30 May 2007

In China There is No Capital Gains Tax for Stocks

China's stock market has become a bubble of frenzied investment.
SHANGHAI -- China's latest attempt to slow its runaway stock market might just work.

The Shanghai Composite Index tumbled 6.5% to 4,053.088 points on Wednesday in its second-biggest fall this decade after the Ministry of Finance tripled taxes on share transactions to 0.3% of trading value.

....ver the past few weeks, many institutional investors had largely stopped buying stocks as individual investors, accounting for up to 80 percent of turnover, began to push prices far above fund managers' expectations.

Stocks fever is gripping the country: Internet chat rooms are full of hot stock tips, people are quitting day jobs to trade, and a folksy investment guru known as "China's Warren Buffett" has won prominence.

The number of stock investment accounts hit the 100 million mark on Monday, and people have been opening about 350,000 new accounts each day. Luminaries from Hong Kong billionaire Li Ka-Shing to former U.S. Federal Reserve Chairman Alan Greenspan warned the market was heading for a crash.

By acting to halt that trend now - rather than waiting for the index to hit 5,000 points, which had become a short-term target for some - authorities may have avoided serious damage to the market, analysts said.

"We expect the policy change may add pressures on share prices in the near term, which could reduce the risk of a market crash," Citigroup said in a report.

Although the stock market may land softly from this bubble, the long term prognosis for China's economy is less than sanguine, according to Gordon Chang.
Sensing American frustration, Beijing is approaching next week’s trade talks with the Bush administration with a hint of desperation. It is making pugnacious pronouncements, purchasing large quantities of American technology and soybeans, and pleading for more patience. It is, in fact, doing everything but complying with its trade obligations. Chinese leaders know that their economy cannot compete according to the rules. And that is one reason why the Chinese one-party state, which is overly dependent on exports to deliver prosperity, might just yet collapse.

Certainly the recent spate of poisoned Chinese food products has not helped to reassure seasoned observers of the Chinese economy. Even in China the people are concerned about their own home-grown food source.
The quality and safety of China's food products has come under scrutiny around the world since tainted pet food caused deaths of cats and dogs in the United States and toxins in toothpaste exported from China led to recalls in Latin America.

At home, China's citizens are treated to a near-daily diet of stories of mass food poisonings or tainted products, and the government is starting to take action.

In the most dramatic of a series of measures, from announcing a system of food recalls to blacklisting producers who break the rules, a court sentenced to death the former head of the national food and drug agency for taking bribes in exchange for drug approvals.

Many analysts are using straight-line extrapolation methods to predict the future of China's economy, but that does not seem wise. It is the underlying corruption, lack of strict accounting practices in the financial sectors, and lack of accountability by the massive state-owned industry sector that urges caution on anyone wishing to predict the future of China's economy. The underlying infrastructure is not nearly as sound as the official external figures suggest.

Consider: what would the US stock market be doing if there were no capital gains tax on stocks in the US?

Labels: , ,

Bookmark and Share


Blogger brian wang said...

I left this comment at the the commentary site as well.

I am one of those who believe that China can achieve a level of economic dominance (in terms of larger overall economy than the USA on an exchange rated basis, the GDP per capita would still be only 25% of the US at that point). I think China’s economy can withstand appreciation up to 3 RMB to 1 USD over the next 10-15 years. the same way the Euro has appreciated by 65% over seven years, the Canadian dollar appreciated by over 50% or the appreciation of the yen in the 1971-1995 period. 6.6-7 RMB to 1USD next year and maybe 6RMB in 2009.

China’s urbanization is happening faster than recent statistics are tracking. Instead of 1% per year it is 2%. 30-35 million moving to urban areas. This boosts the economy as those people transition and earn two to three times more than when they were rural. The US is about 80% urban. So China has another ten to 15 years to run on the economic boost from urbanization. Plus it can take the edge off of any dissent if clear economic progress is made.

China has its 1.2 trillion in reserve to ride out at least a few regime threatening incidents. It will tack on 250-300 billion this year. the $300 billion fund that China has setup and started to use by buying 10% of the Blackstone group, if it grows with 15% returns and continues to get some of the new reserves could be 1-2 trillion fund in 10 years. They can buy industries and influence. It will go a ways to helping control the game.

A steady currency appreciation ensures the flow the of FDI (80billion per year now) as investors get a currency boost. So China gets close to 400billion from FDI and trade surplus/year and then 40billion and growing from investment fund returns. Plus the cash in its reserve let it buy with a cash only advantage.

Meanwhile the US drops back with its deficits and weakening dollar. The US can fix these problems but who is willing to bet on the next set of presidents and congresses succeeding with that task ? I think the US has a lot of advantages but to think that China cannot bring its people up to 25-50% gdp per capita is wrong.

China will have 3 petaflop class computers and a worldclass supercomputer grid by 2010. They are buying technology transfer and will be taking domestic more and more of its infrastructure build out. when Ma wins in 2008 in Taiwan, he will make good on his declaration to setup a trade block with China and direct travel and commerce. China’s leadership will probably continue to slowly loosen its grip and look somewhat like Taiwan in terms of a pseudo-democracy. The US also is not free of corruption. (Bush family and Clintons trading leadership.) I think the key is not democracy or no democracy, the key is competence. Blackstone, Goldman Sachs, McKinsey, Soloman brothers they can all take their cut of the big deals but because they are competent they can add value to the situation. They can generate 15-20% returns and take their 2-4% off the top. The situation is ok. When you have someone incompetent running it and return are 5% or less or losses then the 2-4% that gets skimmed really hurts.

Wednesday, 30 May, 2007  
Blogger Unknown said...

Also, the economist points out that China's economy is less vulnerable to stock market plunge than other BRIC countries.

Wednesday, 30 May, 2007  
Blogger Michael Anissimov said...

From what I've read Brian write here and in other forums, I agree with his outline of the Chinese situation.

If China succeeds economically, it proves that communism can really work after all, which invalidates the whole Reagan mythos.

Wednesday, 30 May, 2007  
Blogger al fin said...

If China succeeds economically, it proves that communism can really work after all, which invalidates the whole Reagan mythos.

Michael, if a nation can institute some form of "communism" without a centrally planned economy, the economy can work. If you can split off the "communist" administration from an economy which is more capitalist in its markets, then I suppose you can claim that "communism" can work.

It is a matter of how far from central planning a "communist" government is willing to allow the economy to stray.

As for whether the Chinese Communist Party regime is capable of the type of long-term restraint that would allow the regime to survive, I have strong doubts.

Taiwan sits off the coast, flouting the authority of the CCP, blocking the free travel of China's rapidly growing blue water navy. Once China invades Taiwan, all bets are off.

Thursday, 31 May, 2007  
Blogger neil craig said...

The Chinese have sentenced their drug agency chief to death for corruption which proves they are serious about it.

China is alsio a pretty much a federation with a very different level of regulation in different provinces which is why the coastal provinces are doing so well & the hinterland is still poor. Assuming they learn from the succesful regions their long term prospects should be good, perhaps astonishingly good.

Thursday, 31 May, 2007  
Blogger brian wang said...

Why would China attack Taiwan if Taiwan joins them in a EU type relationship as appears likely if Ma wins the presidency in Taiwan?

Thursday, 31 May, 2007  
Blogger al fin said...

The Chinese have sentenced their drug agency chief to death for corruption which proves they are serious about it.

You could look at it that way, I suppose. Or you could unkindly suspect that sentencing people to death who are not really part of the inner circle, does not mean very much to the ruling oligarchy. Looked at that way, such a death sentence is a cynical gesture.

An extremely unkind way of looking at it, would be to suspect that a high party official's mother-in-law needed some body parts from the drug chief (compatible MHC), coincidental to the tainted food scandal.

China's economic success is in spite of its government, not because of it. The people of China are intelligent and market savvy to a large extent. If given a better market system they could do even more phenomenally than at present.

China has an extremely closed governmental system, which attempts to save face at all cost. It would be wise to be skeptical of both good and bad news coming out of China. The good news is likely to be overstated, and the bad news understated or misinterpreted.

Thursday, 31 May, 2007  
Blogger al fin said...

Brian, the people of Taiwan are not blind to all the protests taking place in Hong Kong. If they thought the only alternative to a "federation" with China was an invasion, they might agree to it.

If for instance, Hillary Clinton or Barak Obama were elected US President in 2008, the Taiwanese would probably suddenly become more conciliatory to the mainland government.

Thursday, 31 May, 2007  

Post a Comment

“During times of universal deceit, telling the truth becomes a revolutionary act” _George Orwell

<< Home

Newer Posts Older Posts