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Lou Jiwei: help but not bailout

Top Insights2016-07-25

Violations of contracts are increasingly seen in the iron & steel and coal industries in China since 2016 with some central state-owned enterprises (SOEs) involved too. What’s the role played by central finance in removing risks of SOEs?

Violations of contracts are increasingly seen in the iron & steel and coal industries in China since 2016 with some central state-owned enterprises (SOEs) involved too. What’s the role played by central finance in removing risks of SOEs? China's Finance Minister Lou Jiwei responded as “Help but not bailout!” at the 2016 G20 meeting of finance ministers and central bank governors held on July 23-24.

Lou remarked that though enterprises see high debt ratio and also several cases of violations of contracts now, no systemic and regional risks outbreak. Public finance will not get involved until systemic risks arise and possibly result in huge economic loss.

Lou also stressed that “the money is contributed by taxpayers. We must estimate possible loss brought to taxpayers before taking any actions and be prudent with fiscal intervention”.

“Prudence does not mean doing nothing. Macro-prudential supervision from government is needed. As to major financial risks, especially those financial organizations which are ‘too big to fail (TBTF)’, they might bring disastrous impact to national economy, so macro-prudential management should be on guard as early as possible”, according to Lou.

Lou also took questions concerning finance and tax reform during the two-day meeting. Lou indicated that the reform of individual income tax and real estate tax must be actively pushed forward, but unfortunately, blocked by weak information collecting ability and the obstruction of interest adjustment, no scheme is officially launched yet by now.

Lou stressed that “obstruction always awaits true redistribution of tax revenue, but we are determined to do it”.

Lou once publicly indicated in the first half that the real estate tax is undergoing lawmaking process, while schemes for the reform of individual reform are under preparation.

Jia Kang, director of the China Academy of New Supply-side Economics, indicated on July 22 in Sanya, Hainan province that it has been decided that “the individual income tax will offset house loans and pay for the interest of monthly installment payment. It depends on the progress of the individual income tax reform. The central government requires implementation in around one year, but it can’t make it this year. It is for sure that the scheme will be promoted nationwide.”

As to the replacement of business tax with value-added tax, Lou indicated that the recently implemented policies boost the expertise of each industry, help enterprises to gain tax preference, and encourage innovation. But there is still room for improvement, such as enhancing inclusiveness to get more small enterprises involved. In addition, viewed from effects, there are still many imperfections in the policies for the threshold of taxation and further improvement is needed.

Lou also called for levying tax over digital economy.

Lou remarked that “my personal view is that tax must be imposed on digital economy. Taxation should be in place to better ensure taxation fairness while encouraging innovation-driven development”.

Lou indicated that fast growing digital economy brings complicated commercial activities. For instance, the growth of the retailing size of e-commerce largely outmatches that of real stores. China’s retail sales through e-commerce record a growth of 28 percent in the first half, while real stores record only 8 percent. Many shadow banks are also seen in digital finance. As a result, new taxation problems show up. A large part of digital economy sees no collection of tax.

Lou said China has just implemented the reform by collecting tax from cross-border e-commerce industry, the level of which has been for long way lower than that of value-added tax of domestic manufacturers, and it frustrates domestic R&D and manufacturing. Therefore, taxation should not blindly support innovation but should also ensure fairness. The tax imposed on cross-border e-commerce industry means protection and fairness for domestic manufacturers.

Lou also pointed out that “tax must be imposed on digital economy, but it’s very hard to put it into action. Firstly, it gains progressively stronger social influence and vested interests. Secondly, taxation is technically hard to realize. We cannot replace the role played by supervision. Tax revenue can increase as long as supervision is in place”. Lou indicated that supervision must be in place first. For instance, some sharing economy might escape from the supervision concerning intellectual property via Internet. Hence, Lou called for supervision over digital economy.


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