PRC Economy - New Reflections : Dec 15 2011

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby ashi » 24 Sep 2013 19:17

Looks like those who want to see the HSR in China to fail will disappoint again.

Speedy Trains Transform China

CHANGSHA, China — The cavernous rail station here for China’s new high-speed trains was nearly deserted when it opened less than four years ago.

Not anymore. Practically every train is sold out, although they leave for cities all over the country every several minutes. Long lines snake back from ticket windows under the 50-foot ceiling of white, gently undulating steel that floats cloudlike over the departure hall. An ambitious construction program will soon nearly double the size of the 16-platform station.

Just five years after China’s high-speed rail system opened, it is carrying nearly twice as many passengers each month as the country’s domestic airline industry. With traffic growing 28 percent a year for the last several years, China’s high-speed rail network will handle more passengers by early next year than the 54 million people a month who board domestic flights in the United States.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby ashi » 24 Sep 2013 19:27

saip wrote:True. We saw only the right side pictures but our guide was candid and said (s)he is not allowed take us 'there'.


Every year millions of tourist go to China and you maybe the only one person found you were not allowed to travel freely.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Theo_Fidel » 24 Sep 2013 20:04

I ordinarily don’t engage the 50 cent crowd but my one and only response.

It is not difficult to figure out. China has a Gini coefficient of .48 and rising. This means the top 20% of the population takes roughly 50% of ALL income. In fact independent reports have said that the Gini coefficient is actually more like 0.65. Which again means the top 20% take more like 65% of all income. This is not that unusual in a communist country where money flows to power and no elections are needed to decide the distribution of income. Every Chinese on this website should ask how they would live on an income of $200 pm. That is how 80% of your compatriots live, including most of the 100 million factory workers.

For a country with per capita income of $5,000 this directly means that 80% of folks live on $2500 averaged. Meaning as you go down the curve income continues to drop. With a per capita annual income of $2500 life like the left side is all that is possible. So 80% of Chinese live like that. Lets also keep in mind that China is still 40%-50% rural. Occasionally this reality bubbles up like the 15% below the extremely low poverty line ‘snafu’ or leak.

It is unusual that the 50 centers are unaware of this. In fact the Chinese are deliberately not told the reality. It now appears they do not want to know either, at least the ones on this website. No interest in how the other 80% lives. I got mine so all is good, etc… Most other countries are consumed with the question of how to raise the living standards of the 80% at the bottom.

Not China.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby saip » 24 Sep 2013 20:06

Ashi, I reported what the guide told me. But another thing is that BRF is not accessible from China, why? You obviously do not live in China.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby ashi » 24 Sep 2013 20:14

Theo_Fidel wrote:I ordinarily don’t engage the 50 cent crowd but my one and only response.

It is not difficult to figure out. China has a Gini coefficient of .48 and rising. This means the top 20% of the population takes roughly 50% of ALL income. In fact independent reports have said that the Gini coefficient is actually more like 0.65. Which again means the top 20% take more like 65% of all income. This is not that unusual in a communist country where money flows to power and no elections are needed to decide the distribution of income. Every Chinese on this website should ask how they would live on an income of $200 pm. That is how 80% of your compatriots live, including most of the 100 million factory workers.

For a country with per capita income of $5,000 this directly means that 80% of folks live on $2500 averaged. Meaning as you go down the curve income continues to drop. With a per capita annual income of $2500 life like the left side is all that is possible. So 80% of Chinese live like that. Lets also keep in mind that China is still 40%-50% rural. Occasionally this reality bubbles up like the 15% below the extremely low poverty line ‘snafu’ or leak.

It is unusual that the 50 centers are unaware of this. In fact the Chinese are deliberately not told the reality. It now appears they do not want to know either, at least the ones on this website. No interest in how the other 80% lives. I got mine so all is good, etc… Most other countries are consumed with the question of how to raise the living standards of the 80% at the bottom.

Not China.


China's per capital income in 2012 is $6100 and that is already averaged. You take that as the top 20% of people's income which is obviously wrong. And since you brought up India as a comparison, FYI, India's per capital income ins 2012 is $1500.
Last edited by ashi on 24 Sep 2013 20:19, edited 1 time in total.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby ashi » 24 Sep 2013 20:15

saip wrote:Ashi, I reported what the guide told me. But another thing is that BRF is not accessible from China, why? You obviously do not live in China.


BRF can be accessible in China or not has nothing to do with if you can travel freely in China. As a matter of fact I was able to access BRF in Chengdu two years ago while I traveled to China.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Suraj » 24 Sep 2013 20:46

I'd like to ask some practical questions to take this discussion away from the standard argumentative line. This is primarily for PRC residents of Beijing and Shanghai, but anyone who's familiar with the situation is welcome to answer:

* What's the property tax rate in these cities ? Is it a fixed rate nationwide, or set by locality, or something else ?
* Has the rate changed over the course of the last couple of decades ?
* How do asset rich but relatively cash poor residents keep up with property taxes ? Say, a house is worth $700K and tax rate is 1~1.5%. That's $7-10K.
* How do people manage when they're forced out of their home due to an inability to keep up with property taxes, and still stay within desirable areas, where despite the money they made from selling, everything is pricey ? Is there no social issue arising from this ?
* How does the appraisal process work ? Do you get to appeal an appraisal ? Is there a cap on how much appraised value can rise in a year ?
* How do homeowners who are asset rich, unlock the value of their residences, other than by selling ? Is there anything like a HELOC/home equity loan ?

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby saip » 24 Sep 2013 20:54

I was in China last month. I did not say whether one can travel freely or not. I posted what the guide told me. Anyway, what is this obsessive compulsive behavior that you feel that you have to defend every negative comment ever so slight? I could not access BRF from Shanghai, Beijing, Xian. I was able to access Paki sites though. Also, I did not get the same search results in Google. Also every hotel had this strange disclaimer (I will post it when I find it) that they are under the law obligated to monitor and report guest usage of the Internet. And the finger printing at many places. Such a practice would not fly in the US. Anyway this is may last post on this.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Suraj » 24 Sep 2013 21:16

saip: Please continue to post on your experiences there. No need to back away.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby heech » 25 Sep 2013 07:18

wrdos wrote:
heech wrote:And just for frame of reference, 30 years ago 100% of Chinese lived in those conditions or worse.


Heech, it was not that bad. Even 30 years ago in the 1980s, "Da Yuan" or big campuses of government/military/state company dormitory buildings, usually 3~4 stories with reliable supply of electricity/water/gas, widely stand in the cities. Up to 20% urban population was living there according to my memory.

I grew up in the heart of Nanjing. In the 1980s, I lived in a house built in the 1910s, shared with 5 different families... we had one flushing toilet for all 15-20 people, so most of us used the public bathroom around the corner, which was basically just an open sewer. Electricity was definitely not reliable (not that it mattered - the only electrical appliances we had were a few lightbulbs, and a small 9" black white TV). We used natural gas for cooking (and it was reliable), but still burnt coal for heating. We had running water, but we usually preferred to drew water from the well in our front yard (it was colder and cleaner).

Oh, I just realized you said 20% of urban Chinese lived in the new construction... I think it depends on what part of the '80s you're talking about. And in the early 1980s, that number really was 0. By the late 1980s, thats probably about right 20% of URBAN Chinese moved into new construction... (we were assigned a unit through my dad's job, in I think 1985. I remember taking my first shower!) But with only about 20% being urban at that point, that means only about 10% of Chinese had access to those units.
Last edited by heech on 25 Sep 2013 07:34, edited 4 times in total.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby heech » 25 Sep 2013 07:19

I think BRF is probably "accidentally" blocked, rather than intentionally blocked. I say that because BRF is indeed not available from some of my network points (like my home DSL), but it absolutely is available directly from my China Unicom 3G phone. Any of the really sensitive sites would be completely blocked.

And if your tour guide said you "couldn't go there", it's because she meant you didn't have time, or you didn't pay enough, or she just wanted to get home. I don't believe for a second that she told you government authorities restricted you from going there, and you shouldn't imply that was the case.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby heech » 25 Sep 2013 07:26

Suraj wrote:I'd like to ask some practical questions to take this discussion away from the standard argumentative line. This is primarily for PRC residents of Beijing and Shanghai, but anyone who's familiar with the situation is welcome to answer:

* What's the property tax rate in these cities ? Is it a fixed rate nationwide, or set by locality, or something else ?

There is no property tax in China, anywhere. There are transaction-based taxes. There are some pilot programs where property taxes are being charged, but these are not widespread at all. There are always hints property taxes will come eventually, but many are pushing against it. So, that means your questions about property taxes are moot.

* How do homeowners who are asset rich, unlock the value of their residences, other than by selling ? Is there anything like a HELOC/home equity loan ?

Yes, there is. You can use reappraised values of your property as collateral in order to borrow more money. This is pretty rarely done by most Chinese. I think I just saw an article that suggested 60% of Chinese middle-class families don't have even a first mortgage on their homes... and that matches my experience. The amount of leverage / debt tied up in real estate for the average consumer is very low. Any concern about leverage in real estate applies only to developers + banks lending to developers. If the real estate market crashes (and I do think it's conceivable), it's spill-over effect will be very different from what's seen in the US.

There is also now some discussion about implementing reverse mortgages in China.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby heech » 25 Sep 2013 07:38

Is it time we restart the conversation about high speed rail...? I remember lots and lots and lots of discussion here, probably in this very thread, about high speed rail in China.

http://www.nytimes.com/2013/09/24/busin ... wanted=all

Just five years after China’s high-speed rail system opened, it is carrying nearly twice as many passengers each month as the country’s domestic airline industry. With traffic growing 28 percent a year for the last several years, China’s high-speed rail network will handle more passengers by early next year than the 54 million people a month who board domestic flights in the United States.

Li Xiaohung, a shoe factory worker, rides the 430-mile route from Guangzhou home to Changsha once a month to visit her daughter. Ms. Li used to see her daughter just once a year because the trip took a full day. Now she comes back in 2 hours 19 minutes.

China’s high-speed rail system has emerged as an unexpected success story. Economists and transportation experts cite it as one reason for China’s continued economic growth when other emerging economies are faltering.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby heech » 25 Sep 2013 07:38

http://www.nytimes.com/2013/09/24/busin ... ernational

While the crash is still talked about in China today, statistics suggest that China’s high-speed trains have actually proved to be one of the world’s safest transportation systems so far. ...

Comparing the 40 deaths in the crash two years ago to the number of Chinese high-speed train trips completed without loss of life over the last several years suggests that the trains have been exceptionally safe overall, said Arnold I. Barnett, a mathematician at the Massachusetts Institute of Technology who is one of the world’s best-known experts on aviation safety statistics.

“Chinese high-speed rail has so far established a mortality-risk level that equals or exceeds that of the world’s safest airlines,” Mr. Barnett wrote in an e-mail.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Suraj » 25 Sep 2013 08:01

Heech: If there's no property tax, what's the source of income for municipalities to spend on recurring maintenance and public services ? Do homeowners pay an annual land lease, considering that all land is owned by the state and leased out for various terms (99 years or less) ?

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby vina » 25 Sep 2013 09:29

heech wrote:Is it time we restart the conversation about high speed rail...? I remember lots and lots and lots of discussion here, probably in this very thread, about high speed rail in China.

Yes indeed. Let's.

From the same article. Yawwn..

“Even well-performing railways capable of covering their cash running costs and interest on their debt will almost certainly be unable to repay the principal without some long-term financing arrangements,” said a World Bank report last year.

Another impact: air travel. Train ridership has soared partly because China has set fares on high-speed rail lines at a little less than half of comparable airfares and then refrained from raising them. On routes that are four or five years old, prices have stayed the same as blue-collar wages have more than doubled. That has resulted in many workers, as well as business executives, switching to high-speed trains.


Ahh.. Nice onree no ? You don't have to pay for capital (and also the land is "free", no need to buy the right of way from anyone like in other countries) , and on top of that , fares have been dropping adjusted for inflation ..---> all in all, massive subsidies, the classic definition of a white elephant that is chomping away on other's food and growing fat.

What are you going to do about the $500b debt. Is it going to be "Written down" by appropriating the Chinese citizen's savings ? A nice ponzi scheme of rolling over the debt every year/month . Is it recognized as non performing /impaired and the banks make provisions on their books for bad loans and take losses as in other countries ?

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby heech » 25 Sep 2013 10:11

Suraj wrote:Heech: If there's no property tax, what's the source of income for municipalities to spend on recurring maintenance and public services ? Do homeowners pay an annual land lease, considering that all land is owned by the state and leased out for various terms (99 years or less) ?

Yep, your understanding is exactly right. Residential land is leased for as long as 70 years, with some properties as short as 40 years.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby heech » 25 Sep 2013 10:19

vina wrote:Ahh.. Nice onree no ? You don't have to pay for capital (and also the land is "free", no need to buy the right of way from anyone like in other countries) , and on top of that , fares have been dropping adjusted for inflation ..---> all in all, massive subsidies, the classic definition of a white elephant that is chomping away on other's food and growing fat.

It's always nice to have moving targets. The concern before was whether the project would be operationally viable, not whether it was receiving "massive subsidies".

The externalities of high speed rail far, far outweigh the cost of the ticket itself. That should be obvious, and the article covers most of it. The article also didn't mention the freight cargo aspect (from more available standard rail), which has been discussed significantly before. You can't point at the subsidies without considering the additional positive aspects. In any case, it's hugely significant that traffic is growing at such rates that profits from operations are covering interest + depreciation. That's all you need to keep the lights on, which should be the only goal for this project. If the government run rail ministry (or rail "corporation") was actually generating a profit... then we'd all be arguing this represented a tax on travelers. This project is for the public good, not financial returns.

As far as cost goes... inflation in China has not been very high at all (by emerging market standards). It's been kept around 3-4% for years. In the mean time, incomes have been rising at double digit rates. And yes, that's exactly why high speed rail is going to be proven to be such an overwhelming success. It's already extremely affordable for the vast majority of urban Chinese. And in 5 years? High speed rail tickets will be 50% cheaper in real terms as incomes continue to rise.

The economic returns for high speed rail won't even be measured over that 5 year horizon. The real point is what happens over the next 20-30 years. Some day, high speed rail will be as accessible and convenient for the average Chinese consumer as buying a subway ticket is today.
Last edited by heech on 25 Sep 2013 10:36, edited 1 time in total.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby vina » 25 Sep 2013 10:25

The concern before was whether the project would be operationally viable, not whether it was receiving "massive subsidies".

Ah. But is it REALLY operationally viable. Can you run a company or even a country with the underlying economics of the Chinese HSR ? Is it paying any return on the capital employed ?

How about the balance sheet. Okay, if they are charging enough just to cover the direct operating costs (fuel, and wages ), how are they paying back the capital. Are they paying for depreciation ?

So, without paying for capital and for depreciation, is it REALLY operationally viable or are you actually making massive losses ?

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby heech » 25 Sep 2013 10:42

vina wrote:
The concern before was whether the project would be operationally viable, not whether it was receiving "massive subsidies".

Ah. But is it REALLY operationally viable. Can you run a company or even a country with the underlying economics of the Chinese HSR ? Is it paying any return on the capital employed ?

How about the balance sheet. Okay, if they are charging enough just to cover the direct operating costs (fuel, and wages ), how are they paying back the capital. Are they paying for depreciation ?

So, without paying for capital and for depreciation, is it REALLY operationally viable or are you actually making massive losses ?

You certainly have to count for depreciation, and it is REALLY operationally viable on those terms.

But really? Return on capital? There actually are a few "outside" investors (like major pension / insurance funds) involved in HSR, and I'm sure their return on capital has been next to nil so far. So what? Yes, this is absolutely an indirect subsidy. But the fact that HSR doesn't need to take on additional debt to fund on-going operations is a huge sign of success.

Anyways, let's get back to the central point that you (apparently?) now agree with:

1) the HSR is safely carrying tens of millions of passengers today,
2) that number will continue to grow at very large rates for the forseeable future (28% annually in the article),
3) the HSR is earning enough to assure that it will be here for the indefinite future.

That's good enough for me.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Theo_Fidel » 25 Sep 2013 10:57

Again. The criticism of HSR was never over the short routes. Under 500 km, HSR is definitely more efficient. The EU has proven this over and over. For anything over 500 km, Airlines are far more efficient. This is the split the china rulers and the posters here have so much trouble wrapping their heads around. More is not better in this case but try getting the 'we have arrived' crowd to understand this.

That same reports says that the capital cost will probably never be returned. So the entire $500 Billion will have to be written off.

Right now China govt. is still pumping money out. We will see how many folks zip around when the economy contracts. All things look viable in a bubble. It is when the tide goes out that you know what is un-viable. paraphrasing buffet.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Suraj » 25 Sep 2013 11:17

heech wrote:
Suraj wrote:Heech: If there's no property tax, what's the source of income for municipalities to spend on recurring maintenance and public services ? Do homeowners pay an annual land lease, considering that all land is owned by the state and leased out for various terms (99 years or less) ?

Yep, your understanding is exactly right. Residential land is leased for as long as 70 years, with some properties as short as 40 years.

Err, this is just nothing but a property tax, just described differently. Isn't the rate dependent on the valuation ? Or is it fixed for a 99 year duration ? It would be absurd if they had some land lease rent amount that is neither indexed for inflation nor for value addition through construction. Surely this lease is somehow tied to the appraised value of the home ? If that's the case, how does the formula for the land lease work relative to appraised value ?

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Suraj » 25 Sep 2013 11:29

The problem with HSR is long term operational and maintenance costs. The debt burden overhang isn't easy to surmount because expensive maintenance progressives eats into any marginal operating profit. Raising frequency adds to the maintenance burden. Unlike aircraft, where the maintenance load goes into just the aircraft, HSR maintenance needs to cover the whole network, signalling and rolling stock.

Achieving operational profits is not easily verifiable when data is not beyond question. However it's worth considering the history of Japan National Railways, who went bankrupt due to the massive accumulated debt burden associated with building the Shinkansen network, and whose assets were apportioned among the current JR constituents.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby vina » 25 Sep 2013 11:58

You certainly have to count for depreciation, and it is REALLY operationally viable on those terms.

Well, in that case it is NOT viable.

But really? Return on capital? There actually are a few "outside" investors (like major pension / insurance funds) involved in HSR, and I'm sure their return on capital has been next to nil so far. So what? Yes, this is absolutely an indirect subsidy. But the fact that HSR doesn't need to take on additional debt to fund on-going operations is a huge sign of success.

You are confused. In business, it is called cash flow break even point , ie EBITDA break even. What the Chinese HSR has achieved after all this, is exactly that, . EBITDA break even or break even on cash flow. At this point, it wont need additional capital to keep the enterprise going (as long as things remain as is).

But notice, this is the normally the EASY part. Now trying to pay for depreciation and amortization (to pay for the asset that is being used) and interest (on the debt) and generating free cash flow (google for that term free cash flow) to pay equity investors (finally after paying the taxman) is incredibly difficult from this point . Now tell me that the Chinese HSR is going to throw off Free Cash Flow and I will buy your story. Not otherwise.

Anyways, let us see the following financial statements (GAAP only and in English, thank you, I dont speak Chinese and don't know Shanghai Stats/Accounting) .. Balance Sheet, Income Statement and Statement of Cash flows for the Chinese HSR and we can actually talk based on facts, and not on some notional and wishful dreaming.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby heech » 25 Sep 2013 13:05

Suraj wrote:Err, this is just nothing but a property tax, just described differently.

Sorry, I completely misread your original posting.

Land is leased, but the lease payment is made once by the developer before construction. There is no follow on annual costs of any kind. If you purchase an apartment condo today, you can live in it for 70 years and never pay another penny to the government (other than utilities you consume - obviously).
Last edited by heech on 25 Sep 2013 13:11, edited 1 time in total.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Sri » 25 Sep 2013 13:08

Vina Ji,

What heech ji described above is pretty much the case with any rail network system, including India.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Sri » 25 Sep 2013 13:15

heech wrote:
Suraj wrote:Err, this is just nothing but a property tax, just described differently.

Sorry, I completely misread your original posting.

Land is leased, but the lease payment is made once by the developer during construction. There is no follow on annual costs of any kind. If you purchase an apartment condo today, you can live in it for 70 years and never pay another penny to the government (other than utilities you consume - obviously).


:shock: Heech Ji, so the masked land revenues are inbuilt in the cost of apartment?

We in India have to pay approx 10% of value of property as tax at the time of registration and then there are municipal taxes to be paid on regular basis. This is the main source of income for state governments in India.

What is main source of income for municipalities and provincial goventments?

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby heech » 25 Sep 2013 16:15

Sri wrote: :shock: Heech Ji, so the masked land revenues are inbuilt in the cost of apartment?

We in India have to pay approx 10% of value of property as tax at the time of registration and then there are municipal taxes to be paid on regular basis. This is the main source of income for state governments in India.

What is main source of income for municipalities and provincial goventments?

Correct. There's a transaction tax of roughly 3-4% on sales, but no other taxes of any kind on real property.

Municipal revenues are, right now, often coming from land sales or leases, whatever you want to call them (I've read something like 30-40% in the really bubble cities, like Ordos)... which is why many are concerned municipal governments are inappropriately encouraging the housing bubble, since their own revenues are directly tied in. But the majority still comes from tax collection (VAT, personal and business income). Also gets royalties from mining, etc. other resources.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Suraj » 25 Sep 2013 20:51

:eek: No wonder they build like there's no tomorrow - the only way to gain revenues is to build out more and gain transaction taxes! Doesn't it seem completely absurd to the average Chinese ? How do you intend the whole thing to be sustainable in the long term ? At some point - and I think it will be sooner rather than later - you'll need a property tax.


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Re: PRC Economy - New Reflections : Dec 15 2011

Postby saip » 25 Sep 2013 21:15

And if your tour guide said you "couldn't go there", it's because she meant you didn't have time, or you didn't pay enough, or she just wanted to get home.


Yea, right. I was born yesterday and have to learn from you. Thanks grandpa, for enlightening me.
More likely BRF was accidentally 'unblocked' in your phone. As far as I was concerned it was blocked. I tried laptop and the phone. I could access only from expat compound or RDPing.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby heech » 26 Sep 2013 02:58

saip wrote:
And if your tour guide said you "couldn't go there", it's because she meant you didn't have time, or you didn't pay enough, or she just wanted to get home.


Yea, right. I was born yesterday and have to learn from you. Thanks grandpa, for enlightening me.
More likely BRF was accidentally 'unblocked' in your phone. As far as I was concerned it was blocked. I tried laptop and the phone. I could access only from expat compound or RDPing.

You can look at my IP right now. I'm on my home DSL here in Jiangsu, and the connection to BR is fine as we speak.

As far as your mysterious tour guides refusal to take you to this guarded place... How about a wager? You fly back and ask specifically to visit "there", the forbidden place. I'll cover the expenses if you've uncovered some impoverished rural county forbidden to foreign tourists. Indeed, other than Tibet or some kind of military installation, I'll pay for the trip for anyone on this board who discovers such a hidden corner of China.

heech
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Re: PRC Economy - New Reflections : Dec 15 2011

Postby heech » 26 Sep 2013 03:05

Suraj wrote::eek: No wonder they build like there's no tomorrow - the only way to gain revenues is to build out more and gain transaction taxes! Doesn't it seem completely absurd to the average Chinese ? How do you intend the whole thing to be sustainable in the long term ? At some point - and I think it will be sooner rather than later - you'll need a property tax.

More than 2/3rds of municipal revenues are coming from VAT / income taxes. So, not "the only way" to gain revenues. But yes, I agree that's an issue. (Just to be clear: it's land sales that are the issue, not the transaction taxes.)

I think a property tax would do a great job of realigning interests for all. But try convincing average Chinese more taxes are a desirable thing.

Prem
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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Prem » 26 Sep 2013 03:43

Party Will Pay the Price for China’s Rebalancing
http://www.bloomberg.com/news/2013-09-2 ... ncing.html


We need to keep the impact of financial repression in mind in understanding the Chinese growth model. It is a fundamental cause of China’s rapid expansion and its extraordinary imbalances. State-owned enterprises, like other large-scale investors, have benefited from artificially low interest rates, and it is quite easy to prove that over the past decade they have been value destroyers on a very significant scale.
Studies done by the mainland research organization Unirule Institute of Economics suggest that more than 100 percent, and perhaps much closer to 200 percent, of the aggregate profitability of state-owned enterprises in China over the past decade can be explained by monopoly pricing and direct subsidies. Without these subsidies, according to Unirule, state-owned enterprises earned a negative return on equity equal to 6 percent to 7 percent.Indirect Subsidies
More important than either are indirect subsidies. The most important of these is the repressed borrowing cost for big, politically connected companies. A 2009 study done by the research organization associated with the Hong Kong Monetary Authority found that the aggregate profitability of China’s entire state-owned enterprise sector over the decade could be explained by the reduction in borrowing costs of about 1 percentage point caused by implicit state guarantees.
Since interest rates were set artificially lower by at least five to six percentage points, and perhaps a lot more, the interest subsidy alone accounts for several times the aggregate profitability of the state sector. These very low interest rates encouraged a cavalier attitude to investment that led to significant nonperforming loans in the banking system over a decade ago and are probably leading to the same now.
After the last banking crisis, ordinary Chinese paid for all this bad debt in two ways. First, and most obviously, the wide spread between the deposit and lending rates mandated by the central bank had the effect of guaranteeing substantial profits to the banking sector. These profits allowed the banks to absorb nonperforming loans.More important, by artificially reducing interest rates to well below the nominal gross domestic product growth rate, and even to negative real rates, the central bank effectively granted significant debt forgiveness to borrowers every year over the past decade. An insolvent borrower, after all, can easily continue to service his debt if the coupon is set low enough and the principal is constantly rolled over, both of which are the case in China.
Value Creation
How would this catching up take place? As China continued investing at a furious pace, if investment had indeed been value creating in the aggregate, the value creation of some of the earlier investment should have begun to accrue to the benefit of the household sector.
But Chinese workers didn’t begin to see the consequences of earlier investment show up as a higher share of total wealth for them; on the contrary, their share of wealth continued declining, and more rapidly than ever after 2000. From 2000 to 2010, household consumption dropped from 46 percent of GDP, which is already a very low share, to an astonishingly low 34 percent of GDP. This drop occurred because households had been forced to pay for the difference between the real debt-servicing cost of a decade of misallocated investment and the debt-servicing capacity created by that investment.Short of eliminating this subsidy -- which basically means abandoning the growth model -- it would be almost impossible to get the household and consumption shares of GDP to rise and still maintain China’s high GDP growth. China, in other words, must stop transferring income from households to the state and in fact must reverse those transfers. As Chinese household income and wealth become a greater share of the overall economy, so will Chinese consumption.
Although difficult, transferring wealth from the state to the household sector isn’t impossible. Even if China does nothing, it will eventually reach its debt capacity limits, after which a sudden stop in investment will force up the household share (albeit under conditions of negative growth). The government could reverse the transfers -- either quickly or slowly -- by forcing up real interest rates, the value of the yuan and wages, or by lowering income and consumption taxes. It could privatize state assets and use the proceeds directly or indirectly to boost household wealth. Or it could absorb private-sector debt.
Social Instability
I’m not sure what the second one is either, but for the past 20 years, and especially the past 10, the state and business share of a rapidly growing economic pie was also growing, which meant extraordinary growth in the value of assets controlled by the state sector and the economic elite. The household share of the growing economic pie, of course, contracted. But the rapid growth in the pie ensured that household income grew quite rapidly nonetheless, even as the household share of total income declined.When we reverse this process, as we must if there is to be rebalancing, any slowdown in GDP growth may be minimally felt by the household sector (if the rebalancing is managed in an orderly way), but even a scenario of very high GDP growth must result in much slower growth in the value of state-sector income and assets. Of course, if GDP growth actually slows sharply, which I expect it will, the growth in the value of state sector assets will drop even more sharply and perhaps even turn negative.This is the fly in the ointment. The change in the growth rate of the state sector will almost certainly be at the heart of the difficulties that Beijing will be forced to address in the next few years. It was always easier to keep political leaders and factions happy when the value of the state sector was growing comfortably in the double-digit range, as it has for much of the past decade. It is likely to be much more difficult as GDP growth slows and the state sector slows even more, growing in low single digits, or even contracting.
Political Base
Minxin Pei, a professor of government at Claremont McKenna College, has addressed this argument. Reducing the power of state-owned enterprises “would make the Chinese economy far more efficient and dynamic,” he has written. “But it is hard to imagine that a one-party regime would be willing to destroy its political base.”When projecting China’s future, too many analysts have systematically overemphasized the intentions of the Chinese leadership. If the government announces that it plans to accomplish a specific goal -- raise the consumption share of GDP, for example, or double the length of railroad track, or double household income in 10 years -- analysts quickly incorporate that goal into their projections even when it isn’t at all clear how the rulers in Beijing will accomplish it.
I argue that you can discuss as much as you like what China proclaims it will do, but what it actually does will necessarily be constrained by what is economically possible.
Pei says you can talk all you want about what economic policies it will follow, but what it actually does will necessarily be constrained by what is politically possible. If you were to superimpose Pei’s political constraints on top of my economic constraints, you would presumably be left with a much more accurate measure of what can actually happen in China.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Suraj » 26 Sep 2013 04:53

Wikipedia mentions in the taxation in China section that there are the following taxes:
* Urban and Township Land Use Tax
* City Maintenance and Construction Tax
* Land Appreciation Tax
* Urban Real Estate Tax

It's not easy to wade through the jargon of which one is annual and which is per-transaction, but there's clearly a lot more than consumption based VAT and income taxes. I find it inconceivable that they can invest so much in urban development on the basis of just VAT and income tax. I can see how VAT revenues would be quite high due to the amount of commercial economic activity, but personal income taxes ? While the data is from 1997, quite some time ago, wiki again shows personal income taxes to be approximately equal to city maintenance tax revenues, with urban real estate tax too being quite significant. Another source of revenue in China is that agricultural output is taxed.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby ashi » 26 Sep 2013 08:32

saip wrote:And the finger printing at many places. Such a practice would not fly in the US. Anyway this is may last post on this.


Besides your tour guide experience, finger printing at many places? That is totally new to me and many who have visited China.

Theo_Fidel

Re: PRC Economy - New Reflections : Dec 15 2011

Postby Theo_Fidel » 26 Sep 2013 09:02

2 month old article but still a good read.
My own view is that this will be the key factor.
When I hear of a shoe factory worker hitting the HSR every month that to me is a red flag.
Even Factory workers in the west would struggle to do that.
Thinks are seriously out of whack.

http://www.forbes.com/sites/stratfor/20 ... c-miracle/

The second thing to bear in mind is the overwhelming poverty of China, where 900 million people have an annual per capita income around the same level as Guatemala, Georgia, Indonesia or Mongolia ($3,000-$3,500 a year), while around 500 million of those have an annual per capita income around the same level as India, Nicaragua, Ghana, Uzbekistan or Nigeria ($1,500-$1,700). China’s overall per capita GDP is around the same level as the Dominican Republic, Serbia, Thailand or Jamaica. Stimulating an economy where more than a billion people live in deep poverty is impossible. Economic stimulus makes sense when products can be sold to the public. But the vast majority of Chinese cannot afford the products produced in China, and therefore, stimulus will not increase consumption of those products. As important, stimulating demand so that inefficient factories can sell products is not only inflationary, it is suicidal. The task is to increase consumption, not to subsidize inefficiency.


The Chinese are not going to completely collapse economically any more than the Japanese or South Koreans did. What will happen is that China will behave differently than before. With no choices that don’t frighten them, the Chinese will focus on containing the social and political fallout, both by trying to target benefits to politically sensitive groups and by using their excellent security apparatus to suppress and deter unrest. The Chinese economic performance will degrade, but crisis will be avoided and political interests protected. Since much of China never benefited from the boom, there is a massive force that has felt marginalized and victimized by coastal elites. That is not a bad foundation for the Communist Party to rely on.

The key is understanding that if China cannot solve its problems without unacceptable political consequences, it will try to stretch out the decline. Japan had a lost decade only in the minds of Western investors, who implicitly value aggregate GDP growth over other measures of success such as per capita GDP growth or full employment. China could very well face an extended period of intense inwardness and low economic performance. The past 30 years is a tough act to follow.

Theo_Fidel

Re: PRC Economy - New Reflections : Dec 15 2011

Postby Theo_Fidel » 26 Sep 2013 09:05

saip,

BTW I tried to get to the BRF forum using 3 different proxy servers based in Jiangsu all of them gave the same 'website not working' error message. :rotfl:
BRF remains blocked on the mainland though these 50 centers to a man miraculously have access. Very powerful folks these.....

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby wrdos » 26 Sep 2013 14:17

I could hardly understand the math of your reference.

Among the 1.4billion Chinese, if 0.9billion is as low as $3000 (like Mongolia), and the other 0.5billion is even lower at $1500 (like India), then how the average turns out to be as high as $6000?

Theo_Fidel wrote:2 month old article but still a good read.
My own view is that this will be the key factor.
When I hear of a shoe factory worker hitting the HSR every month that to me is a red flag.
Even Factory workers in the west would struggle to do that.
Thinks are seriously out of whack.

http://www.forbes.com/sites/stratfor/20 ... c-miracle/

The second thing to bear in mind is the overwhelming poverty of China, where 900 million people have an annual per capita income around the same level as Guatemala, Georgia, Indonesia or Mongolia ($3,000-$3,500 a year), while around 500 million of those have an annual per capita income around the same level as India, Nicaragua, Ghana, Uzbekistan or Nigeria ($1,500-$1,700). China’s overall per capita GDP is around the same level as the Dominican Republic, Serbia, Thailand or Jamaica. Stimulating an economy where more than a billion people live in deep poverty is impossible. Economic stimulus makes sense when products can be sold to the public. But the vast majority of Chinese cannot afford the products produced in China, and therefore, stimulus will not increase consumption of those products. As important, stimulating demand so that inefficient factories can sell products is not only inflationary, it is suicidal. The task is to increase consumption, not to subsidize inefficiency.



sanjaykumar
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Re: PRC Economy - New Reflections : Dec 15 2011

Postby sanjaykumar » 26 Sep 2013 17:16

Among the 1.4billion Chinese, if 0.9billion is as low as $3000 (like Mongolia), and the other 0.5billion is even lower at $1500 (like India), then how the average turns out to be as high as $6000?

You don't seem to realise the extent of corruption in China and the benefits of a CCP membership.

I see Indian students at the university-they are the average student on a campus I would see in India-frugal and unprepossesing.

However the Chinese students here drive BMWs and the females are carefully dressed and manicured. They look nothing like the average students on campus in China, being much taller for one.


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