Every year Chris Devonshire-Ellis, the Senior Partner of the business and tax consultancy Dezan Shira & Associates, and publisher of China Briefing, is invited to spend a few days with various Ministers for an update on reforms and policy changes that affect foreign direct investment.
One of the few foreign businessmen to be granted such privileges, these are then presented in an annual special issue of China Briefing. This report details his findings from his meeting this year, which took place just after the annual National People’s Congress. We also highlight further information concerning some of the regulatory changes that have recently been introduced that affect income tax, property, and labor laws.
Executive Summary
From the macro-economic position, China’s 11th Five Year Plan got off to a good start in 2006, against a positive background of high growth and low inflation that is expected to continue for some time. However, against this, the Chinese government is concerned about the imbalances in the economy, and in particular the huge trade surplus, which hit US$177.5 billion in 2006 and was US$39.6 billion in the first two months of this year. That is a 225 percent increase on last year’s figures. They are also concerned about the continuing expansion of China’s foreign currency reserves, which are now in excess of US$1 trillion and saw an increase of US$200 billion in 2006 alone.
A study led by the Ministry of Commerce is underway to explore methods to reduce the trade gap surplus by promoting imports. In the meantime, the Ministry of Finance, the State Administration of Tax and the General Administration of Customs are formulating new policies to further enhance this in respect of their own areas of responsibility. In fact I have never seen the government so focused on these issues, and the various ministries so well coordinated in my years of meeting with them. These may, I suspect, lead to future announcements of policies intended to increase China’s imports, some of which will be domestically driven. Indeed, getting consumers in China’s massive rural areas to buy imported products is a key area – 70 percent of China’s population is in these regions. If China does not succeed in dealing with this issue then it will walk into serious conflicts over trade imbalances and RMB appreciation, leading to greater diplomatic, political and trade pressures. The U.S. Congress for example is already planning new trade sanctions against the PRC.
