China's Major Tax Problem | Economics Explained

china has a major tax problem or actually  china has a few major tax problems and   most of them stem from the fact that china is  both the second largest economy in the world   with advanced financial systems and international  trade networks while also still being a largely   informal economy china's large economy demands  a level of government spending which requires   a large and broad tax base to fund unfortunately  the country does not have that the united states   china's closest peer and economic size has  federal tax revenues of around 17 percent of gdp   or around 25 percent when you include all  local and state revenues china by comparison   has revenues of nine percent now this video  isn't to argue for lower taxes or higher taxes   it is instead to look at the systemic issues  that china will have to overcome to stop living   on borrowed time and create a sustainable system  to fund its government's activities but to truly   understand this problem we are as always going to  need to look at some specific issues why has china   been unable to raise more taxes from its economy  is this low tax revenue actually going to hurt its   economy and finally is there anything that they  can do to fix this issue once we have done all of   this we can put china the second largest economy  in the world on the economics explained national   leader board this episode of economics explained  was brought to you by morning brew okay how had   no one told me about morning brew for those of  you that don't know morning brew is a free daily   newsletter delivered directly to your email every  morning i do a lot of reading about things going   on around the world partly because i find it  interesting but also because it's my job even   still it can be difficult to keep up to speed with  everything because i don't know if you've noticed   there is a lot going on keeping on top of the  craziness that is our modern world is a lot easier   with morning brew because their short articles  get straight to the point on the issues of the day   so if you want to make sure that you're not left  scratching your head next time a friend talks   about some new hot topic use the link on screen  now to sign up for morning brew completely for   free so china's tax collection problem is really  three problems they can't collect taxes from most   people the people they can collect taxes from do  a really good job of avoiding those taxes and the   taxes they do collect don't always go where they  need to china operates off a central authority but   no single man or even a single institution can  oversee the operations of 1.4 billion people   in one of the lightest countries in the world by  basically every metric that's why the government   authority is shared amongst provinces with their  own subprovincial regions and cities within those   regions all of these local authorities are in  charge of certain government functions that are   too small or regionally specific to be controlled  by the government organizations above them   it doesn't make sense for the people's party  congress to be managing the trash collection   schedule of hangzhou so they delegate that down to  the provincial government body who will probably   delegate it down to a city council so far this  is not that unusual it's basically exactly the   same system that i'm sure most of your own  governments use to perform their functions   the big difference is in the way that they get  their funding in most developed economies local   governments get their funding primarily through  a combination of property taxes and money coming   from a more senior level of government the federal  government gives money to the states and states   give money to their local governments they may  also have alternative revenue sources from things   like parking tickets or business fees but those  are pretty much irrelevant compared to these two   china's local governments are a little bit  different in that they make most of their   money by taxing businesses and selling off 20 to  70 year leases on their land holdings in china no   private company or citizen can own urban land so  renting it out for 70 years is the next best thing   60 of whatever these local governments make from  businesses needs to be returned to the central   government but the land revenues are all theirs  this is a very significant revenue source because   the real estate market in china is absolutely  massive we made a video a few months ago about   the real estate debt crisis the country had got  itself into to prop up this market a video that   i'm just saying we released just a month before  the news broke about the financial troubles of the   evergreen property development group now the thing  about land lease revenues is that they only work   if the land is worth developing land is only worth  developing if there's some kind of infrastructure   in place to support the people that will be living  in these new developments the solution to this is   that provincial governments are consistently in  an arms race against one another to build out   more infrastructure so they can make themselves  economic hubs so they can sell off land rights   so that they can fund more infrastructure so  that they can make themselves economic hubs   this game of chicken and egg does two things the  first is that it creates a glut of infrastructure   ghost cities and railways that carry no  passengers are not uncommon sights in china   again we did a video about exactly this the second  thing it does is necessitate a lot of upfront   investment by these provincial governments the  problem is that these governments are not allowed   to issue bonds and they don't start making land  revenues until they sell off their land holdings   so they need to get creative they have come up  with what is called a local government financing   platform and it's pretty much exactly as dodgy as  it sounds what these local governments do is set   up a private company and then give that company  some of their state assets this can be cash shares   and state enterprises or the land rights that they  are trying to sell off this supposedly private   company can then go to the bank and use all of  these assets as collateral to get a loan the   local government can then use this cash to fund  whatever infrastructure projects it wants and the   banks can bundle these loans up and sell them as  bonds on the open market in 2019 local government   financing bonds constituted 39 of all outstanding  bonds in china's domestic market the other 60 was   up until recently mostly made up of real estate  bonds sold by the development companies that   needed funding to build on the land that was being  leased out to them by these local governments   these local government financing platform  bonds are deemed to be quite safe because they   indirectly have the backing of the communist party  and it's unthinkable for many chinese investors   that the government would default on their debts  this also has the benefit of pushing government   debt into the private sector so national debt to  gdp figures look better than they really should   of course the problem is that these are local  governments not the national government and   they have every chance of going bankrupt because  they are limited in how they can raise revenue so   far this whole system hasn't been an issue because  the real estate market has appreciated in value so   relentlessly that even the most reckless borrowing  practices can be wiped away with the money that is   made by leasing out this land but this precarious  status quo is starting to come undone for starters   china is still practicing strict lockdowns to stop  the spread of covert the government has adopted a   zero case policy which means even entire cities as  large as shanghai will go into complete lockdown   should any cases be detected these lockdowns have  banned people from leaving their house for any   reason outside of getting groceries so businesses  are obviously suffering a lack of business   activity has cut off a major source of revenue  for local chinese governments and that's before   we get into the problems in the real estate sector  the unwavering confidence the chinese people once   had in real estate is will wavering off the back  of high profile property development bankruptcies   this has meant that less people want to invest in  properties which means less are getting built less   getting built means that local governments gain  less revenue from renting out their land holdings   it also means that banks are no longer interested  in accepting these land holdings as collateral to   underwrite the bonds for these local government  financing platforms to make this all worse the   chinese central government has started issuing tax  returns to compensate citizens from being locked   into their homes while simultaneously pushing  for more infrastructure projects to offset the   economic impacts that the lockdowns caused in  the first place this means less money coming   in more money going out and less options to raise  money to bridge the financing gap in the meantime   now if highly speculative financial assets that  are deemed too safe to fail because they are   backed by real estate in the market that has been  booming sounds familiar to you then this should   probably make you a little bit worried to top this  all off almost all bonds issued in china are rated   at least double a and local government financing  bonds are almost exclusively rated at aaa   which suggests to investors that these are the  safest possible investment when the reality is   anything but this is a 19 trillion dollar bond  market that is based on a system that requires   perpetual growth you might have been thinking  this entire time that should this market implode   spectacularly well that would be bad but the  central national government would step in to bail   these local governments out if for no other reason  than to save the reputation of their own party   but they might not be able to the chinese  bond market is massive the total value of the   global mortgage-backed securities market is 11  trillion dollars and in many ways that market   was probably better regulated this is a market  significantly larger than china's entire gdp   and this is all to say nothing of the other big  problem with how the chinese government handles   land 20 to 70 year leases eventually come to  an end and some of those shorter leases have   now started to expire which is presenting the  government with a problem what do they do with   that land now the traditional agreement was that  this land would go back to the government but   obviously that idea is very unpopular amongst the  people that will be kicked out of their homes and   stripped of their largest investment a widespread  belief has grown amongst chinese citizens that   the land will never be taken back off them once  these leases expire because it would simply be too   politically unpopular the real estate market also  supports this way of thinking homes with 20 years   left on their land lease cost the same as homes  with 70 years left on them all other things been   equal why would anyone pay the same price for  a home that they can only live in for 20 years   when there is a similar property available that  they can live in for 70 years well because they   don't expect that these leases will ever come to  an end that and building standards in open china   mean that these buildings probably won't last that  long anyway this stasis has been further confused   by new laws that proclaim that residential land  rentals would be automatically renewed but failed   to mention if they would be renewed for free or  if land holders would need to pay for a new lease   a member of the drafting team that wrote this  law actually later admitted that they kept it   intentionally vague because they did not want  to be responsible for choosing how this issue   would be resolved if the government does cave and  chooses to extend land rentals forever with no   further fees then they would have cut themselves  off from one of their primary revenue sources   so this leads us on to the other problem china has  with taxes people don't pay them china does have   traditional progressive income taxes ranging from  3 up to 45 depending on how much citizens earn   the problem is that most people don't pay this  most people in china are still employed in the   informal economy they run small stores or work on  farms or do a number of other jobs that are paid   with cash in hand or transfers over wechat people  on the other end of the financial spectrum rarely   get their income from a paycheck and instead  are able to funnel it through businesses and   other assets which can massively reduce their tax  burden it is a narrow minority who are wealthy   enough to have a formal job while not being  wealthy enough to have the means to avoid tax that   end up paying it there have been a number  of scandals surrounding high-profile chinese   business leaders and celebrities engaging in tax  avoidance and the truth is that the government   could probably stop most of this tomorrow if it  really wanted to but it doesn't for two reasons   the first is that loose regulations around  business taxes encourage business activity   and encouraging business growth has been a core  driver of the country's massive economic growth   over the past three decades the second is that  if they let people get away with dodging taxes   then at any time they can just choose to  investigate those people and they will always know   that they will find something to arrest them for  very handy for silencing an outspoken celebrity   or business leader of course the problem this  creates is that you can't effectively tax just   two percent of the population not only does  that leave an unfair burden on the workers   who are genuinely paying their fair share and not  only does it hamper the government's ability to   raise regular tax revenue it also fundamentally  limits the government's control over the economy   a lot of focus has been placed on monetary  policy recently in light of record high inflation   but fiscal policy as in the raising and lowering  of taxes and government spending is just as   if not more important to running an effective  economy increasing taxes can be a very effective   tool for curbing inflation and lowering taxes can  accelerate economic growth during difficult times   but a tax break is only effective if  people were paying taxes to begin with   if the government fails to levy taxes on the  majority of the population this control mechanism   is all but ineffective levying income taxes on  just a small portion of the population means that   the chinese government really does not have that  much control over the economy if it's going in any   direction other than up managing an economy as big  as china's during a downturn without broad control   over the tax base would be like trying to land a  jumbo jet by flapping a hand fan sure everything   might fall into place but they really  don't have that much control over it   okay now it's time to put china the world's  second largest economy on the economics explained   national leaderboard starting as always with size  and obviously there is not much to say about this   with a gdp of 14.7 trillion dollars it gets a 10  out of 10. that gdp is spread relatively thin out   over the world's largest population though so it  has a gdp per capita of 10 400 this now makes it   a middle-income country by global standards and  despite the criticisms i give it no one can take   away from the fact that it has been home to the  single most intense period of economic development   ever in history this figure is almost exactly  in line with the world's gdp per capita of 10   900 so it gets a 5 out of 10. stability  and confidence is a difficult one to place   the economy itself is so large and influential  these days that it's certainly not going anywhere   anytime soon but we have also repeatedly seen  things like businesses not to mention people   been erased on the whim of the government this  sovereign risk combined with increasingly worrying   news surrounding lockdowns and military ambitions  means that the country can't get more than a six   out of ten growth in china has been unbelievable  it's almost hard to imagine a time now when   china wasn't a major economic superpower but its  economy has more than doubled in size since 2010   and it's more than 10 times larger than it was  in the year 2000 it gets a 10 out of 10. no   other economy has really ever come close finally  industry and again what is there to say china has   got to where it is today by being the workshop of  the world they have developed from being a center   of low cost manufacturing where foreign companies  could take advantage of a cheap pool of labor   to the unrivaled industrial hub they are today  the country now has an advanced financial system   a healthy domestic market and globally recognized  local companies sure they aren't producing the   real high-end stuff like airliners and competitive  microprocessors but they still can't get anything   other than a 10 out of 10. altogether this  gives china an average score of 8.2 out of 10   which puts it into second place on the economics  explained national leaderboard this video is made   possible by morningbrew if you aren't already  subscribed to their email newsletter you are   seriously missing out you have just watched me  talk about tax policy in a foreign country for the   past 15 minutes so you are obviously interested  in the economy around us now while i do my best   to bring you guys a video a week morning brew  can keep you topped up with fascinating articles   every single day it is 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Channel: Economics Explained

Views: 2,718,392

Keywords: china tax problem, tax in china, economics explained, china income tax, economics, economy of china, china land rental, china, china debt crisis, china debt problem, china debt default, china debt trap, chinese debt crisis, china housing market, china housing bubble, china housing price index, china debt crisis explained, china real estate, china government bankrupt, china economy crash, China economic crash, chinese economy, chinese economy 2022, chinese economy explained

Id: qMaWegICQHA

Length: 16min 40sec (1000 seconds)

Published: Tue Jun 28 2022