state, and so use of land for whatever purpose has to receive the state's stamp of approval. Every year, the Chinese state issues lists of the industries which are to receive state backing. It is easy for the favored industries to gain the right to use state land at low prices. In practice, due to lack of legislation and legal deterrents, many local governments ignore the state policy and offer land to all industrial sectors at a low price, sometimes even at zero cost. Almost all industries in China, including the steel industry, expend remarkably little on the cost of land. To change this situation, the Chinese State Council issued notification number 31 in October 2006 declaring its intent to increase the sales prices of land for industrial use by 40-60 percent. In addition, the minimum sales prices in the various regions were now to be decided and issued by the state. Currently, the land price range is from a low of RMB 60 (USD 7.31) per square meter in some areas in northwestern Xinjiang to a high of RMB 840 (USD 107.41) per square meter in the outskirts of Shanghai. Due to the new strict land bidding system, the administrative land subsidies system is being replaced by market rules. Taxes and loans The Chinese central government prefers to offer tax and loan subsidies to enterprises in the favored industrial sectors. The subsidies mainly involve rebates for corporate income tax and Value-Added Tax (VAT) for exported goods, the high depreciation rate of fixed assets, cancellation of tariffs and VAT on certain imports, high deductions before tax, and low-interest bank loans. As to the local governments, the types of tax subsidies they offer are more complicated and vary in the different regions across China, even including the return of corporate profits. In particular, foreign investment-backed corporations always enjoy more favors than local corporations. According to government data, almost 75 percent of foreign enterprises in China are in practice free of any tax imposition for the first three years of their operations in China. However, although there are many subsidies on offer from local governments, unlike the foreign and big state-owned enterprises, it remains difficult for the domestic middle and small sized enterprises to get bank loans, even in the case of high-tech industries. They have to face potential dangers of capital shortages due to the existing discrimination towards them at the level of the local banks. Material As regards the steel industry and the various manufacturing industries, apart from the above-mentioned subsidies, the cheap local prices of materials also favor them. The low cost of using natural resources resulted in a long-standing situation of cheap natural resource prices. Due to the low costs and huge market demand, coal, iron ore, rare metals, oil, natural gas, and so on, have been mined and tapped at crazy rates in recent years. However, this is rather a case of state negligence than of state subsidies. Due to excessive mining and lack of effective state management, serious environmental and safety problems have been met with in recent years. The Chinese state is aware of and worried by this situation of disorder. However, it will be very hard to effect a change in the current situation in the near future. On the one hand, China needs time to learn more about which subsidies are good for economic development and which subsidies are allowed by the WTO. On the other hand, to tackle the subsidy chaos prevalent at local government level will be hard work for the central government since it will involve reform of the state management system.

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