Stop capital flight by reducing taxes

The way to encourage industries to keep jobs in the country is to lower the burden of costs they are hampered by

News that China's largest automobile glass-maker Fuyao Group is to invest $600 million (570.3 million euros; 486 million) to build a 2,000-worker factory in Moraine, Ohio, in the United States should set off alarm bells, prompting the Chinese government to lower taxes and operating costs for manufacturing industries to prevent the drain of Chinese capital and jobs.

Responding to criticisms of his investment abroad in a recent interview, Cao Dewang, chairman and founder of Fuyao Glass Industry Group in Fujian province, complained about the heavy tax burden in China. Cao, who started investing small amounts in the United States in 1995, said it took him more than 20 years of observation to make the "prudent" decision two months ago, because there is an obvious gap in production and operational costs between China and the US.

Taxes on enterprises, electricity tariffs and natural gas costs in China are all higher than in the US, he said. And compared with a number of fees an enterprise has to pay for using land in China, land is virtually free to use in the US, thanks to local subsidies.

The high cost of production and the heavy tax burden on manufacturing enterprises are facts many in China already knew. But it is Cao who first highlighted that in China they were not just high, but much higher than in the US.

At the recently concluded Central Economic Work Conference, the central government pledged to lower taxes, fees and other costs to foster the development of the real economy.

So Cao's remarks immediately after the conference should spur the authorities in charge of reform to put their words into action.

Although China has deepened economic reform through a series of measures since late 2012, the production and operating costs for enterprises, including labor and institutional transaction costs, have increased.

All costs ultimately find their way into retail prices paid by consumers, so, many enterprises, including well-established ones, will either have to accept the loss of their competitiveness as buyers opt for alternative products at lower prices, or they can relocate overseas to places where production costs are lower and the business environment better.

In fact, many Chinese enterprises have moved their production bases to foreign economies, especially Southeast Asian countries, in recent years. And this trend is likely to gather pace in the future.

Because of its re-industrialization strategy, the US government is seeking to attract manufacturing industries, including foreign ventures, back to the country, as they are not only important taxpayers but also job generators.

If the cost gap Cao talked about is true, Chinese people should not lament the shifting of Fuyao Group's production unit; instead, they should appreciate the fact that many Chinese enterprises have not moved to the US.

The government has made some breakthroughs in tax reform. But it's far from enough. The enterprise tax rate in China is still markedly higher than in developed countries. So the government should not only see how much tax it has cut; it should also see how much could still be cut.

US President-elect Donald Trump has vowed to lower enterprises' tax from 35 percent to 15 percent. The Chinese reform authorities should show the same sense of urgency to protect Chinese capital and enterprises. Behind the tax reform is a deeper level of reform - that of the government itself, as well as the national administrative system.

The author is a Beijing-based financial columnist. The article was first published in Beijing News on Dec 28.

(China Daily European Weekly 01/06/2017 page12)