China's land-based fiscal system is unsustainable
Caixin PMI hits three-year high, Shanghai Stock Exchange wants to drive China's tech independence
Our briefing on critical economic and financial developments in China as of Friday, 5 July, 2024:
Consensus within China is that the local government fiscal system based on land-transfers is unsustainable and outdated, due to country’s faltering property market.
State-owned media has seen calls for reform of China’s income tax system, to better capture the revenue streams of the country’s ultra-wealthy as well as its rentier class.
The central government is pursuing concerted efforts to standardise the development of artificial intelligence.
Trading volumes on China’s A-share market have fallen to a near 10-month nadir.
Caixin’s PMI reading for June hits a three-year high, after remaining in positive territory for eight straight months.
Beijing wants central state-owned enterprises to play a key role in Chinese tech innovation.
The Shanghai Stock Exchange has convened meeting on reforms to drive the funding of China’s tech independence. These reforms are expected to drive a wave of mergers and acquisitions in the tech sector.
"China's land-based fiscal system is unsustainable"
Growing consensus within China is that the regional fiscal system based upon land transfers is no longer sustainable.
In the first five months of 2024, revenues derived from the transfer of land usage rights totalled 1.281 trillion yuan, for a year-on-year (YoY) decline of 14%.
Cao Jingjing (曹晶晶), head of the China Index Research Academy, told Securities Times that the land fiscal system was a "rational choice for local government under special conditions," as it helped to drive urbanization and industrialisation.
"However, excess reliance upon the land-based fiscal model is unsustainable, and land transfer revenues are subject to the cyclical impacts of the real estate sector, making them unstable" Cao said.
The Covid pandemic and China's faltering property market have severely undermined land-based fiscal revenues.
Land transfer revenues fell from 8.7 trillion yuan in 2020 to 5.8 trillion yuan last year. Yuekai Securities forecasts that 2024 could see a further decline in these revenues of around 1.1 trillion yuan.
State-owned media wants income tax reform to target ultra-rich and rentiers
An editorial piece published by 21st Century Business Herald on 4 July has called for fiscal and tax reforms to improve both economic efficiency and social equity, as well as prevent highly leveraged local governments from becoming more indebted.
The editorial piece highlights increasing debt pressure on local governments as a result of declining revenues from land transfers.
"[This] necessitates improvements to the local government tax system to ensure that they can make necessary expenditures.
"It will also help to incentivise local governments to make greater use of the active role of fiscal policy in the process of high-quality development."
The editorial also wants income tax reforms to better capture the earnings of China's ultra-wealthy and rentier demographics.
"For a long-time, China's personal tax has mainly been a wage tax. Entrepreneurs, celebrities, Internet tycoons and other high-income groups can use companies to avoid tax, while there are also holes in the system for income from investment returns and other non-labour remuneration.
"For this reason, we should reform the personal income tax to drive it to become a comprehensive tax, and make use of its warranted role in adjustments to income allocation."
Central government wants to standardise artificial intelligence
The Ministry of Industry and Information Technology (MIIT) recently led the issue of the "State Guidelines on the Establishment of a Comprehensive Standardised System for the Artificial Intelligence Sector (2024 Edition)" (《国家人工智能产业综合标准化体系建设指南（2024版）》).
The Guidelines call for the formulation of at least 50 new national standards and industry standards for China's artificial intelligence sector by 2026.
Science and Technology Daily reports that China has also participated in the formulation of over 20 international AI standards to "spur the globalised development of the artificial intelligence sector."
China's A-share trading volumes sink to near 10-month low
Trading in China's A-shares on the Shanghai and Shenzhen bourses has become increasingly lethargic since the start of 2024.
On 3 July, the total trading volume for the two exchanges was 580.3 billion yuan, for a contraction of 64.4 billion yuan compared to the previous trading session, and the lowest point in nearly 10 months.
Caixin's PMI rises to 51.8 in June for highest print in three years
The purchasing managers' index (PMI) published by Chinese financial news outlet Caixin came in at 51.8 for June, for a rise of 0.1 points compared to the previous month.
The Caixin PMI print for June is the highest since June 2021, and marks the eighth consecutive month that it's remained in positive territory above the 50 point threshold.
Zhou Maohua (周茂华), financial markets researcher with Everbright Bank, said to Securities Daily that the latest PMI points to a steady recovery in China's domestic demand, and that the overall condition of small and medium-sized enterprises was still improving.
"Production and new orders continue to expand, indicating that demand in the manufacturing sector and supply drivers are still strengthening."
China wants big state-owned enterprises to play key role in driving original tech innovation
China's State Council recently convened a meeting on policies to enable central state-owned enterprises (SOEs) to create "original technology sources" across a total of 36 areas, including quantum computing, artificial intelligence and biopharmaceuticals.
The meeting outlined support for a total of 58 central SOEs to create 97 "original technology sources."
The development arrives after the Central Commission on Comprehensively Deepening Reforms released the "Guidance Opinions on Driving State-owned Enterprises to Create Original Technology Sources" (关于推进国有企业打造原创技术策源地的指导意见) in February 2022.
At the time, Xi Jinping called for "raising the ability of SOE's with regard to original technology demand guidance, source supply, resource allocation and commercialisation, and the creation of original tech sources."
Shanghai Stock Exchange convenes meeting on using capital markets to drive China's technological independence
The Shanghai Stock Exchange (SSE) convened a meeting with securities companies on 1 July to discuss the implementation of reforms to the Science and Technology Innovation Board (the STAR Market).
According to a report from the Shanghai Securities Journal, the "Eight STAR Market Measures" (科创板八条) clarify "development goals and missions for the STAR Board… in order to service efforts by China to achieve scientific and technological independence.”
“[The Measures] fully embody the political nature of work on capital markets, and propose a raft of reform measures with a focus on strengthening regulation, the prevention of risk, and expediting high-quality development."
The move comes as Beijing pushes for capital markets to play a greater role in the Chinese financial system, particularly when it comes to channelling funds to emerging industries and promising tech companies.
Shanghai's stock market reforms set to drive acquisitions spree in tech sector
The launch of a new round of reform measures for the Shanghai Stock Exchange's tech board is expected to drive a wave of mergers and acquisitions.
Less than several weeks following the release of the "Eight STAR Market Measures" (科创板八条), three listed tech firms have announced plans to acquire controlling stakes in other companies.
Aidea (艾迪药) (688488) has announced that it will acquire a 51% stake in NDPharm (南大药业), while Novosense Microelectronics (688052) wants to acquire over 79% ownership of MagnTek (上海麦歌恩微电子).
Semiconductor Manufacturing (芯联集成) (688469) plans to acquire a 72.33% stake in Xinlian Yuezhou Integrated Circuits.
An analyst from China Galaxy Securities told Securities Journal that he expected a leap in mergers and restructurings driven by the latest round of reform measures, with an especial focus on emerging technologies related to "new productive forces," as well as the manufacturing and pharmaceutical sectors.
Reforms to the STAR Board are intended to boost the role of capital markets in funding the Chinese tech sector, and helping it to achieve greater independence vis-a-vis overseas supply chains.