driving the day
1. Leader of the pack
On Wednesday, Xi made his way to Fujian’s capital, Fuzhou, where he visited (Gov.cn 1):
- A historical site, where he talked about protecting cultural heritage
- A 19-km-long pedestrian walkway, where he talked about urban planning
He also visited RICOM Group, a Chinese optical lens company.
- There, Xi had a chat about one of his favorite topics – innovation.
Xi said innovation is the only way forward: (Gov.cn 3)
- “We must rely on innovation for the country to advance in the next five years.”
- “Following the pack can’t help us make remarkable progress”
He promised government support to anyone that can contribute to the innovation cause.
- “As long as you contribute to innovation, China will fully support you – no matter where you come from.”
Get smart: Policymakers want to help companies – including private ones – to innovate more than ever.
Get smarter: Some of this support is on offer to innovative foreign companies – but locating RD efforts in China may be viewed as a betrayal back home.
2. Another extension for pandemic relief
On Wednesday, the State Council decided to extend two lending programs introduced by the People’s Bank of China (PBoC) last year to help small firms endure the pandemic.
- Both programs, which were meant to expire this month, will now be extended until the end of 2021.
The move means the PBoC will continue to:
- Pay an incentive – 1% of a loan’s outstanding principal – to commercial banks that exercise forbearance on loans to small companies that mature in 2021
- Provide 40% of the principal for unsecured loans that commercial banks make to small firms
The State Council said it was extending the programs in order to (Gov.cn):
- “Maintain unabated financial support for small firms.”
- “Ensure small firms can access credit conveniently.”
- “Decrease financing costs.”
Some context: Even though the worst of the pandemic is over, Beijing has been extending targeted support measures – such as tax cuts – to ensure that struggling firms can still get the help they need.
Get smart: These measures are about more than just the pandemic.
- Beijing has been trying to get banks to lend more to small firms for years, and these two programs have had unprecedented success in achieving that.
Get smarter: The PBoC might keep these programs around for longer than pandemic relief warrants.
3. It just got cheaper to nerd out
On Wednesday, the State Council announced more tax benefits for companies conducting research and development (RD) in China.
Specifically, companies will get a bigger tax deduction (Xinhua):
- “[T]he ratio of extra tax deduction on enterprises’ RD costs will be raised from 75 percent to 100 percent, starting Jan. 1 this year.”
- “This means, for every one million yuan spent on RD, a company will see two million yuan deducted from its taxable income.”
The tax breaks are also more flexible:
- Enterprises can apply incentives semiannually, meaning RD spending during H1 can be deducted during prepayment of corporate income tax in October.
Some context: Premier Li Keqiang noted that this was coming in his Government Work Report, at the Two Sessions earlier this month.
That’s a whole lot of tax deductions:
- It will cut taxes by RMB 80 billion, in addition to the RMB 360 billion in RD-related tax cuts from last year.
Get smart: Tax cuts will mean less money for the government – but innovation doesn’t come cheap.
Get smarter: The government is playing the long game – taking a hit now in hopes that more innovation will drive economic growth, and tax revenue, later.
4. Policymakers mull tax for big tech
It’s not all sunshine and tax breaks for innovators (see previous entry).
On Tuesday, Executive Vice Premier Han Zheng, chaired a symposium on fiscal and taxation work at the Chinese Academy of Fiscal Sciences (CAFS).
- The heads of the Ministry of Finance (MoF) and the State Administration of Taxation (SAT) were also there.
Some context: CAFS is MoF’s in-house think tank.
One thing from the meeting’s readout caught our eye: (Gov.cn 1)
- Han asked policy advisors to conduct fiscal research on how to regulate the platform economy.
What it means: Han wants to tax big tech companies.
And get this: Policymakers are even looking to join forces with foreign governments in setting taxation rules for big tech.
- The State Council and Party issued some guiding opinions related to tax reform on Wednesday.
- The documents called for deepening participation with other countries in formulating international tax rules for the digital economy. (Gov.cn 2)
Get smart: Discussions around levying digital taxes have gained steam since the second half of 2020.
- But this is the first official confirmation we have seen that China’s top leadership is weighing options on this front.
Get smarter: Senior leaders are convinced that big tech has had a free ride for too long.
- They want to see the entire country benefit from the meteoric rise of Chinese tech, not just high-flying execs and investors.
5. Top policy advisor recommends pivot to Europe
On Wednesday, The Paper published an interview with Yuan Peng, the president of the China Institute of Contemporary International Relations (CICIR), on Sino-US relations.
Why we care: CICIR is affiliated with China’s top spy agency, the Ministry of State Security, and has a direct line to top leadership.
Yuan is particularly influential: A US specialist by training, he briefed the Politburo on national security issues in December (see December 14 Tip Sheet).
Yuan is not bullish on bilateral relations:
- He said that the US understanding on contentious issues is so fundamentally different from China’s that “it is often impossible to discuss matters based on their own merits.”
With Sino-US relations seemingly stuck, Yuan thinks that Chinese leaders should focus their attentions elsewhere:
- Yuan advocates for trying to build closer ties with Europe.
Get smart: Yuan’s spot on when it comes to Sino-US relations. The prospects for improvement there look slim.
Get smarter: But Yuan is overly optimistic on China’s ability to win friends in Europe. In much of Europe, attitudes toward China have already hardened, and will be tough to change.
6. What does HM stand for?
On Wednesday, the Communist Youth League called out Swedish clothing retailer HM for a statement it issued on Xinjiang’s cotton industry in a Weibo post.
Things then moved fast. By late Wednesday:
- Two of HM’s Chinese brand ambassadors dropped their affiliation in protest.
- HM shops and products were no longer visible on most major ecommerce platforms.
- “HM stands for ‘huang miu’” – which means ridiculous – was trending on Weibo.
Some context: China is HM’s fourth biggest market globally. The brand reported over US 1 billion in sales in China last year.
That’s not all: Netizens unearthed similar statements from other brands – including Nike, Adidas, and Uniqlo – and called for more boycotts.
The timing is interesting, to say the least.
- HM’s statement was released in September to yawns.
- The EU just announced sanctions on Chinese officials and entities linked with Xinjiang on Monday (see March 23 Tip Sheet).
The Global Times insists the outrage is not manufactured:
- “[This] is a normal reaction of any consumer group, particularly when they feel deeply offended.”
Get smart: Over 80% of China’s cotton – and nearly 20% of the world’s crop – is from Xinjiang. So it’s a difficult place for companies sourcing fabric in China to avoid.
Get smarter: Companies serving Chinese consumers are increasingly going to face Catch-22 situations like these.