Corporate profits likely up by more in China than in the US …
OK, we don’t know how much corporate profits increased But 29% increase in China’s corporate tax revenues in 2006 tops the 22.2% y/y increase in US corporate tax revenues so far FY 2007 …
I think the tax data rather reinforces the argument that Louis Kuijs and Bert Hofman of the World Bank’s Beijing office have been making about how rising corporate savings have been the key driver of the overall rise in China's national savings. Martin Wolf – citing Jon Anderson of UBS – has made a similar point.
Overall tax revenues grew by something like 20% y/y — so spending also needed to grow by 20% y/y to keep China’s fiscal balance constant. I rather suspect that spending didn’t grow at that rate, which implies that a falling fiscal deficit and rising government savings contributed to China’s rapid savings growth as well.
The FT article notes that investment growth slowed in the second half of 2006. That also wasn’t an accident: the government clamped down on lending growth.
It all seems quite with another of Dr. Wolf’s key arguments – China has had to take policy actions to raise savings and reduce investment in order to keep its economy from overheating, given the strong stimulus provided by the rapid growth of its exports. And in the process, Chinese policy has in effect created is savings surplus. The causality though goes from the fall in China’s nominal exchange rate to a surge in exports to a policy-induced rise in savings relative to investment – with the rise in savings relative to investment necessary to prevent inflation from leading to a real appreciation.
And if corporate tax revenues are a good proxy for corporate profitability, it isn’t hard to figure out who the big winners from the most recent round of globalization have been. I don’t think wages (or compensation) are growing by 30% y/y in China or 20% plus y/y in the US … Judging from the tax data, profits are rising as a share of national income in both China and the US.
Is corporate profit in itself bad for either country? At least in the case of U.S. we seem to have an over-consumption problem. And corporate savings are more likely to be invested rather than consumed, no? Yes part of those will be paid to shareholders — shareholders (think pension/401K etc) are also more likely to reinvest than to spend. And of course the governments (federal and states) get to tax these profits twice. So no complaint there! China has the opposite problem of saving too much so putting more money in the consumers’ hand over there would be good. Then again Chinese consumption has been growing pretty solid double digits.
HZ - From the perspective of increased Chinese consumption, the real question is how many of these corporates reporting increased profits are substantially owned by Chinese investors? If they’re largely foreign owned, no significant increase in Chinese consumption is likely to arise.
My guess is that these corporates will just park it in the banking system pending an even greater appreciation of the RMB.
Given that foreign direct investors generally benefit from a low tax rate and account for a relatively small share of total Chinese investment (and hence the capital stock), my guess is that they don’t explain the majority of the increase in profits.
And rather than putting money in the banks at 2.5% nominal or whatever the deposit rate is now, they supposedly tend to invest in something — on the theory that its nominal return should top 2.5% in an economy growing by 12% plus in nominal terms. So the basic story is firms finance increasingly high levels of investment internally — basically leaving the banks (who are much more profitably now that a lot of npls have been taken off their books) with lots of spare household savings that they lend in no small part to the PBoC.
What is the concern with rising corporate profits — in a word, rising inequality. RApid productivity growth in both China and the US is not generated a commensurate rise in compensation. Corp. profits are close to record high as a share of GDP. Call it “internal imbalances.”
And investment (at least in the US) isn’t that strong — lots of those funds have been returned to investors via buybacks and the like in the US (v. basically none in China).
And obviously, if you own equities in either the uS or China internal imbalances and so on may not concern you very much — you may quite like the status quo. But even then you may want to worry a bit: as Dan gross has noted, if support for globalization is going to be sustained, the gains from globalization need to be broadly shared.
What might cause Chinese government revenues to rise by 20%? Higher (or, lower) rates? More taxpayers (broader base)? Better enforcement? Change in the payment of SOE dividends? All of the above?
But, never, ever forget GIGO: garbage in, garbage out.
The People’s Daily report says “Total tax revenues swelled by 21.9 percent to reach 3.76 trillion yuan (US$482 billion) last year. Growth has registered an average of 20 percent in the past decade, and exactly 20 percent in 2005.”
According to the China Statistical Yearbook 2006, total government revenues in 2005 were Rmb3,164.9 billion (up 19.9% over 2004) and total tax revenues were Rmb 2,877.9 billion (up 19.1%). Let’s assume that a lazy speechwriter didn’t bother to differentiate revenues from taxes, and the same writer can’t see the difference between 19.9% and ‘exactly 20 percent.’
It doesn’t matter. From either revenues or tax revenues to the Rmb 3,760 bn figure cited is not an increase of 21.9%. On revenues, it would be +18.8% and on tax revenues, +30.7%.
The data are much better on personal income tax revenue: Rmb245.2 bn is indeed 17.1% more than the Rmb209.5 bn collected in 2005.
What can we conclude? We can conclude that there is insufficient or insufficiently accurate - data with which to draw conclusions about taxes collected from businesses in China, let alone compare it to the wildly different collections from businesses in America.
* * *
The GDP figures cited in the FT article are also interesting. From 12.6% nominal growth and 10.5% real, the GDP deflator works out to +1.9%, lowest since 2002. To match 2005’s 3.9% rise, nominal growth last year would have had to be nearly 15% — or real growth only about 8.5%.
GIGO.
Savings,let it be corporate or personal has to be
drawn one day.That day of reckoning will come.But
US consumer has eaten into their savings so they
will find empty accounts( ie run on the banks).The
govt has to print its way out to get the solution.
That’s inflationary.We know inflation feeds
inflation expectations.
I think trigger for this will be higher oil prices
due to exploding automobile sales.
CHINESE NEW YEAR IS ON 18TH FEBRUARY.CAR SALES IN
THAT PERIOD SHOULD TELL WHAT WILL BE THE OIL CONSUMPTION.
Just like christmas for west,chinese new year for
china.They expect a bonanza.Wait and see is mantra
for me
Here’s something that may impact corporate profits: the end of tax breaks for foreign firms operating in China. From the WSJ:
As a result, the government appears increasingly likely to pass a long-discussed tax law during China’s annual legislative session in March that would, among other things, equalize tax rates for local and foreign companies. China’s current official rate is generally higher than Hong Kong’s and Singapore’s, but lower than those of many European countries, and roughly in line with those of other developing nations.
According to a draft of the proposed “Enterprise Income Tax Law” that has been circulating among businesses in recent weeks, the tax rate for foreign and domestic companies will be set at 25%, and most existing tax holidays will be phased out over five years. Currently, the corporate-income tax rate is 33%, but local governments and development zones have often offered foreign companies rates as low as 15% to set up in their jurisdictions.
GDP update: Real +10.7%, Nominal (Rmb20940.7 bn = US$2,622 bn) +14.4% = GDP deflator +3.3%.
Assuming the data are correct . . .
.
Junk Keeps Defying Gravity: Why haven’t defaults begun to kick up? Analysts cite a host of reasons, starting with the relatively strong economy and the recent muscle in profits. But the biggest factors are the enormous amount of money sloshing around and the changing structure of the debt market. Foreign investors are shipping gobs of cash into the U.S. At the same time, there has been an explosion of hedge funds, distressed debt traders, and others eager to buy junk-rated debt for the higher yields it offers, much of it chopped up and resold in other sophisticated financial instruments such as collateralized loan obligations.
If Fed Funds Rate “Fails” To Fall: Thus, we have a paradox: the Fed doesn’t want to signal ease, because the data are looking better, but the data are looking better because the market is explicitly betting on Fed easing. In fact, I believe that it is not just the yield curve that is making that bet, but “risk assets” more generally, notably ebullient stocks with low volatility and tight corporate credit spreads (which are linked, of course, by the Merton thesis1). This paradox will not long endure, in my view: either the Fed will “validate” the markets’ pricing of easing, or the markets will un-price that easing, tightening financial conditions.
“In contrast to a Western balance sheet, Chinese accounting standards do not include an accounting of the debts that a corporation holds, and are less suitable for management control than for accounting for tax purposes.” http://en.wikipedia.org/wiki/Chinese_accounting_standards
“…international accounting standards are built on foundations that China does not possess, such as experience of truthful record-keeping and deep, clean, markets so that “fair” valuations can be placed on financial instruments, property and softer assets like brands and intellectual property. (These in turn rely on enforceable laws.)…” http://www.economist.com/displayStory.cfm?Story_ID=8522275
re: “deep, clean, markets” - and looking at this morning’s ‘news’, I’m wondering if the Economist can tell us where (or if) these sorts of markets (could) exist.
“On Tuesday, Mr. Cramer, a former hedge fund manager turned TV star, compared Scotiabank to Hyman Roth, a ruthless and ultimately untrustworthy character in Francis Ford Coppola’s The Godfather: Part II — the second instalment of the film trilogy tracing the rise and fall of the Corleone family. U.S. investors also applauded the comments, bidding Scotiabank shares up 62 cents (U.S.) or 1.4 per cent to $43.55 on the New York Stock Exchange… So how is it that being equated with a mafia kingpin can be a good thing for Canada’s second-largest bank by market value? In this case, it’s all about Scotiabank’s impressive track record of success in Latin America and the Caribbean…” http://www.globeinvestor.com/servlet/story/RTGAM.20070124.wxr-scotia25/GIStory/
so “if support for globalization is going to be sustained, the gains from globalization need to be broadly shared” - by and among whom?
shared among all segments of the population of the world’s political units — i.e. states.
Yes, but there has to be incentives as all individuals and their respecitve political, and economic, units are not equally ‘productive’, and as views about what productivity really is and how it is measured must differ radically - even by members within distinct political units.
Another obvious problem has to be establishing regional, let alone international, standards for measurement and redistribution of the gains that are to be shared. But if I’m reading this correctly, it sounds to me like one example of how demands for more transparency and equitability are instead met with more PR and lobbying.
“…As Nouriel Roubini, a US economist, pointed out on Wednesday, one key current global trend of this decade “is that the financial markets are becoming more opaque, not more transparent”. But as this opacity grows - partly because of the rise of sectors such as private equity and over-the-counter trading - some senior bankers are starting to fear that this could ultimately trigger a backlash, unless they engage in a more open debate with policy makers. Participating in forums such as Davos is one way to achieve this.” http://www.ft.com/cms/s/3abb5ae2-abc1-11db-a0ed-0000779e2340.html
“…However, while the new rules may encourage bureaucrats to share more data with the public, there is little chance they will give citizens significant access to anything officials would prefer to keep private. For Beijing, transparency is generally taken to mean more the effective dissemination of information, rather than any empowerment of citizens to oversee government affairs…” http://www.ft.com/cms/s/00b6dd82-a74b-11db-83e4-0000779e2340.html
The incentives have to work both ways — if firms are more productive but workers wages aren’t rising, what real incentive do the workers have to increase their productivity other than fear of getting fired? right now, CEOs have lots of incentives (an increase in the firms productivity increases their renumeration by more than the increase in productivity), workers, well not so much (more productivity hasn’t translated into higher wages) …
in any case, i don’t think the difficulties measuring productivity/ the distribution of gains from rising productivity is all that hard. the CBPP looked at tax return data to get a good sense of relative wage growth among different segments of the population — and there is little doubt that the us is overall more productive and that the higher income from that increase in overall productivity has benefitted some segments of the population far more than others …
but it also goes to what kind of society people want to live in –
Guest: I wrote much of that article on Chinese accounting standards, and I’ll need to rewrite it. The accounting standards have changed drastically in the last five years, and most SOE’s now have *gasp* balance sheets.
Most of the companies that are showing profits are state owned enterprises. The increase in corporate profits is because the really bad ones have been shut down, and the good ones are no longer paying for health and welfare benefits. What should happen at this point (and as far as I can tell is happening) is that the state then needs to use the extra tax revenue to replace the social safety net that the corporations used to provide.
Not perfectly current but nevertheless:
Are these profits or losses?
Last Updated(Beijing Time):2006-04-28 11:20
According to a Ministry of Finance report in February, performance of Chinese SOEs maintained stable growth in 2005, generating 900 billion yuan in profits, a year-on-year increase of 25 percent. A comparison of figures in recent years shows rising profits in key SOEs, especially those in monopoly industries. In 2005, the 169 SOEs directly supervised by the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) reported profits of 640 billion yuan, accounting for more than 70 percent of the total profits earned by all SOEs.
In 2004, of the 480 billion yuan in profits earned by these enterprises, more than 70 percent came from just seven enterprises, six of which are monopoly companies in the petrochemical and telecom sectors. While official statistics for 2005 are yet to be released, it is predicted that this proportion will rise further. And it is these enterprises that are the target of the proposed audit exercise.
At the National Auditing Work Conference held at the end of 2005, Auditor General of the National Audit Office Li Jinhua said that a preliminary overhaul of 11 key SOEs such as the China National Petroleum Corp. and the State Grid Corp. of China revealed that gains and losses were not reported accurately and many SOEs made false reports of profits. Owing to weak internal control, especially the lack of effective checks and balances on the power of top executives, state assets were embezzled.
http://en.ce.cn/Business/Macro-economic/200604/28/t20060428_6850897.shtml
Foreign-funded enerprises gain 200b USD in profits in China
Last Updated(Beijing Time):2006-05-21 17:19
Foreign-funded enterprises have recorded more than 200 billion U.S. dollars in post-tax profits in China since the 1990s, a senior Chinese commerce official said.
http://en.ce.cn/Business/Enterprise/200605/21/t20060521_7039935.shtml
Whatever the actual mass of profit, I’d question that the domestic rate would be particularly high.