China
Trump’s currency war without a cause
Author: Yiping Huang, Peking University
The greatest economic damage of the ongoing trade war between China and the United States is caused by policy uncertainty, not import tariffs. In early August 2019, US President Donald Trump introduced some new shocks. Amidst the new round of trade talks between the two countries, Trump announced that the United States will start putting tariffs of 10 per cent on the remaining US$300 billion of goods imported from China. Quickly following that, the US Treasury Department designated China as a ‘currency manipulator’.
This currency war reminds me of an old Chinese saying: ‘Even when right a scholar cannot win an argument with a soldier’ — because it defies any common sense about currency manipulation. At one of the earlier G20 meetings, a US official warned that the United States would name China a currency manipulator if it did not intervene to hold up the value of Chinese renminbi (RMB). In fact, it would have been more appropriate to label China the ‘currency non-manipulator’.
The US Treasury Department usually follows three criteria to determine if a trading partner is a currency manipulator — the first is a bilateral trade surplus with the United States of more than US$200 billion; the second is a current account surplus of more than 3 per cent of GDP; and the third is a total purchase of foreign exchange equivalent to more than 2 per cent of GDP within 12 months.
Of these, China only satisfies the first criterion. And even this one needs to be looked at with caution. It is widely known that China’s bilateral trade surplus with the United States is a result of the global supply chain, as its overall trade account is almost balanced. And even this bilateral surplus is shrinking rapidly.
The US Treasury’s action might have been triggered by the weakening of the RMB on 5 August, with its bilateral exchange rate against the US dollar (USD) exceeding 7.0 for the first time in more than ten years. But this depreciation was a direct result of Trump’s announcement of additional tariffs that could deteriorate China’s external account. Several months ago, a senior IMF official suggested to me a hypothetical scenario, in which Trump would push down the value of the RMB by escalating trade tensions and then would call China a currency manipulator. This was exactly what happened.
If there was a cause for the new currency war, it was single-handedly created by Trump.
In July 2005, China started the managed floating exchange rate regime with reference to a basket of currencies. The People’s Bank of China (PBoC) pursues a policy agenda trying to make the exchange rate more market-determined over time but attempting to avoid excessive volatility in the short term. The RMB appreciated gradually before mid-2014 but suffered from periodical depreciation pressures after that. But since the beginning of 2017, the PBoC has avoided intervening heavily in the foreign exchange markets.
‘Management’ of the exchange rate is done mainly through the application of the ‘counter-cyclical factor’ by setting central parity at the start of trading days. The 12-month moving average of exchange rate volatility of the RMB increased steadily from late 2010 and was already close to those of major global currencies — such as the US dollar, the Euro and the Japanese yen — in early 2019.
By and large, the purpose of the ‘management’ is to reduce excessive exchange rate volatility, not to lower the currency value. The perception that a weaker currency strengthens economic growth is also outdated since it only considers the trade channel of the exchange rate effect on growth. But the effect of the finance channel could be the opposite — a weaker currency encourages capital outflow and weakens economic growth. During the second half of 2015, for instance, RMB depreciation was accompanied by sharp declines of net capital inflow.
Empirical analyses also confirm that, in China today, the finance channel already dominates the trade channel. Therefore, it is no longer in China’s own interest to single-mindedly pursue a policy of a weak RMB.
Likewise, a US policy of a weak US dollar would likely be futile, because US comparative advantages are more concentrated in the service sectors rather than in manufacturing industries. As C Fred Bergsten pointed out, Trump’s trade wars with China and many other countries reduced US imports, but did not boost US exports or bring back manufacturing facilities from overseas.
Unfortunately, such an unreasonable currency war would…
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
