The Pledge of Prosperity: Property Tax, Carbon Neutral, Taiwan, and More, Special Weekend Edition of October 31

Intelligence and Insights on China's government actions, foreign policy, economy, and the capital markets.

On the commencement of COP26, we would like to bring you a special 4-point proposal from H.E. Ruth Kagia, Deputy Chief of Staff to the Presidency of Kenya, on China’s engagement with Africa.

Below is a transcript from Ms. Kagia’s special remarks.

For the past 11 years, China has been Africa's largest trading partner. China is also the single largest player in African infrastructure. It finances one in five infrastructure projects and builds one in three of them. This has begun to remove one of the most critical constraints to development in the continent: infrastructure.

How can this super-sized partnership be leveraged to unleash Africa's growth potential? We propose that the role of China in Africa's transformation could become even more consequential only if China made four strategic shifts.

  • Achievement in its development strategy.

  • An improvement in the quality of cooperation.

  • Expansion in the scope of its development program.

  • A recalibration of a framework of cooperation.

China needs to make strategic shifts in its development. A strategy in order to align it to the key trends that are driving transformation in Africa is the young population, urbanization, industrialization, infrastructure development, and the untapped resource wealth of the continent, as well as the innovative application of digital and mobile technology. We will not discuss infrastructure because the Chinese have already done a very good job on that. Let's take the others in turn.

Africa is both the youngest and the fastest-growing continent. Roughly 60% of the population is under the age of 25. By 2050, one in four people in the world will live in Africa. How do we unleash the tremendous potential of this demographic? The obvious starting point is to improve the human development and human capabilities of the population through education, training, skill development as well as to strengthen connections with finance and markets.

When you look at the China training program in Africa, which is currently the largest with over 100,000 people trained every three years, it is completely misaligned to the basic human development needs of the continent. We, therefore, propose that China could usefully align its support for training and skill development in Africa in three ways:

  • The first is basically to align it to strengthening human development through educational training along the lines mentioned minutes ago.

  • The second is skill development and training to enable Africans to maintain the huge infrastructure that China has helped build, such as bridges, ports, roads, to ensure that they are engineers and the service people to ensure that infrastructure becomes sustainable and productive.

  • The third one is to share lessons of experience, particularly on poverty elevation, where China has done a tremendous job.

Between 2015 and 2045, the urban population in Africa will grow by an average of 24 million per year. Globally more than 80 percent of GDP is generated in towns and settings for the obvious reason of agglomeration where money capital and people are concentrated in small spaces. But for towns and cities in Africa to realize the productive benefits of organization, we need to identify the needs of affordable housing, well-connected transport systems, and basic services as well as jobs. China could usefully make a strategic shift to apply the same approach it has applied on infrastructure to meet the housing and basic services needs over towns and cities. Africa has 60 percent of the world's underdeveloped arable land and a huge quantity of mineral resources.

But currently, Africa is not providing either the revenues or the jobs that could accrue from its extractive industry. We, therefore, propose a strategic shift is required in the way China approaches the extractive industry in Kenya so that it imports finished products, not just raw materials. We have seen how Botswana built its wealth around exporting refined diamonds. I would like to propose that this is one of the most important contributions China could make to Africa. By getting the natural resources refined in Africa, processed in Africa, and then Africa exporting a finished product.

China also needs to align its partnership so that it can become an even more powerful force of growth and transformation and could do this in several ways. The first is basically putting African and African leaders at the driver's seat and allowing African leaders to define and lead the development program. As far back as the inauguration of what is now the African Union, our leaders then said, ‘we have the resources, but we have failed to make full use of our power in the independence to mobilize our resources for the most effective take-off of social development.’ They basically went on to talk about needing to control the means of production and to control their finances. We are at a similar point now. Africa can no longer continue being just a recipient of development aid. They need to shape the investments, and as we saw during Covid-19, African leaders became quite effective at coordinating to shape their destinies. The African medical supplies, for example, very quickly organized a platform and supplied Covid-19 related materials. In a similar way, we have seen the engagement economic commission for Africa and how they have engaged the rest of the world on financing for coverage and debt management. On another level, we have begun to see a few countries rebalance their relationship with China. They insist that if the infrastructure is built, they also need to see that training is developed. In Ethiopia, for example, we need to see more of that where Africans are driving the nation in a much more equitable manner.

Concerns that have been expressed about the trade relationship between China and Africa is that it is deeply asymmetrical. China seems to benefit more from the relationship than its African counterparts. There is a huge deficit amounting to over 20 billion dollars, for example. Africa imports expensive finished goods from China for exporting cheaper raw materials. African firms face significant entry barriers to China's value-added product market. This asymmetry is not good for the maximization of such a strategic relationship.

What we propose is that there needs to be a major rethink of the quality of Africa-China trade, in particular, to make it much more reciprocal and less asymmetrical. China could harness new growth opportunities in Africa over and above the existing program. The most promising one is supporting the acceleration of the digital economy in Africa. The digital economy stimulates business vitality, shapes lifestyles, changes consumption habits, and as we noticed during Covid-19, it basically helped to maintain systems running in a way that would not have been possible in the past. Chinese companies, in an ironic way, have secured a huge share of the digital market in Africa. For example, Huawei equipment constitutes 70 percent of the 4G infrastructure in Africa, and it was the first in the continent to offer 5G services from tech companies such as ZTE, Cloud Work, and so on who have secured Government contracts to build smart cities, data-centres, Governance for e-governance platforms surveillance systems and so on. Again Huawei alone is involved in 25 data centre and e-governance projects across Africa. There is a contradiction here between the needs of accelerating digital development in Africa and importing wholesale Chinese technology. The strategic shift we propose is for Chinese enterprises to support digital development in Africa rather than simply transferring their technology wholesale.

Investment should focus on supporting the development of a robust technology ecosystem that includes the infrastructure, digital business, digital skills, values, etc. It is a huge opportunity for investment. This will spark a digital trade that will help transform the industrial supply and value chains. It will also enable digital acceleration in key sectors such as education, health, retail, and finance.

The other new area that we propose that China could expand its programs into is supporting the African indigenous manufacturing capacity. During Covid-19, African manufacturers have demonstrated the capability and innovative capacity to produce essential medical supplies. There is now scope to increase local manufacturing capacity in areas such as pharmaceuticals and agro-processing. This is a tremendous opportunity to unleash growth and development. For every dollar of manufactured product, Africa imports approximately 40 cents in input from outside the continent. If local manufacturing was strengthened, you could unleash billions and billions of dollars into the continent's manufacturing output. What we are seeking here is for China not just to be a factory for Africa in China but to help Africa become a manufacturing hub driven by its own felt needs.

The third area that we propose a shift is required is basically pushing China beyond its comfort zone and beyond the scope of its current strategic development agenda for Africa. We propose three areas.

The first one is debt. This is a sensitive topic, but we cannot hope to unleash growth and development in Africa at this point unless we squarely confront the issue of debt. China is Africa's largest bilateral accreditor. It holds at least 21 percent of total African debt. Payments to China account for nearly 30 percent of the 2021 debt service. There is a huge outlay, and we're proposing, as one civil society organization said, ‘let's throw out the rule book and revisit this issue in a manner that enables Africa to sort of shake off the shackles of death through a possible deathly profiling of debt restructuring.’

Also, we are proposing that the scope to explore alternative cooperation strategies in finance such as joint ventures, mergers acquisitions, and PPPs. Essentially our starting point has to be how to reduce the dead weight of debt.

For African growth and recovery, the second one is supporting Africa in peacekeeping efforts. Africa is doing a lot to try and silence the guns with qualified success. We are proposing that China could usefully scale up its support for peacekeeping efforts, including increased UN assessed contributions to ensure sustainable and predictable financing for AUP support operations because you cannot have development without peace.

The third area where we are proposing China moves slightly beyond this comfort zone is supporting African climate change. Africa is doing a lot on climate action. Financing and Chinese investments could help African countries grow green economies to achieve low carbon and climate-resilient outcomes by focusing on food security, clean energy, green and resilient cities, environmental stability, and so on and so forth.

China could also discuss with African countries innovative financing mechanisms that are currently being discussed by various nations, including debt for climate swaps and to provide space for economic recovery and climate adaptation.

Finally, we propose that China could usefully adjust its framework of cooperation. At the moment, China has developed a very effective mechanism for engaging the African continent. Through FOCAC, 46 African countries have already signed the Belt and Road Initiative.

There is sort of a continental approach from the China side towards African development.  But we don't have a parallel structure for engaging African countries. At the moment, engagement is primarily bilateral even when decisions are made at the FOCAC level. We, therefore, propose that as a final strategic shift, China could be proactive in supporting the actualization of the Africa continental free trade area and use that as a regional platform to engage the continent in a more strategic and holistic manner. China could support accelerated integration of African support, regional economic integration to facilitate Africa trade and investment as well as to promote the connectivity of the cross-regional infrastructure.

These proposals will realize the promise of Africa. They will help release the development potential of the 1.2 billion people who have a combined GDP of more than 3.4 trillion, which makes it the fifth-largest economy in the world. Everybody benefits from making these strategic investments both external partners, in this case, China as well as obviously the African continent.

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Summary of Articles:

Economy

  1. Official Response to the Top 10 Concerns on China’s Economy

  2. A Review of China’s Residential Property Market

Capital Market

  1. Liu He’s Address Aims to Alleviate Real Estate Fear and Comfort Foreign Companies

Carbon Economics

  1. New Government Roadmap on Decarbonization

Government in Action

  1. China to Expand Property Tax Pilots

  2. China’s Property Tax Pilot Dampens Real Estate Market, with Effects under Doubt

  3. Second Rectification Wave Anticipated Ahead of 6th Plenum

  4. NDRC Restrained Electricity Pricing Following Marketization

  5. Beijing Fights Covid Surge as 100 Day Olympic Countdown Kicks Off

International Relations

  1. First Joint Naval Patrol By Russian And Chinese Warships In the Western Pacific

  2. Top Diplomats Reach Consensus on Improving China-Japan Ties

  3. Biden’s Nominee for Ambassador to China Embraces Tough Line Against Beijing

  4. EU Delegation to Visit Taiwan Next Week

  5. Taiwan’s Tsai Confirms US Military Presence on the Island

  6. Xi Jinping Rejects International Order Shaped by One Country at the UN Address

US-China Trade

  1. Lackluster Call between Liu He and Janet Yellen

Unicorn in Spotlight

  1. Company Profile: Plus.ai ( 智佳科技)


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Economy

1. Official Response to the Top 10 Concerns on China’s Economy

China’s economic trajectory has garnered much attention over emerging downward pressure following the electricity outage and Evergrande turmoil. On October 24th, China’s Xinhua News Agency published an official article on "Ten Questions on China's Economy."

The article reiterated China’s commitment to “progress towards high-quality development” while tackling economic challenges. (source)

The 10 Challenges

2021 is the first year of the “14th Five-Year Plan" (14th FYP). (read more)

These are the 10 challenges the country will face, according to state media:

1. Overall trend: Stability remains an overriding concern for the country’s development. China should refrain from “overwhelming flooding” (大水漫灌) (monetary policy) and stick to high-quality growth.

2. Consumption and investment: Though consumption growth has slowed, China’s huge market still has potential; current and future measures will look to encourage consumption in a country with high savings rates. The schedule to support effective investment has also been drawn up.

3. Foreign Trade: Foreign trade trends are likely to fall steadily in the coming period, as China’s trading companies embrace innovation in a bid to maintain and expand international markets. Relevant policy support will aim to improve these trends and reinforce growth in both imports and exports.

4. Supply-side structural reform: China has already made considerable progress and will accelerate reforms and innovations to establish a sound base for the 14th FYP.

5. Power curtailment: The government has already taken actions against surging coal prices. Implementation of further electricity marketization is to be deepened so as to ensure safe and stable residential energy supplies.

6. Global supply chain: China has begun to rectify deficiencies in the industrial supply chain to increase local control, especially in high-tech fields such as 5G, artificial intelligence, and the Internet of Things. Beijing will continue to embrace foreign investment so as to bring cooperation and competition to the market.

7. Common prosperity: It’s not egalitarianism, nor “robbing the rich and helping the poor” (劫富济贫). Rather, common prosperity coaxes the country’s wealthy to stimulate and help the poor. Over the long term, the process balances efficiency and fairness to achieve sustainability.

8. Anti-monopoly and regulation over the disorderly expansion of capital: Fairness and efficiency are important on the path to a mature market, and a cascade of regulatory action and investigations into private enterprises were not targeted at particular companies or industries. They are aimed at promoting healthy competition and development.

9. Rural revitalization: China has now established a dynamic monitoring and assistance mechanism to prevent areas of the country from slipping back into poverty. Revitalization work would continue, with over 30 policies targeting over 160 pilot towns and villages.

10. Financial risk prevention: Recent debt defaults by real estate companies are individual risks, and the spillover effect to the financial industry remains under control. However, since regional financial risks still exist, local governments are required to take responsibility for preventing local fiscal, industry, and regional economic risks from transforming into financial risks. Governments should focus on improving the local credit environment and financial ecology and provide help to small and medium financial institutions. (source)

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2. A Review of China’s Residential Property Market

Ren Zeping (任泽平), the former chief economist at Evergrande, published a report on the state of China’s resident property market that is worth reviewing. (source)

The estimated valuation of the residential property market in comparison to stock and bond market valuations in major countries in 2020 (in USD trillion)

         US      Japan        UK       France   Germany     China

(Blue: Residential properties; Orange: Stock market; Purple: Bond market)

The report estimates the 2020 market capitalization of residential properties in China at around US$62.6 trillion dollars, nearly twice the size of US$33.6 trillion market cap in the United States, 6 times the property valuation of US$10.8 trillion in Japan, and twice as large as the combined US$31.5 trillion of the UK, France, and Germany.

Real estate market valuation as a share of GDP

In terms of property capitalization to GDP, China reports a ratio of 414%, much higher than those of the US (148%), Japan (233%), Germany (271%), the UK (339%), and France (354%).

Ren noted that Japan’s ratio was around 391% in the 1990s before the housing bubble burst.

Average residential property’s market value (in RMB 10,000s)

(From left to right: Tier-1 cities, Tier-2 cities and Tier-3 & 4 cities)

Cities in eastern China account for more than 60% of the country’s total market capitalization. More than 101 cities in China have reported a property capitalization-to-GDP ratio of higher than 350%.

Ren on uneven distribution of resources

Ren Zeping thinks the high property capitalization-to-GDP ratio in China is driven by the uneven distribution of supply and demand across different regions of the country. Limited land and other high-quality resources, including education and medical care, which are heavily concentrated in tier-1 cities such as Beijing and Shanghai, led to population outflow from tier-2 and tier-3 cities and fueled the sharp increase of property prices in the former.

Ren pointed out that a huge liquidity injection also triggered the price surge over the years into the economy. Since 1998, China’s M2 monetary supply grew at an annual rate of 15%, much higher than the GDP growth rate of 11.9%.

Stock & bond investments as a share of total capital stock

Real estate value as a share of China’s stocks, bonds, and real estate capital stock China also reports a high ratio of 66.6%, higher than the US (27%), Japan (37%), the UK (49%), France (56%), and Germany (64%).

Similarly, real estate wealth as a share of total family wealth has reached 61.8%, significantly higher than the UK (46%), Japan (37%), the US (24%), and Germany (20%).

The underdevelopment of China’s capital markets is a major cause of the higher ratios. Stocks and bonds are still the smaller vehicles corporations resort to than banking lending.

At the same time, China’s shallow capital markets and the traditional value of “the home” also discouraged people from investing in non-real estate financial assets.

Property to total asset ratio in 2020, by country

                  China                 UK                  Japan             US               Germany

Proposed policy changes

Ren proposed two directions for policy changes:

  • A more sustainable mechanism for the development of the real estate sector:

    • Land supply in major cities should be linked to the actual rate of population growth.

    • The government needs to ensure the long-term stability of monetary policy and finance policy for the real estate industry to support real demand and suppress speculation.

    • Improve supply-side structural reform by shifting from the current system of one major supplier — the developer — to multiple suppliers (developer, government, renting companies, etc.).

    • Gradually expand the property tax pilot scheme.

  • Further develop capital markets and improve household asset allocation structure.

    • Increase the proportion of direct financing and support technology and innovative companies through a registration-based IPO system.

    • Increase the proportion of institutional investors and promote value investment practices.

    • Improve the legal and regulatory system to ensure market fairness.

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Carbon Economics

1. New Government Roadmap on Decarbonization

On October 24th, the Central Committee of CPC and State Council of China co-issued Opinions on the Complete, Accurate and Comprehensive Implementation of the New Development Concepts for the Carbon Peak and Neutrality Works (关于完整准确全面贯彻新发展理念做好碳达峰碳中和工作的意见), which formally lays out a clear timeline for China’s carbon neutrality. (Source)

The document has defined 3 key phrases:

  • Non-fossil energy will account for 20% of total energy consumption by 2025. China will see the initial framework of a green and low-carbon economic system and a huge improvement in energy efficiency in key industries.

  • Non-fossil energy consumption will reach 25% by 2030. The green transition of China’s economy and society will see significant results. Energy efficiency in energy-intensive industries will reach the internationally advanced level.

  • Non-fossil energy will account for more than 80% of total energy consumption by 2060. China will see the full establishment of a green and low-carbon economy and a clean, safe and efficient energy system.

The development plan, as laid out in the document, has put focus on the following key areas:

  • Industrial upgrades and green development in traditional industries, including agriculture, energy, materials, construction, transportation, etc. More restrictions on energy-intensive and high-emission projects and more support for low-carbon industries, including IT, biological tech, EV, etc.

  • Increase energy efficiency.

  • Restrict fossil energy consumption.

  • Facilitate the development of low-carbon buildings and improve the structure of energy consumption for buildings.

  • Strengthen environmental protection. Restrict unnecessary land usage. Accelerate large-scale reforestation projects.

  • Establish a green energy trading system. Promote high-quality and high-value-added green products. Enlarge the exports of green products and energy-saving and environmental protection services.

  • Consummate the existing legal and regulatory framework to ensure compliance with the new policies. Strengthen organizational leadership inside the party and government.

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Government in Action

1. China to Expand Property Tax Pilots

China’s top decision-making body, the National People’s Congress, authorized China's State Council to launch a pilot real estate tax in some regions on Saturday, October 23rd. The State Council will determine the selected regions for the pilot scheme and other details. (Source)

Experts believe that Zhejiang, Hainan, and Guangdong provinces are likely to be selected as the initial regions for the pilot scheme, given major cities in the province have been the center of recent discussions. It is also anticipated that the new rules will borrow existing experiences from previous experiments with property taxation in Shanghai and Chongqing that were launched 10 years ago. (Source)

Key points of the pilot real estate tax scheme:

1. The tax will apply to both residential and non-residential property and land and property owners, except rural land and properties on rural land.

2. The scheme’s general framework will be laid out by the State Council, while the specific rules will be designed by the regional government.

3. The pilot scheme will last for 5 years from the issue of more details from the State Council.

4. The scheme will follow a gradual transition route from piloting to legislation.

2. China’s Property Tax Pilot Dampens Real Estate Market, with Effects under Doubt

China’s top decision-making body, the National People’s Congress, authorized China's State Council to launch a pilot real estate tax in some regions on Saturday, October 23rd. The State Council will determine the selected regions for the pilot scheme and other details. Source

Key points of the pilot real estate tax scheme:

1. The tax will apply to both residential and non-residential property and land and property owners, except properties built on rural land.

2. The scheme’s general framework will be laid out by the State Council, while the specific rules will be designed by the regional government.

3. The pilot scheme will last for 5 years from the issue of more details from the State Council.

4. The scheme will follow a gradual transition route from piloting to legislation.

Implications

The launch of the pilot real estate tax was connected to China’s drive towards common prosperity, as stressed by President Xi Jinping. However, it may not produce the target effects.

No empirical evidence in countries that levy tax on properties suggests a robust correlation between the levy of property taxation and the decline of housing prices.

In regions of China where the housing demand is inelastic, it is likely that property taxes levied will be transferred into the home sales prices. Further, property taxes may be transferred to home renters, increasing rents in regions where property tax is piloted. This goes against the well-wish of common prosperity, in the sense that home prices, in markets where demands outweigh supply, will go higher. Subsequently, rent prices will go higher too. Property tax could further benefit the rich and strain the poor.

Local government’s heavy reliance on land transfer tax

In 2020, local governments generated RMB 8.4 Trillion of revenue from land transfer taxes, a direct result of real estate development activities.

Of the 38 countries in the OECD, tax on property/GDP ranges from 0.2% in Estonia to over 4% in the UK. Such ratios stand at about 2.4% in the US. If China were to resort to the lower end of such a ratio, a 1% tax on property/GDP ratio would give China RMB 1 trillion in property tax revenue, based on RMB 100 Trillion GDP in 2020.

RMB 1 trillion is just a little over 10% of the land transfer tax received in 2020.

Chinese local governments’ reliance on land transfer and real estate development will continue unless and until alternative sources of fiscal revenue become a genuine alternative to the land transfer tax.

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3. Second Rectification Wave Anticipated Ahead of 6th Plenum

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