Published: 21st May, 2015 13:30 HKT
As China enters the ‘new normal’ of declining GDP growth figures, one famous Chinese economist argues there’s still room for optimism, that China’s GDP growth is in fact under-reported. One of the main reasons for this is private enterprise under-reporting in their income tax assessments. The size of this under-reporting error will only increase, as current Chinese government policy is to encourage more GDP growth from the private sector, causing a more disproportionate understatement in China’s actual GDP.
Below are translations in italics taken from Professor Li Yining’s article entitled ‘Six cutting edge issues in the current economy’, with some related observations on the real economy. 《当前经济形势的六大前沿问题》- 厉以宁。
Roof over ones head 盖房子
“In developed Western countries, homes built by rural residents are included in GDP calculations, whereas in China, homes built by themselves, or with the help of neighbours and relatives are not calculated as part of GDP. This is a large amount, and as more new villages are built, and the pace of urbanisation steps up, this figure will keep on increasing.”
In China’s rural areas its common to see villagers building their own homes, for the obvious reason it saves on costs. When I stayed in rural Chongqing for a brief period, in every village there would be the constant noise of brick-making machines, and villagers grouping together to build each others houses. In many cases they are building on the same plot of land that they have rights to and their family has always lived on. In other words it’s a constant renovation process, having to tear down the old house, and rebuild the new house, each generation upgrading in tandem with their rising wealth.
The A’yi army 阿姨大军
“China has tens of millions of domestic helpers, whose income would be included in GDP figures in developed Western countries. In China, because domestic helpers’ salaries are not included in GDP calculations, that means tens of millions domestic helpers incomes are not being accounted for in the GDP amount. Moreover over the past few years the number of domestic helpers has been gradually increasing, along with their salaries. This situation cannot go overlooked by economists.”
With the rise in China’s middle-class, and slowly changing attitudes to women’s careers, this is a natural phenomenon for a rising demand in houseworkers. In the larger cities, professional nannies can command salaries higher than graduates. In rural areas, it’s common to see nannies looking after children left behind by parents working in the cities.
Jumping into the sea 下海
“How much is the real turnover of China’s self-employed businesses? In China, the amount of income apportioned to sole proprietors is derived from the tax system, however actual business turnover will be more than that stated in the tax assessment. In other words, large numbers of self-employed understating their incomes on tax returns, will result in a lower calculation of China’s GDP. Stipulations are still in place that allow small and micro businesses, with a monthly turnover not exceeding 30,000 yuan, to avoid paying tax. With these tax exemptions in place, its thus even more difficult to collect statistics on their real income.”
Nobody willingly pays tax in China, especially a self-employed worker. Recent government data puts the number of self-employed in China at over 50 million. That’s more than the entire population of Spain, and in reality, difficult to chase down and collect taxes from this group.
When it rains in China, suddenly a group of street hawkers will congregate around subway exits, selling umbrellas. When it’s hot, they’re selling fresh fruit, and when it’s cold, baked sweet potatoes. The Chinese willingness to start up a new business with no license, run with it as long as it’s profitable, then switch to another line of business, is income that’s hard to record by China’s statisticians.
Tax dodgers 逃税者
“Recent statistics on the composition of China’s GDP shows SOEs contributed no more than 35%, foreign enterprises around 10%, and private enterprise over 55%. In the past few years, foreign experts have raised the possibility of false data reports overstating Chinas GDP figures. Actually this just goes to show little they understand China. Its common practice for private businesses to understate their incomes on tax returns. If the tax authorities do not check, then theres no need to report, as doing so would mean paying more tax and incurring losses. At the same time some SOEs might submit false income statements, in order to show off their performance, or for their leaders to win promotion. Yet the upside for this overstated amount is limited, as it only takes one audit to give the game away. Overall then, given that private enterprise constitutes around 55% of GDP, their income understatements will exceed SOE overstatements, resulting in GDP statistics being lower than in reality.”
Now apply the same street hawker mentality to SMEs, and the tax dodging game continues. I knew one worker at a small shadow bank in Beijing’s Chaoyang district describe how sometimes all of the office would suddenly decamp to another location, only to return a few hours later. The reason? An expected visit from the tax man. Been in business almost one year? Close down and open under a new name, or spin off the business lines into other businesses and so on. Surely China’s tax avoidance ruses date back to the Qin dynasty or before. The only difference is the fundraising dilemma today’s Chinese SMEs face. Hence one set of real accounts, one set for the tax man, and a spruced up set for the local bank when applying for a loan.
Granted these tax avoidance schemes are not only to be found in China. But the simplicity and scale of them do highlight why the government needs to push through with legal system reforms to help capture these tax revenues, and in doing so, they might be able to provide a boost to those less than stellar official GDP figures.
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Included in the popular Sinocism newsletter, May 21st 2015.
Cited by Asia Times, May 22nd 2015.