CCTV News: Inflation and Taxes
I was on CCTV News BizAsia today, giving my regular commentary. I said a couple of things that didn’t exactly mesh with the party line, which may or may not explain why my interview clips weren’t featured on their website, as they normally are (uh oh). However, both segments can be viewed as part of the entire program which was posted here.
The first discussion, which starts at the 2:00 mark, concerns the release of November figures for China’s Purchasing Manager Index (PMI), a key indicator of the pace of business activity. PMI rose for a fourth straight month to 55.2, up from 54.7 in October (anything above 50 indicates expansion, so the rise indicates that growth is not just strong, but actually accelerating). Most economists predicted that the PMI would stay flat, reflecting government efforts to rein in inflation. The fact that that didn’t happen means inflation remains a big concern, and the government is likely to have to take further action to get prices under control.
What kind of action? So far, the government has focused on administrative price controls, which I believe won’t work and will only introduce further distortions into the economy. In an earlier clip, from two weeks ago, I explain why I don’t think interest rate hikes or boosting the reserve requirement ratio for banks will do the trick either. The main source of inflationary pressure in the Chinese economy, I argue, is the maintenance of the RMB peg to the dollar. Today, I made that point even more forcefully. Given the overheated PMI numbers we’re seeing, if China’s economy isn’t strong enough to start allowing the RMB to appreciate, I ask, when would it be? An uncomfortable question for Chinese policymakers, I suspect, given how deeply they’ve dug their heels in on this issue, but one they’re going to have to face sooner rather than later — not because of US political pressure, but because of the urgent need to tame inflation.
The second segment starts at the 24:45 mark, and focuses on the new requirement for foreign companies in China to pay the same construction and education surtaxes as local companies are charged. For a long time, local and foreign companies in China operated under entirely different tax codes; over the past couple of years these two systems have been brought together and harmonized. This latest move is portrayed by Chinese officials as an effort to “level the playing field” by removing a special tax advantage for foreign firms. As I mention, I think everyone can agree that a “level playing field” is a desirable thing, but taxes are just one part of a bigger picture. If China taxes foreign and local companies the same, it should also treat them the same when it comes to market access, intellectual property protection, government procurement, etc. — areas where, all too often, the deck is stacked against foreign firms. At least one official interviewed for the preceding story observes that the cost of the new taxes will be minimal compared to the opportunities presented by the Chinese market. That’s true — as long as foreign firms actually have access to those opportunities. That’s probably not a point Chinese officials appreciate hearing, but it’s one they need to hear, because it’s a real and growing concern among the foreign business community in China.
Finally, here’s another clip from two weeks ago where I talked about the still-unfolding debt crisis in Europe. It’s a little dated — Ireland was still deciding at that point whether or not to take a bailout — but the basic picture I paint remains the same.