Twofish's Blog

March 23, 2007

Comments on China Law Blog

Filed under: china, politics — twofish @ 10:58 pm

> Beijing also has been giving big rebates on the VAT to subsidize exporters.

One of the actions of the NPC was to equalize foreign and domestic tax rates.  China is becoming an attractive enough destination is there is no need to attract investment by lowering taxes.

In any event, government revenues are coming in and there is enough money to pay for things.

> Beijing is too far away to stop local officials from collecting taxes that have been eliminated.

No they aren’t.  What has happened in the last fifteen years is this dance.  Beijing bans X, local officials respect ban, but try to collect revenue using method Y.  Beijing ban local officials from using rural credit cooperatives as cash machines.  They set up tariffs.  Those get banned.  They set up fees.  Those get banned.  They set up land sales.  Those are now banned.

The basic problem is that local governments are broke.

What makes this time different is that finally the central government is coming in and paying for things, because they now have the cash to do it from the VAT.  Setting up a proper tax system was something China tried and failed to do in the 1750’s, and it was the *big* reason why China went through hell in the 19th century, and now in the 1990’s, it’s finally done it.

(No taxes -> no armies -> no armies, you are at the mercy of your neighbors.  That $70 billion that the PRC spends on its military might seem like a waste, but if it spent zero, I can assure you that China is going to be at the mercy of Japan, Russia, and the United States, and we are going to be back to the 19th century.  If you want to see the consequences of “lets talk peace and hope people are nice to us” ask the Tibetans.)

> Everyone still has to pay for books, uniforms and tuition, so where is this “education” fund?

They are starting with the poorest Western provinces.  They started last year with 50 million children.  Last count they are up to 150 million kids.

> Chinese hospitals require payments up front.

And they’ll get it from insurance payments in NCMS.  As with the education fund, the government is starting with the poorest counties and working their way up.

> The banks are still corrupt, witness the furor over one of the big 4 accounting firms tallying a $900 billion NPL ratio for the 4 big state owned banks, which also pretty much wipes out much of the savings of average chinese.

We covered that here.  If you look at the archive, I went through and pointed out exactly where Ernst and Young couldn’t add right, and double counted about $300 billion.  The total figure for NPL’s was about $500 billion.  Of that about $300 billion from the SOE’s has been  paid off over the last ten years, and that will  done when they close the asset management companies next year.

That leaves about $200 billion in bad loans in the rural credit cooperatives and joint stock cooperative banks, and fixing those is on the todo list.

> China has to pump money into the US so we can buy all of those exports made by slave labor.

Actually, I see the money that China is paying the United States as something akin to “military tribute.”  The money that China is paying the United States has the effect of allowing the United States to keep reliable oil supplies from the Middle East, while at the same time preventing the United States from acting in ways that are extremely adverse to Chinese national interest.

Let’s be clear on this.  Without Chinese money, the US would be pulling out of Iraq in six months at the most.  With Chinese money, the United States is telling Chen Shui-Bian to shut up every time it talks about Taiwan independence.

If you want to see slavery go back to the 1960’s.  Until 1978, you couldn’t choose your job, under centralized socialism, the government was the only employer and you did what the government told you to do.  The market has eliminated that.

Since 1978, China has moved about 300 million people to the middle class, and has at least guaranteed basic necessities for the remaining 900 million.  That’s further along than Deng Xiao-Ping planned.

If you assume about 8% economic growth, then get 1.3 billion people up to Western standards from 1978 is going to take about a century.  If you seriously think that you can do better than that, I’d be interested in how.

I’m not interested in abstract political philosophy, and I have very little respect for “magic wand” solutions.  I want numbers and concrete proposals.  How much is this going to cost?  Where is the money going to come from?  Who wins?  Who loses?  How long is it going to take?  What are the political challenges?  What are the risks?  What are the benefits?  What are the assumptions that you are making?  What if they are wrong?

It’s answering these sorts of questions that gets anything done in business and politics, otherwise you end up with discussions that are just pointless at best, and tremendously harmful at worst.



  1. > Let’s be clear on this. Without Chinese money, the US would be pulling out of Iraq in six months at the most. With Chinese money, the United States is telling Chen Shui-Bian to shut up every time it talks about Taiwan independence.

    Comment by Peter Kauffner — March 24, 2007 @ 3:13 pm

  2. So what’s your conclusion? China should dump its reserves, force the U.S. to turn Iraq over to al-Qaeda, and make Taiwan to return to the motherland? All the U.S. wants from Iraq is a government that doesn’t send airliners crashing into our skyscrapers. The interior of China is full of desperately poor peasants, yet here you are fantasizing about how China can spend its money in such a way as to piss off the U.S. and Taiwan.

    China is still taking development money from the U.S. and the World Bank, so I’m not sure what you mean by “the money that China is paying the United States.” Do mean the policy of selling exports below cost? China does this in order to maximize production and employment. It’s not a favor to the United States. China’s reserves are still under $1 trillion. They’ll need a big piece of that to deal with the NPL issue. If you think of the rest spent over a five to ten year period, it’s not going to break the bank for the U.S. It would be a gradual rise in U.S. exports.

    The more tension there is between Taiwan and China, the more money the U.S. makes selling weapons. Who would invest in China if it went to war with Taiwan? China is forever making threats about Taiwan, but nothing ever happens. It’s time to face reality: China doesn’t want Taiwan back. The issue is a pretext for more military spending and domestic repression. The reason has nothing to do with the U.S. Seventh Fleet or the Taiwanese air force. The CCP doesn’t know how to handle a democratically aware population. Mao never wanted Hong Kong. Deng took it back only because the British made a big fuss about the 1997 deadline. The Red Guards took over Macau in 1967, but Mao was only interested in humiliating the Portugese, not kicking them out.

    Comment by Peter Kauffner — March 24, 2007 @ 3:44 pm

  3. No. I think that China and the United States should realize that their economies are interlinked, and try to figure out a way so that the world economy doesn’t blow up. I happen to believe that the China should not have a confrontational policy against the United States. The only way that China and wreck the US economy is by wrecking its own economy, and vice versa. This is a good thing.

    China is pumping $200 billion dollars per year into the US economy. About $100 billion is in the form of US treasuries, and about $100 billion is in the form of mortgage backed securities.

    In comparision to this, the amount of aid that China gets is negligible. China is basically paying for the Bush tax cuts, the US housing boom, and the war in Iraq.

    The banking NPL issue is largely resolved. The $300 billion in bad loans from the 1990’s will be paid off by the end of 2008. There is still about $100 billion in bad loans in rural banks, and maybe $100 billion in the joint stock commercial banks.

    China wants Taiwan back, but it is willing to wait decades if not centuries to have it happen. The PRC realizes that there is no possibility for political unification in the next decade and probably not within the next thirty years, but it wants to keep the possibility of eventual unification open. As long as there is a chance that there will be unification “someday,” the PRC will not take any drastic moves. However, if the PRC gets into a “act now or lose Taiwan forever” then it will fight. It may lose, but if it is a “do something or else situation” it will not lose without putting up a fight.

    I think we are talking about a difference in timescales. Chinese are extremely patient and are willing to wait centuries to have something happen. Mao was in no hurry to get back Macao, Hong Kong, or Taiwan, but as long as the hope that it could happen “someday” that was good enough not to press the issue.

    This difference in time perception can lead to some dangerous misunderstandings, which fortunately have been cleared up.

    Let me tell you a story which might explain something about how some Chinese see things…..

    A few years ago, my family moved some tombs to a new place. One of the tombs is empty. The body that should have been in it was the body of one Wang Wan-long who was my great-great-great-great grandfather. He died in the Opium Wars trying to keep British boats from entering a river and he sunk with the ship. One side of the tomb has Wang Wan-long, died in the Opium War against the British, the other side has Wang Wan-long, this tomb was moved in the year of the return of Hong Kong to the motherland.

    The Chinese view of time is actually more common than the American view of time. In most parts of the world, people talk about things that happened five hundred years ago as if they were yesterday, which means that they also think about things that will happen five hundred years from now as if it were tomorrow. There are bad things about this, one of which is that people still fight over things that happened five hundred years ago. But there are good things, about having long memories.

    What I am pretty sure is going through the mind of bin-Laden, the Taliban fighter, or the average Iraqi insurgent is “sure, you Americans are going to win every battle today, but are you prepared to fight for five years? ten years? a hundred years? a thousand years? Because if you are not, you will leave. Not today. Not tomorrow, but someday, and when you leave, even if it is a thousand years from now, we will win.”

    And it frightens me that they just might win.

    Comment by twofish — March 25, 2007 @ 2:37 am

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