China
Beijing Goes on the Hunt for Hidden Lending
2010 was a tough year for China’s financial regulators. While on the face of it banks sharply reduced their lending, in line with Beijing’s decision to call an end to economic stimulus spending, the reality was banks lent just as much as the year before but hid a lot of it off-balance-sheet. Though the China Banking Regulatory Commission has been trying to bring wayward lending back onto the books, the genie is out of the bottle. And in a country where new loan data is one of the key determinants of monetary policy, that’s a real problem. Now moves are being made to do something about it. In an essay posted on its Web site Thursday, the People’s Bank of China proposed a radical overhaul of how monetary policy wonks look at the economy. “New yuan loan data no longer actually reflects the extent of financing in the real economy,” said the essay ( in Chinese ), authored by Sheng Songcheng, director of the PBOC’s Survey and Statistics Department. Sheng proposes a new formula that includes more than just loan data. “That will help avoid overly focusing on the size of loans and needing to play whack-a-mole, where one problem pops up while you’re dealing with another, such as banks using off-balance sheet lending to avoid credit limits,” Sheng wrote. While banks formally lent 7.95 trillion yuan, or roughly $1.2 trillion, in loans last year, according to the essay, the use of entrustment loans (where-by banks match-make lenders and borrowers and take a fee for their pains) and bank acceptance bills (a type of bank guarantee) meant off-balance-sheet lending inflated banks’ credit creation by a further 3.47 trillion yuan. An Fitch Ratings report issued in December estimated “credit leakage” from the banking sector at more than 3 trillion yuan . The new formula to calculate what the PBOC has termed “social financing” adds yuan loans to foreign currency loans, entrustment loans, trust loans, bank acceptance bills, corporate bonds, funds raised by share sales of non-financial companies, insurance payouts, insurance companies’ investment properties and “others,” and leaves open the option of including private equity and hedge funds in the future as those sectors mature. According to the essay, focusing on new loan data once made sense in an economy where the banks were by and large the only source of financing, but the development of China’s capital markets over the last nine years now means at the end of last year loans accounted for less than 60% of all financing. Despite the fairly holistic attempt to paint a snapshot of actual fundraising in the economy, there’s still one notable emission from the formula: China’s informal lending sector. China’s banks have long neglected lending to entrepreneurs and small firms. Beijing has been trying to redress the problem in recent years by launching a raft of small-scale financial institutions to plug the gap and by encouraging the major commercial banks to set up SME funding units. Still, there is a major unregulated cottage industry for loans, the relative size of which varies from year to year: According to some estimates informal lending was about a third of the size of total new banks loans in 2007, a year when monetary conditions were significantly tighter than the last couple of years. With the banks sloshing money around over the last couple of years, the informal lending networks, loans between family and friends, and underground banks have been relatively less important. And Beijing may now feel that its efforts to encourage formal institutions to extend credit to smaller firms is also reducing the overall importance of informal lending. But if monetary policy does start to tighten meaningfully this year, it Beijing might find its new indicator comes up short. –Dinny McMahon
2010 was a tough year for China’s financial regulators. While on the face of it banks sharply reduced their lending, in line with Beijing’s decision to call an end to economic stimulus spending, the reality was banks lent just as much as the year before but hid a lot of it off-balance-sheet. Though the China Banking Regulatory Commission has been trying to bring wayward lending back onto the books, the genie is out of the bottle. And in a country where new loan data is one of the key determinants of monetary policy, that’s a real problem. Now moves are being made to do something about it. In an essay posted on its Web site Thursday, the People’s Bank of China proposed a radical overhaul of how monetary policy wonks look at the economy. “New yuan loan data no longer actually reflects the extent of financing in the real economy,” said the essay ( in Chinese ), authored by Sheng Songcheng, director of the PBOC’s Survey and Statistics Department. Sheng proposes a new formula that includes more than just loan data. “That will help avoid overly focusing on the size of loans and needing to play whack-a-mole, where one problem pops up while you’re dealing with another, such as banks using off-balance sheet lending to avoid credit limits,” Sheng wrote. While banks formally lent 7.95 trillion yuan, or roughly $1.2 trillion, in loans last year, according to the essay, the use of entrustment loans (where-by banks match-make lenders and borrowers and take a fee for their pains) and bank acceptance bills (a type of bank guarantee) meant off-balance-sheet lending inflated banks’ credit creation by a further 3.47 trillion yuan. An Fitch Ratings report issued in December estimated “credit leakage” from the banking sector at more than 3 trillion yuan . The new formula to calculate what the PBOC has termed “social financing” adds yuan loans to foreign currency loans, entrustment loans, trust loans, bank acceptance bills, corporate bonds, funds raised by share sales of non-financial companies, insurance payouts, insurance companies’ investment properties and “others,” and leaves open the option of including private equity and hedge funds in the future as those sectors mature. According to the essay, focusing on new loan data once made sense in an economy where the banks were by and large the only source of financing, but the development of China’s capital markets over the last nine years now means at the end of last year loans accounted for less than 60% of all financing. Despite the fairly holistic attempt to paint a snapshot of actual fundraising in the economy, there’s still one notable emission from the formula: China’s informal lending sector. China’s banks have long neglected lending to entrepreneurs and small firms. Beijing has been trying to redress the problem in recent years by launching a raft of small-scale financial institutions to plug the gap and by encouraging the major commercial banks to set up SME funding units. Still, there is a major unregulated cottage industry for loans, the relative size of which varies from year to year: According to some estimates informal lending was about a third of the size of total new banks loans in 2007, a year when monetary conditions were significantly tighter than the last couple of years. With the banks sloshing money around over the last couple of years, the informal lending networks, loans between family and friends, and underground banks have been relatively less important. And Beijing may now feel that its efforts to encourage formal institutions to extend credit to smaller firms is also reducing the overall importance of informal lending. But if monetary policy does start to tighten meaningfully this year, it Beijing might find its new indicator comes up short. –Dinny McMahon
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Beijing Goes on the Hunt for Hidden Lending
China
China Provides Tax Incentives on Special Equipment for Green and Digital Development
China has introduced a new tax incentive for companies investing in digital and smart upgrades of special equipment to encourage environmental protection and safe production. Companies can enjoy a 10 percent deduction from their corporate income tax payable. Eligibility and requirements are outlined by the Ministry of Finance and State Tax Administration.
A new China tax incentive aims to encourage companies to invest in digital and smart upgrades of special equipment. Companies upgrading certain equipment that aids environmental protection and safe production can enjoy a deduction of the investment at a rate of 10 percent from their corporate income tax payable. We explain the requirements of the new tax incentive.
China’s Ministry of Finance (MOF) and State Tax Administration (STA) have issued a new preferential corporate income tax (CIT) incentive for companies investing in digital and intelligent transformations of certain types of equipment. To be eligible for the incentive, companies must invest in the digital and intelligent transformation of equipment related to energy and water conservation, environmental protection, and safe production.
The new tax incentive aligns with a State Council Action Plan, released in March 2024, which aims to accelerate the renewal of large-scale equipment and consumer goods, promoting high-quality development and driving investment and consumption for long-term benefits.
If the annual CIT payable is insufficient for the offset, it can be carried forward to future years for up to five years.
The CIT payable refers to the balance after multiplying the annual taxable income by the applicable tax rate and deducting the tax reductions and exemptions according to China’s CIT Law and relevant preferential policies.
Note that companies enjoying the tax incentives must use the transformed equipment themselves. If the equipment is transferred or leased within five tax years after the transformation is completed, the incentives must stop from the month the equipment is no longer in use, and the previously offset CIT must be repaid.
The “special equipment” eligible for the preferential tax treatment covers equipment purchased and used by companies listed in the Catalog of Special Equipment for Safe Production for Corporate Income Tax Incentives (2018 Edition) and the Catalog of Special Equipment for Energy Saving, Water Conservation, and Environmental Protection for Corporate Income Tax Incentives (2017 Edition).
This article is republished from China Briefing. Read the rest of the original article.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at china@dezshira.com.
China
Revealing the Encouraged Industries of Hainan in 2024: Unlocking Opportunities
The 2024 Hainan Encouraged Catalogue, issued by the NDRC, MOF, and STA, aims to boost industries in the Hainan Free Trade Port. It prioritizes sectors like tourism, modern services, and high technologies, offering incentives for foreign investment and market access expansion since 2020. The Catalogue includes 176 entries across 14 categories, with 33 new additions focusing on cultural tourism, new energy, medicine and health, aviation, aerospace, and environmental protection.
The National Development and Reform Commission (NDRC), in collaboration with the Ministry of Finance (MOF) and the State Taxation Administration (STA), has issued the Catalogue of Industries Encouraged to Develop in Hainan Free Trade Port (2024 Version), hereinafter referred to as the “2024 Hainan Encouraged Catalogue.” The updated Catalogue took effect on March 1, 2024, replacing the previous 2020 Edition.
Beyond the industries already addressed in existing national catalogues, the new entries in the 2024 Hainan Encouraged Catalogue are based on practical implementation experiences and the specific needs within Hainan, prioritizing sectors such as tourism, modern services, and high technologies.
The Hainan FTP has been providing incentives to draw investors to invest and establish businesses in the region, especially foreign investment. Alongside a phased approach to opening the capital account and facilitating free capital movement, Hainan has significantly expanded market access for foreign enterprises since 2020, particularly in sectors such as telecommunications, tourism, and education.
The Hainan Encouraged Catalogue comprises two main sections:
Similar to the approach adopted by the western regions, foreign-invested enterprises (FIEs) should always implement their production or operations in accordance with the Catalogue of Encouraged Industries for Foreign Investment.
On top of the industries already addressed in existing national catalogues, the 2024 Hainan Encouraged Catalogue encompasses 14 distinct categories and a total of 176 entries especially encouraged in the region, including 33 new additions compared to the 2020 Edition. These new entries predominantly span cultural tourism, new energy, medicine and health, aviation and aerospace, and ecological and environmental protection, among others.
This article is republished from China Briefing. Read the rest of the original article.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at china@dezshira.com.
China
Key Guidelines for Companies in Compliance Audits for Personal Information Protection Standards
China’s standards authority has released draft standards for personal information protection compliance audits, potentially making them mandatory for companies in 2023. The audits will require companies to undergo annual or biennial checks based on the number of people’s information they handle. The draft standards outline the audit process and requirements, seeking public feedback until September 11, 2024.
China’s standards authority has released draft standards for conducting personal information protection compliance audits. Regular compliance audits to ensure compliance with personal information protection regulations may become a requirement for companies in China under draft measures released in 2023. We explain the audit processes and requirements proposed in the draft standards.
The Standardization Administration of China (SAC) has released a set of draft standards for conducting personal information (PI) protection compliance audits. Under draft measures released by the Cyberspace Administration of China (CAC) in August 2023, companies that process the PI of people in China are required to undergo regular compliance audits.
Specifically, companies that process the PI of over one million people must undergo a compliance audit at least once a year, while companies that process the PI of under one million people must carry out an audit at least once every two years.
While the draft measures stipulate the obligations of the auditing body and the audit scope, the draft standards outline the specific audit process, including evidence management and permissions of the audit organization, as well as the professional and ethical requirements of auditors.
The Secretariat of the National Cybersecurity Standardization Technical Committee is soliciting public feedback on the draft standards until September 11, 2024. Public comment on the draft measures released in August last year closed on September 2, 2023, but no updated document has yet been released.
The draft standards outline five stages of the PI protection compliance audit: audit preparation, implementation, reporting, problem rectification, and archiving management.
Auditors are required to accurately document identified security issues in the audit working papers, ensuring that the records are comprehensive, clear, and conclusive, reflecting the audit plan and its execution, as well as all relevant findings and recommendations.
This article is republished from China Briefing. Read the rest of the original article.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at china@dezshira.com.
- China Provides Tax Incentives on Special Equipment for Green and Digital Development
- Revealing the Encouraged Industries of Hainan in 2024: Unlocking Opportunities
- Key Guidelines for Companies in Compliance Audits for Personal Information Protection Standards
- A Comprehensive Guide to China’s Expanded 144-Hour Visa-Free Transit Policy at 37 Ports
- Regulatory Changes in China Aim to Boost Service Sector Growth in Six Cities
- Adhering to Updated Registered Capital Regulations in China’s Revised Company Law
