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Exemption of Agricultural Taxes

The year of 2005 has been auspicious for the underprivileged rural population, which accounts for over 70 percent of the country's total.

In January, the Central Committee of Communist Party of China (CPC) issued a document putting forward the plan to enlarge the program of scrapping agricultural taxes in terms of both area and extent. The plan has been implemented nationwide over 2005. By the end of 2005, a total of 28 provinces and regions have achieved full exemption of agricultural taxes, benefiting a total of 800 million farmers. The measure has offered a respite to China's rural population perennially under economic pressure. Before the reform of agricultural taxes was initiated in 2000, government raked in a total of 60 billion yuan (US$7.5 billion) in agricultural taxes every year.

Opening up RMB Bond Market

In the first quarter of 2005, the Ministry of Finance gave go-aheads to three international financial institutions--the International Finance Corp. under the World Bank, Asian Development Bank and Japan Bank for International Cooperation-to issue yuan--denominated bonds in China, with a total value of 4 billion yuan (US$500 million).

It is the first time that foreign institutions are allowed to issue local currency bonds in China, demonstrating the government's positive attitude toward opening up its capital market in a studied way.

The positive effects of such an act include enhancing China's credibility and clout in the international capital market, boosting investors' confidence in Chinese economic development, upgrading the structure of China's capital market, introducing advanced expertise in issuance of bonds and accelerating the internationalization of local bond market.

With the opening of the bond market, the phasing out of restrictions over capital outflow now tops the agenda of Chinese finance officials.

Textile Export Pains

2005 has been a bumpy one for China's textile industry. Although international textile quotas were formally scrapped at the beginning of this year, China, a major textile manufacturer and exporter, fails to unleash its full production potential due to trade barriers set up by the United States and the EU. Over the year, the Chinese textile industry has been moving forward amid frictions and strife over protectionism.

In June, China and the EU signed a memorandum of understanding over textile trade. Five months later, an agreement imposing a cap on growth rates of China's textile exports to the United States was reached between the two countries in November. Although quota limits over China's textile and garments exports are still in place, the partial solution of trade frictions may bring a better new year for China's textile exporters.

Failed Oil Merger

In June, China National Offshore Oil Ltd. (CNOOC), an affiliate of China's third largest oil producer China National Offshore Oil Corp., filed a bid to acquire U.S. oil giant Unocal. The bid dominated world business headlines. Under the proposed merger, CNOOC would pay US$18.5 billion in cash to acquire the ninth largest oil and gas company in the United States, which had run losses for several years and filed a bankruptcy petition. CNOOC also announced that it would retain employment of Unocal management and staff and this deal would not bring about any negative impact on the U.S. oil and gas market.

If the merger had succeeded, it would have become the largest international merger Chinese companies had been involved in, as well as the second largest merger anywhere in six years. CNOOC finally lost the bid to a lower offer from Chevron Corp. due to fierce political opposition from the U.S. politicians.

The failed merger attempt has once again put a Chinese company in the international spotlight after the country's computer giant Lenovo successfully purchased IBM's personal computer division in late 2004. With accelerating economic globalization, companies from China are sure to increase their activity in international mergers and acquisitions.

National Oil Drought

An oil shortage first broke out in the southern business hub of Shenzhen in the second half of July and quickly spread throughout south China. Most oil stations in Shenzhen and Guangzhou were soon drained, and those with oil left carefully limited sales quotas. In one month, the oil shortage spilled over north China with tension only easing at the end of August.

The oil shortage triggered a spike in oil prices, incurring losses for companies of some industries. Some experts assert that China has entered a new era featuring higher oil prices.

This short-lived fuel scarcity also alerted people to the importance of China's energy security. Moreover, this incident highlighted the struggle between business interests, represented by China's two oil giants, China National Petroleum Corp. and China Petroleum & Chemical Corp., and the National Development and Reform Commission for the pricing of retailed petroleum products. All eyes are now on the reform of the oil pricing mechanism.

Appreciation of RMB

China revalued the yuan against the U.S. dollar on July 21 and introduced a currency basket to determine the exchange rate against the previous dollar peg. The adoption of a flexible exchange rate regime featuring a wider floating band is another milestone of China's opening up. As a result, China's financial sector will be more responsive to fluctuations of the international market.

RMB's rate to U.S. dollar has climbed steadily since, constantly reaching new records. While the revaluation of the yuan has to some extent helped to relieve the global current-account imbalance, it did not exert a noticeable negative impact on China's exports.

11th Five-Year Guideline

The Fifth Plenum of the 16th CPC Central Committee approved proposals on the 11th Five-year Guideline for National Economic and Social Development (2006-10) on October 11. This pivotal guiding document outlines China's economic and social development over the next five years.

It is regulated in this document that China will stick to a people-oriented, comprehensive, coordinated and sustainable approach to development, which prompts a shift of focus from the increment of wealth and GDP growth obsession to development of humanity. The plan pointed out that over this period, emphasis will be put on increasing the pay of low-income groups, enlarging the proportion of the middle-income segment, adjusting the high income of professionals, regulating the mechanism of personal income distribution and allaying the widening of income gap among different regions and different social groups.

The paramount goals for the next five years' social and economic development are to double per-capita GDP by 2010 against the 2000 level on the basis of upgrading industrial structure, enhancing profitability and reducing consumption of energy, and to raise the efficiency of resources usage and push down the level of energy consumption per unit GDP by 20 percent against that of 2005. In the next five years, the hi-tech manufacturing industry, service sector, energy industry and infrastructure industry will be given preferential treatment for development.

Completion of Qinghai-Tibet Railway

October 12 saw the completion of the Qinghai-Tibet railway. The track will start trial operation in July 2006.

The Qinghai-Tibet railway breaks a number of world records in length, altitude and the length through frozen earth. Of the total length of 1,142 km, 960 km stays at an altitude of 4,000 meters or above, with the highest point reaching 5,072 meters. The geological conditions of the railway are so harsh that it travels over 550 km through perennially frozen earth. The railway also marks a high point in terms of environmental friendliness. Over 2 billion yuan (US$250 million), or 8 percent of the total investment, was spent in adopting facilities that harmonized with the environment.

The construction of the Qinghai-Tibet railway started in September 1958. The first phase of the project, which stretched 815 km from Xining, provincial capital of Qinghai, to Golmud, was finished in August 1978. The second phase to link Golmud with Lhasa was initiated on June 29, 2001.

Before the completion of Qinghai-Tibet railway, Tibet relied on road transport for industrial and trading purposes. Distances were long and costs were prohibitive. For example, the price of coal and concrete in Lhasa is about 800 yuan (US$100) per ton, which includes a staggering transportation cost of 600 yuan (US$75) per ton. It is estimated that the railway will absorb 75 percent of the cargo transportation volume, which will greatly reduce transportation costs and benefit Tibetan traders.

China Construction Bank Going Public

China Construction Bank (CCB), which got listed at the Hong Kong Stock Exchange on October 27, becomes the first of China's Big Four lenders to go public after implementing the government's initiative to reform state-owned commercial banks for two years. The initial public offering (IPO) of China's third largest lender, which raised a total of US$7.98 billion, was the largest IPO the world has seen for four years. The successful IPO offers instructive references for other state-owned lenders that are gearing up for IPO.

"CCB's IPO marks the first step of reform of the Chinese banking sector," CCB President Guo Shuqing said. As China's financial sector opens up wider and foreign strategic investors are introduced, there will be overhauls in the banks' governance structure, internal audit, credit culture and risk-evaluation practices and concepts. Furthermore, the current configuration of China's banking sector will be upgraded into one featuring more intense competition.

Amendment of Personal Income Tax

A revised Personal Income Tax Law was adopted in November, raising the threshold for monthly personal income tax from 800 yuan (US$100) to 1,600 yuan (US$200). This rise became the most eye-catching change of the third revision of the law.

According to a draft amendment approved by the State Council in July, the taxable income limit was regulated at 1,500 yuan (US$188). The threshold was further lifted after three committees under the National People's Congress, China's top legislature, held hearings and considered suggestions from all walks of life.

The yawning gap between the rich and poor is becoming an increasingly serious social problem in China. In response, the Chinese Government suggests that a scientific and fair personal income tax mechanism should be set up so as to narrow the wealth gap, promote social fairness and build a harmonious society. In the process of amending the income tax law, the voice of taxpayers has been heard and considered.

(Beijing Review January 5, 2006)