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Is China's low-cost era approaching its end?

(People's Daily Online)

16:43, August 17, 2012

The withdrawal of Adidas and other multinational corporations from China deserves special attention, economist Han Zhiguo, director of the Beijing Banghe Fortune Research Institute, said worriedly.

Han noted at the end of last year that the Chinese economy would enter a passive crisis transition period in 2012 due to the end of demographic dividend, soaring land prices, and deteriorating investment, consumption, foreign trade, and international environments.

Dr. Yang Peichang, an expert on German economic policy, also considers their withdrawal as a dangerous signal. Multinational corporations are far-sighted, and have noticed the risks facing China’s economy.

Although China’s low-cost era is not over yet, the trend is obvious. Yang said that China’s manufacturing sector can still enjoy low cost advantage for 10 more years, which, however, will be somewhat pointless and useless if the macroeconomic situation remains sluggish.

Winter has come for manufacturing

The National People’s Congress enacted a new Corporate Income Tax Law in March 2007, marking a symbolic end to nearly three decades of policies favoring foreign investment.

Previously, foreign-invested enterprises in nearly 60 special economic zones paid a corporate income tax rate of 15 percent, less than half the 33 percent levied on domestic Chinese enterprises.

China established its first special economic zone in Shenzhen in 1980 to attract and quarantine foreign investment but such zones have since proliferated as local governments competed to lure overseas money.

The bill on corporate income tax, which had been debated for seven years since it was first proposed in 2000, equalized tax rates between domestic and foreign-invested enterprises at a mid-rate of about 25 percent in 2008.

Foreign-invested enterprises that enjoyed low tax rates before the enactment of the Corporate Income Tax Law can still enjoy the low rates for up to five more years. In addition, the Chinese government has continued to provide targeted incentives to high-tech manufacturing companies.

Han said that previous tax exemptions for foreign-invested enterprises saved them significant money. At present, various factors such as the end of the “non-national treatment” and increasing production costs are squeezing their profit margins. The steadily increasing consumer prices in China over the past 10 years indicate that the country’s demographic dividend is coming to an end. Han noted that growing living costs force workers to ask for higher wages, otherwise they could not afford to live in cities.

Previously, most foreign-invested enterprises paid a corporate income tax rate of 15 percent, and enjoyed the preferential policy of “two-year exemption and three-year 50 percent reduction” (first two years tax-free, subsequent three years taxed at half the rate). However, many local governments offered preferential treatments of “five-year exemption and five-year 50 percent reduction” and even “10-year exemption and 10-year 50 percent reduction” to these enterprises.

Han said that foreign enterprises had paid zero cost to use the lands in China a few years ago but now these preferential policies had been canceled. Moreover, the workers also raised their awareness of maintaining their lawful rights and interests, so their advantages in China also gradually disappeared.

It indicated that the Chinese economy will face a crisis in the next three to five years, Yang said. In other words, China's manufacturing industry has ushered in the winter.

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Leave your comment5 comments

  1. Name

HuoQiao at 2012-08-1875.72.239.*
If the government does not control labor cost, land/home sale, and wage increase, China would see the end road soon. China has one used aircraft carrier, the U.S. has 11 aircraft carriers, how could China face any conflict in the high sea? Sad, but hope China doesn't drop into history any time soon.
wende at 2012-08-1871.255.83.*
International businesses got used to earning big profit from operations in China. Their pie is getting smaller and therefore the exodus. It is time for Chinese businesses to put up their own brand and compete with them. First target the 2nd and 3rd world countries and move to US and EU when the brands get known worldwide.
Huoqiao at 2012-08-1766.87.144.*
I am not an economist, but Government must control land, housing price, and labor cost. The poors remain poorers, but the riches are getting richers. Hope China is not not moving toward doom day.
Huoqiao at 2012-08-1766.87.144.*
Every one want pig pays, everyone want more for less work, everyone fight to get on top! Ten years ago a 3 room apartment on high rice in small town cost $10,000 U.S dollars, now $75,000 U.S dollars. What do The Chinese think they gain? To me, they gain nothing. 1995, a split level home cost $120,000. Five years ago, similar home cost $300,000! That led to the fall of housing price and people can't afford to pay their mortgage any more so lead to thousands of bankupcies and foreclosures. If the Chinese government fail to control, soon enough, the world is going to lough at China. Worst, citizen disobedience from within and inserting from abroad would spark flame and China would burn before the watchful eyes of the world.
helen at 2012-08-17175.142.242.*
South China and coastal China are getting expensive. The solution lies in encouraging investors to go to Central and Western China with improved transportation infrastructures.Investors will only go to places where they can maximise their profits. This is the inevitable course of businesses.

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