China Economic Quarterly Q4 2017

Better than expected growth in 2017 might guarantee a good year in 2018

February 2018

Major economic indicators p1/Policy updates p10 /Hot topic analysis p13

www.pwccn.com/ceq

ContentI. Major economic indicators 1

II. Policy updates

China’s top leadership mapped out economic plans for 2018

New policies in boosting China’s private investment

10

10

12

III. Hot topic analysis

China’s response to the US tax reforms

What is the impact of real estate macro control on China’s economy?

13

13

18

Quarterly GDP values and quarterly and annual GDP growth rate

1.70%

1.80%

1.80%

1.80%

2.00%

1.70%

1.80%

1.50%

1.30%

1.90%

1.80%

1.70%

1.40%

1.90%

1.80%

1.60%

7.30%6.90% 6.70% 6.90%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

0.00

5.00

10.00

15.00

20.00

25.00

Quarterly GDP value Quarterly growth Annual GDP growth

GD

P (

Trilli

ons o

f R

MB

)

Major economic indicators

I

China’s GDP growth for the fourth

quarter has increased 6.8% year-on-year

again, following the same rate for the

third quarter. As a result, total GDP

reached to 82.71 trillion yuan (about

US$12.84 trillion), with an annual

growth of 6.9% for the whole year, the

first pickup in GDP growth rate since

2011. This is much better than the

market expectation. We believe that the

steady growth in 2017 might guarantee a

relatively good year in 2018.

The International Monetary Fund

expects China’s GDP growth to reach

6.6% in 2018, up from the 6.5%

prediction made last October, according

to its World Economic Outlook released

on 23 January 2018. This is the fifth time

for the IMF to raise its Chinese economic

growth prospects in two years. In 2017,

China’s contribution to world’s economic

growth has surpassed 30%.

China’s economic performance is much

in line with an upbeat outlook for the

global recovery. The IMF also revised

upward its global growth forecast for

2018 by 0.2% to 3.9% due to increased

global growth momentum and the

expected positive impact of the recently

approved U.S. tax policy changes.

In addition to GDP growth rate, China’s

other three macro economic

measurements also performed well. 13

million new jobs were created in urban

areas in 2017, and unemployment rate

stood at 4.98% by the end of December.

Consumer Price Index (CPI) for the

whole year only increased by 1.6%, lower

than official estimate. For the balance of

payments, China’s foreign exchange

reserves rose from US$3.01 trillion in

2016 to US$3.14 trillion by the end

of 2017.

PwC 1

Source of data: Unless otherwise stated, economic data is from the National Bureau of Statistics,

Wind and financial data from the People’s Bank of China.

Source: National Bureau of Statistics of China; Wind

13%

12%

12%

12%

12%

12%

12%

12%

11%

10%

10%

46%

46%

47%

46%

45%

44%

43%

41%

41%

41%

41%

41%

41%

41%

42%

43%

44%

45%

48%

48%

49%

49%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

primary secondary services

Perc

enta

ge

For the whole of 2017, the output of

primary, secondary and tertiary

industry was 6.55, 33.46, and 42.70

trillion yuan respectively. The tertiary

industry or services, accounting for

51.6% of total GDP, grew by an

impressive rate of 8.0% year-on-year,

while the growth rate for the primary

and secondary industry registered 3.9%

and 6.1% respectively.

More specifically, the tertiary industry

or services (consumption) has

contributed 58.8% to total economic

growth in 2017, increasing by 1.3%

compared to last year. In the meantime,

gross fixed capital formation

contributed 32.1%, and net imports of

goods and services contributed 9.1% to

total economic growth, compared to a

negative figure in 2016.

Obviously, services (consumption) plays

a leading role in driving China’s

economic growth, and fixed asset

investment, amounting to 76.4% of

GDP, remains a vital force.

GDP composition

2 China Economic Quarterly Q4 2017

Fixed Asset Investment: Accumulated Growth

13.50%

11.40%

10.30%10.00%

10.70%

9.00%

8.20% 8.10%

9.20%

8.60%

7.50%7.20%

Perc

enta

ge

Total fixed asset investment reached

63.17 trillion yuan, expanding by 7.2%

year-on-year in 2017, 0.9% less

compared to the same period last year.

However, on monthly basis, total fixed

asset investment increased by 0.53%

in December.

State sector investment rose to 23.29

trillion yuan in 2017, an increase of

10.1% year-on-year. Thanks to the

government’s favorable policy measures,

private investment, accounting for

60.4% of total investment, went up to

38.15 trillion yuan, increasing by 6%

year-on-year, much better than 3.2%

registered in 2016.

For the whole year, by sectors, fixed

asset investment of the primary,

secondary and tertiary industry went up

by 11.8%, 3.2% and 9.5% respectively.

As industrial investment went up by

3.2% year-on-year to 23.58 trillion yuan,

manufacturing investment increased by

4.8% to 19.36 trillion yuan and

contributed 21% to total investment.

High-tech manufacturing (17.0%),

equipment manufacturing (8.6%) and

technological upgrading recorded high

growth (16%), while investment in high

energy-intensive industries fell by 1.8%

from last year, paving the way for further

green growth.

On the other hand, fixed asset

investment in service sectors,

accounting for 59% (37.50 trillion yuan)

of the total investment, rose by 9.5%

year-on-year, while infrastructure

investment went up by 19.0% to 14.0

trillion yuan in 2017, 1.6% more than

in 2016.

On the external front, China’s outbound

investment reached US$120 billion in

2017, falling by 29.4% over a year ago

due to government’s increased scrutiny

over investment deals. Investment in

Belt & Road countries registered at

US$14.4 billion, declining by only 1.2%

over 2016. In contrast, foreign direct

investment into China reached a record

level of US$144 billion in 2017, making

China the second most popular

destination for FDI after the US. FDI

value stood at US$126 billion in 2016.

PwC 3

Growth rates in real estate

-33.8%-33.1%

-31.7%

-19.4%

-11.7%

-6.5%-5.9%

-3.0%

-7.8%-8.5%-6.1%

-5.5%-4.3% -3.4%

6.2% 5.7%

8.1%

5.3%

8.8%

11.1%10.1%

12.2%

15.8%

1.3%

2.2% 2.6%

-1.0%

14.7%16.8%16.8%

15.6%15.3%14.8%15.5%15.5%15.0%15.2%

7.0%

11.5%11.4%9.9%

11.2%

9.7% 9.0%

8.0%

8.2%

2.0%

1.3% 1.0%

3.0%

6.2%7.2% 7.0% 6.1% 5.3% 5.4% 5.8% 6.6% 6.5%

6.9%

8.9%

9.1%

9.3%

8.8% 8.5%7.9% 7.9%

8.1%

7.0%

-40.0%

-35.0%

-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Growth rate of land purchased Growth rate of resources of funds Growth rate of investment

Despite strengthening macro control

and tightening regulations, the overall

real estate market in 2017 remained

relatively stable, with investment

growing by 7.0% (nominal growth)

year-on-year to 10.98 trillion yuan.

Investment in residential building,

accounting for 68.4% of the total real

estate investment, stood at 7.51 trillion

yuan, an increase of 9.4% from last year.

In 2017, floor space sold and sales

volume of the commercial buildings

went up by 7.7% and 13.7% (or 13.37

trillion yuan), and residential housing

sales rose by 11.3% from last year.

Ironically, housing prices did not go

down following macro control, since

sales increased more than floor

space sold.

In terms of sources of funds, 15.61

trillion yuan were made available in

2017, rising by 8.2% year-on-year. Of

the total funds, domestic loans

accounted for 16.1%, growing by 17.3%;

self-financing constituted 32.6% (5.09

trillion), growing by 3.5%; other funds

including deposit and advance payment,

personal mortgage loans (7.98 trillion

yuan) accounted for 51%, growing

by 8.6%.

As regulation and control over house

purchasing stepped up, personal

mortgage decreased by 2% year-on-year.

Growth rate of land purchased reached

15.8% in 2017, while space of land

purchased stood at 2.55 trillion square

meters. Obviously, increase in sales

volume has brought up developers’

confidence to reserve more land.

Since the national and local

governments are likely to continue their

restrictive policies to further curb

market speculations, however, the

property market will face greater

uncertainties in 2018 and the years

ahead.

4 China Economic Quarterly Q4 2017

PMI hit a new high of 52.4% in

September (since May 2012), China’s

Purchasing Managers’ Index

(PMI) for manufacturing sector in the

past three months has returned to an

annual average level of 51.6% in 2017.

PMI dropped to 51.6% in October from

52.4% in September, then kept at 51.8%

and 51.6% in November and December.

However, it is a positive indication that

PMI stayed above the 50 level that

marks expansion and contraction.

Production index and new order index

remained high at 53.3% and 53.2%

respectively in December. But main raw

materials inventory index and employed

person index kept below the threshold

at 48.0% and 48.9%. This means that

the raw material inventory and the

number of employees of manufacturing

sector continued to decrease.

Furthermore, as trading volume had

increased, new export orders index and

import index reached to new high of

51.9% and 51.2% in December.

Purchase quantity index, main raw

material purchase price index and

producer price index also kept a high

level of 53.6%, 62.2% and 54.4%

respectively in December,

demonstrating a strong willingness

to purchase.

Non-manufacturing PMI remained at a

higher level than manufacturing, with

business activity index reaching 55.0%

in December. Non-manufacturing PMI

of services sector fell 0.2 percentage

points to 53.4% in December, slightly

lower than last year.

PMI of post and express delivery,

telecommunication, internet, software

and IT, financial services, insurance

stayed at high level in December, while

index of catering services, capital

market services, real estate were lower

than the threshold. It is worth noting

that PMI of construction industry

reached to 63.9%, the highest among all

other sectors.

Overall, the stable trend of

manufacturing PMI is likely to continue

in 2018. Most of the non-

manufacturing PMI is also expected to

maintain at a high level.

Purchasing Managers’ Index

PwC 5

53.8%53.4%

54.4%

53.8% 53.7% 53.7%

54.5%

55.1%54.9%

55.4%55.0%

50.2%49.8% 49.7%

50.2%50.0%

50.4%

51.4%51.8% 51.7%

52.4%

51.6%

46.0%

48.0%

50.0%

52.0%

54.0%

56.0%

Perc

enta

ge

Non-manufacturing Manufacturing 50% breaking point

Growth of Industrial Added Values (for companies over certain scales)

6.80%

5.70%5.90%

6.80%

6.20% 6.10% 6.00%

7.60% 7.60%

6.60%

6.20%

Perc

enta

ge

The growth of Industrial Added

Values for companies over certain

scales went up by 6.2% (in real terms)

year-on-year in December, 0.1% higher

than November. For the whole year of

2017, it increased by 6.6%, 0.6% higher

than that of 2016.

By sectors, manufacturing went up by

6.5% year-on-year in December, utilities

sector went up by 8.2%, and mining

sector fell by 0.9%. For the whole year,

manufacturing went up by 7.2%

year-on-year, utilities sector went up by

8.1%, and mining sector fell by 1.5%.

On the other hand, in 2017, profits of

industrial enterprises over certain scales

rose to 7.52 trillion yuan, an increase of

21.9% year-on-year. They have reached a

record high level since 2012, or 12.5%

more than 2016, thanks to supply side

reforms, rising commodity prices and

improving demand from domestic and

overseas markets. The main business

profit margin from industrial enterprises

over certain scales reached 6.46%, or

0.54% more than in 2016.

Profits of the mining sector increased 2.6

times, or 459 billion yuan year-on-year

in 2017. While a relatively small amount,

it shows that the mining sector has

turned around after making losses in

2016. Profits for manufacturing grew by

18.2% year-on-year to 6.65 trillion yuan

in 2017, while profits for power, heat, gas

and water declined by 10.7% over 2016.

We expect the growth of industrial added

values and profits would continue in

2018.

6 China Economic Quarterly Q4 2017

Retail Sales of Consumer Goods: Accumulated Growth Rate

10.56%

10.41%

10.50%

10.70%

10.30% 10.30%

10.40% 10.40%

10.00%

10.40% 10.40%

10.20%

Perc

enta

ge

Consumption continued to be the largest

driver of economic growth, contributing

58.5% to China’s GDP in 2017.

Total retail sales of consumer goods

went up by 10.2% year-on-year to 36.62

trillion yuan in 2017, which is 0.2% less

than in 2016. Catering consumption

(3.96 trillion yuan) grew by 10.7%

year-on-year, while the goods retail sales

(32.66 trillion yuan) went up by 10.2%.

Among it, sale of sports and recreational

articles increased by 15.6%, cosmetics up

by 13.5% and telecommunication

equipment/devices grew by 11.7% year-

on-year.

In addition, China’s online sales reached

7.18 trillion yuan in 2017, growing by

32.2% year-on-year. The growth rate is

6% higher than that of 2016.

Among the online sales, material goods,

accounting for 15% of total retail sales

(2.4% more than in 2016), stood at 5.48

trillion yuan, up by 28.0%. Meanwhile

sales of non-material goods reached 1.69

trillion yuan, increasing by 48.1%

year-on-year.

Growth of population, income and

overall economy are the backbone of a

steady and strong consumption. In 2017,

China’s GDP per capita reached

US$9,237, a step closer to entering the

group of high-income countries (above

US$12,476). In 2017, China’s per capita

disposable income (in real terms)

increased by 7.3%, 1% higher than in

2016. Total population in mainland

China reached 1.39 trillion or 7.37 million

more than in 2016, which contributed

0.5% to total consumption.

PwC 7

¥100

¥200

¥300

¥400

¥500

¥600

¥700

¥800

¥900

¥1,000

¥1,100

¥1,200

-25.00%

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

Net Export (RMB billion) Export Growth Import Growth

Gro

wth

(Billion)

526.62 918.01 861.22 1118.34 933.93 898.77 838.16 880.05

0.06% -1.50% -13.93% -8.62% -1.17% 8.99% 20.83% 9.74%

3.36% 8.64% -2.31% -1.59% 1.25% 0.80% 12.46% 7.08%

101.92 788.11 755.53 1007.20 810.26 967.14 458.51 800.70

-1.07% 0.95% -17.46% -13.83% -7.89% 1.95% 30.27% 16.43%

-6.05% 12.71% 4.90% -5.44% -4.26% 0.34% 10.47% 7.66%

Quarterly Balance of Trade

China’s imports and exports

performed fairly well in 2017, thanks to

recovery of global economy and

domestic demand. After a two-year

negative growth, total imports and

exports reached 27.79 trillion yuan,

increasing by 14.2% over 2016.

Among them, exports went up by 10.8%

year-on-year to 15.33 trillion yuan, and

imports grew by 18.7% year-on-year to

12.46 trillion yuan. As a result, net

surplus in 2017 was 2.87 trillion yuan.

As usual, general trade accounted for

56.4% of the total trade, which increased

by 16.8% in 2017 or 1.3% more than in

2016. Machinery products continued to

dominate China’s exports (accounting

for 58.4%), growing by 12.1% year-on-

year in 2017.

As the Ministry of Commerce pointed

out, according to WTO data, China has

possibly been the world’s largest

exporter on goods trade for nine

consecutive years since 2009. China’s

exports constituted 13% of the world’s

total in 2016, and is expected to grow

again in 2017.

During the first three quarters, China’s

imports accounted for 10.2%of global

imports, contributing 17% to its growth.

In order to deepen economic

globalisation and reduce tensions with

China’s major trading partners over

trade surplus issue, the first China

International Import Expo will be held

in Shanghai from 5-10 November, 2018,

following the announcement by Chinese

President Xi Jinping in May 2017. The

expo will include exhibitions and

forums, providing a new platform for

China to increase its imports of goods

and services.

For 2018, we expect China’s total trade is

likely to continue to grow at a higher

pace. However, a trade war with the US,

the major source of China’s trade

surplus, cannot be ruled out as President

Trump has announced a plan of

imposing higher tariffs against Chinese

exports. Trade tensions with the EU may

also escalate. Under this scenario

China’s imports and exports will be

severely disrupted, though the likelihood

is relatively low as both the US and the

EU would face Chinese retaliations and

their economies could be adversely

affected.

8 China Economic Quarterly Q4 2017

1.38% 1.39% 1.60% 1.60%2.30%

1.88% 1.92% 2.08%

0.90%1.50% 1.60% 1.80%

-4.56%-4.81%

-5.95% -5.90%

-4.30%

-2.60%

0.10%

5.50%

7.60%

5.50%

6.90%

4.90%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

CPI PPI

Gro

wth

(contr

actio

n)

rate

Producer Price Index and Consumer Price Index

Producer Price Index (PPI) went up

by 6.9%, 5.8% and 4.9% year-on-year in

October, November and December

respectively, maintaining a high level

while in general decline. For the whole

year of 2017, PPI increased by 6.3%, which

guaranteed that the negative PPI growths

over the past five years would not reoccur

in the near future.

There are a few reasons why PPI grew

more than 6% in 2017. Firstly, PPI

suffered negative growth from 2012 to

2016 for nearly five years, leaving a lot of

room to grow in 2017. Secondly, recovery

of the global economy and commodity

prices has pushed up PPI levels. Thirdly,

China’s supply side reform restructuring

measures, such as cutting the capacity of

steel and coal, have triggered price-hiking

in some major commodities.

For 2018, PPI is unlikely to grow further,

and may maintain at a reasonable level.

Compared to high levels of PPI, growth in

consumer price index (CPI) was

fairly low. CPI increased by 1.9%, 1.7%

and 1.8% year-on-year in October,

November and December respectively.

For 2017, CPI grew by 1.6% year-on-year.

More specifically, food prices dropped by

0.4%, price of healthcare went up by

6.0%, prices of residential housing,

education, culture and recreation all

increased by more than 2%.

In 2018, CPI could remain stable. The 6%

growth for price of healthcare is unlikely

to last long, especially when it would

affect the affordability of health care for

low income families and the government

has put lowering the cost of healthcare as

one of its priorities for 2018.

PwC 9

● China’s top leadership mapped out economic plans for 2018

IIPolicy Updates

The Annual Central Economic Work

Conference, which usually sets the tone

for China’s economic policies for the

following year, was held in Beijing from

18-20 December 2017.

The meeting, led by President Xi

Jinping, adopted a new development

concept represented by “Xi Jinping

Thought on Socialist Economy with

Chinese Characteristics for a New Era”,

and stressed the Party’s leadership in

economic management, people-oriented

development, the new economic normal,

the market’s role in resource allocation

and supply-side structural reform. In

tandem with the new concept, China will

take steps to reconstruct its systems of

development indicators, policies,

standards, statistics and performance

assessment.

The meeting called for China to develop

a modernised economy focused on

quality and performance in order to raise

China’s capacity for innovation and

competitiveness. It emphasised that

high-quality development is the

fundamental requirement for

determining the development path,

therefore economic policies and

macroeconomic regulations must be

consistent with this objective.

According to the statement of the

conference, eight priorities were

highlighted for 2018. They include

deepening supply-side structural reform

to eradicate ineffective supplies and

resolve overcapacity through innovation;

invigorating the vitality of different

market forces; pushing ahead with rural

prosperity program; implementing

coordinated strategies for regional

development; promoting all-round

opening-up policies; improving people’s

livelihood and social welfare; speeding

up the set-up of a long-term mechanism

for a stable, healthy housing market; and

further promoting ecological civilisation.

The conference decided to keep a neutral

monetary policy, control money supply,

keep a reasonable growth of credit, and

maintain the RMB exchange rate at a

reasonable equilibrium level. It proposed

to promote a virtuous cycle between

finance, the real economy and the

property market. For preventing and

defusing major risks, China will contain

the overall leverage ratio while raising

the financial sector's ability to serve the

real economy.

To promote direct foreign investment,

China will push for nationwide

implementation of a pre-establishment

national treatment system for foreign

companies as well as a negative list,

which determines where foreign

participation is prohibited or limited.

The country will also improve laws and

regulations, enhance protection of

intellectual property rights, increase

imports and cut tariffs, and expand free

trade zone pilot areas.

10 China Economic Quarterly Q4 2017

In 2018, housing system reform will be

prioritised in China's economic work by

developing a house rental market,

particularly long-term rental, and by

ensuring supply through multiple

sources and encouraging both housing

purchases and rentals. This means

China’s housing supply model that has

heavily relied on commercial housing

sales will shift to one based on both

house purchases and rentals.

As decided in the 19th Party Congress,

China will step up its efforts to ensure

significant progress in the winning of the

“three tough battles” in 2018, which

include the prevention of major financial

risks, poverty alleviation and pollution

control.

Similar messages were delivered by Mr.

Liu He, China’s economic policy

mastermind, at the Davos Economic

Forum, where he emphasised that China

would remain open to the world, further

integrate with international trade rules,

ease market access, and substantially

open up the services sector (the financial

sector in particular), so as to create a

more attractive investment

environment.

While all these measures are sound

policies in the right direction, a lot more

effort would be needed to put these new

policies into real practice. And it requires

high level of skills to properly manage the

process, in which a few policy goals may

conflict with each other. The seemingly

imminent trade war with the US may

force China to take more bold measures

in liberalising its trade regime and

reforming its industrial policies and state

subsidy system, but things won’t change

easily due to vested interests of interest

groups. It will not be an easy ride.

PwC 11

● New policies in boosting China’s private investment

On November 20, 2017, the Ministry of

Industry and Information Technology

(MIIT), together with 15 other central

government agencies including the

National Development Reform

Commission, the Ministry of Commerce,

the Ministry of Science and Technology

and the Ministry of Finance, released the

“Guidelines on Exerting the Function of

Private Investment and Promoting the

Implementation of the Manufacturing

Power Strategy” that aims to break the

systemic investment barriers and

revitalise China’s dwindling private

investment.

While highlighting the central role of the

market in resources allocation, the

Guidelines proposed eight tasks to

enhance the capacity of private

manufacturing. The tasks include

improving the capacity of innovation

development; enhancing the fusion of

informatisation and industrialisation;

participating in upgrading basic

industrial capacity; improving quality and

brand; promoting green manufacturing;

optimising industrial structure and

participating in mixed-ownership reform

of the state-owned enterprises (SOEs);

promoting transformation of services;

and fostering international development

and overseas investment.

Five supporting measures covering

systemic supply, public services, talent

incentives, corporate management and

financial support were also offered. The

Guidelines encouraged private investors

to invest in emerging industries such as

information technology, Internet,

intelligent manufacturing, high-end

equipment manufacturing, and

telecommunications. Private investors

are also encouraged to take part in core

government projects previously kept for

SOEs, and benefit from government

financial support. Specifically the

Guidelines called on government and

financial institutions to help private

sector develop a variety of private

investment funds, utilise the existing

industrial transformation and upgrade

funds, and develop new financial

products to support overseas

investment.

The Guidelines comes at a time when

China’s private sector has faced various

challenges in business growth due to

deteriorating investment environment,

and the Made in China 2025 initiative

has attracted doubts and criticism from

foreign companies for lack of clarity and

discrimination against foreign players.

China’s private investment, accounting

for over 60% of China’s total fixed

investment, remained sluggish, rising by

only 6% year-on-year in 2017, slightly

better than the annual rate of 3.2% in

2016.

Inadequate protection of intellectual

property rights had contributed to the

decline in private investment.

Recognising the problem, Chinese

premier Li Keqiang vowed to improve

regulations to enhance protection of

intellectual property rights at a cabinet

meeting in November 2017. He also

promised to make private businesses

enjoy equal rights similar to SOEs and

introduce punitive fines for IPR

infringements.

Going forward, it remains to be seen how

effective these new policies will be.

Private companies in China are

increasingly getting frustrated with the

prospect of trade and investment

liberalisation measures never being fully

materialised. In 2005, the State Council

announced its famous 36-points

guidelines to give the private sector better

treatment and wider market access, but

most of those policies haven’t been fully

implemented till today.

12 China Economic Quarterly Q4 2017

IIIHot topic analysis

● China’s response to the US tax reforms

Overview of the US tax reform

With the aim to re-gain its global

attractiveness and competitiveness, the

US law makers recently enacted the

most comprehensive tax reform since

19861, effective from 1 January 2018.

The US tax reform is framed literally as

the “Tax Cut and Jobs Act (TCJA)”, and

so Corporate Income Tax rate (CIT) is

unified at 21% (from the progressive

rates with top rate at 35%) and Personal

Tax rate is slightly reduced (the top

progressive rate is reduced from 39.5%

to 37%). However, it is effectively a

structural overhaul of its existing tax

system, rather than merely a tax cut.

When reducing the tax rates for

businesses and individuals, it at the

same time expands the tax base and

repeals certain reliefs, so different

industries, families and investors may be

feeling the impact differently.

The US tax reform is expected not only

to affect US domestic economy and US-

based multinational corporations (US

MNCs), but also has awakened the

attention and concerns of other

economies and international

organisations, in light of the large swath

of new international tax rules introduced

and its spillover effects. Among other

provisions, the following in particular

are attracting debates and controversies

in the international arena:

• Transitional tax — It taxes a US

shareholder’s pro rata share of

certain foreign subsidiaries’

previously un-taxed earnings and

profits residing outside the US since

1986 at 15.5% for cash and other

liquid assets and 8% for non-cash

assets (as opposed to the original rate

of 35%). It serves as a one-off

measure to clear up all the legacy

issues and move over to the new US

tax regime;

• Tax exemption for post-2017 foreign

dividends — It is a transformation to

partial territorial system to encourage

repatriation of US MNCs’ overseas

profits back to the US

in future;

• Foreign Derived Intangible Income

(FDII) provision — It effectively

allows US businesses to enjoy a

preferential tax rate (13.125% from

2018 to 2025 and 16.406% for 2026

and beyond as opposed to the

original rate of 35%) to high-return

income derived from export sales of

US-made goods or services to

overseas. It is seen as a policy to

encourage US-made goods and

services for overseas markets;

• Global Intangible Low-Taxed Income

(GILTI) provision — It effectively

captures overseas low-taxed

high-return intangible income into

the US tax net in a more mechanical

and efficient manner. It is a kind of

anti-tax avoidance measure to

discourage US MNCs leaving profits

overseas untaxed or low-taxed;

PwC 13

1 In 1986, the Tax Reform Act of 1986 was

passed as the significant tax reform pushed

forward by the Reagan Administration.

• Base Erosion and Anti-avoidance Tax

(BEAT) — It in general denies the

deduction of certain payments (for

non-tangible goods) to non-US related

parties by imposing effectively a

minimum tax. It is an anti-tax

avoidance measure, but also seen as a

discouragement of purchases of non-

tangible goods and services from

overseas.

Taken together, these policies and

measures are expected to have significant

impact on the cross-border investment,

business model, intellectual property

arrangement, capital flow, and trade of

international businesses. Nevertheless, it

is important to note that most of the

policies and measures under this round

of tax reform are temporary, i.e. expiring

at the end of 2025. In light of this, it is

hard to assess the long-term impact of

the US tax reform at this stage.

Meanwhile the US law makers and

administrations are currently still

preparing the detailed implementation

rules, making it difficult to conduct a

concise prediction and analysis of

the impact.

14 China Economic Quarterly Q4 2017

Possible impact of the US tax reform

According to the estimation of the Joint

Committee on Taxation (JCT)2, the net

revenue effect caused by the US tax

reform would increase the on-budget

federal deficit by $1.456 trillion over 10

years. However, this has not taken into

account the dynamic effects (i.e. the tax

revenue would increase as the tax rate

reduction would boost the economy and

lead to a stimulus effect).

From a dynamic view, the International

Monetary Fund (IMF)3 expects that the

US tax reform (especially the reduction

in CIT rate and the temporary allowance

for full expensing of investment) and

associated fiscal stimulus would

temporarily raise the economic growth

of the US, with favorable demand

spillovers for its trading partners

(especially Canada and Mexico). The

IMF also made an upward revision on

the prediction of the global growth;

around one-half of upward adjustment is

contributed by the expected global

macroeconomic effects of the US

tax reform.

Though tax is definitely not the sole

factor for investment and treasury

decisions, some MNCs have already

taken actions in response to the US tax

reform. For example, Apple plans to

invest over $30 billion in US capital

expenditures, creating over 20,000 new

jobs at existing campuses and a new

campus to house technical support for

customers4. Broadcom, the global

semiconductor leader, announces its

plan to move its headquarters from

Singapore back to the US5. Meanwhile,

many more US MNCs are calculating

their deferred tax liabilities and planning

for the payment of the Transition Tax.

Facing the anxiety that capitals may flow

back to the US, some countries are

reviewing or revising their tax systems to

make sure they are competitive in the

global markets and appealing to

international investors. Meanwhile,

some international tax provisions under

the US tax reform are regarded as

aggressive and disturbing the

international tax standards (e.g. base

erosion and profit-shifting (BEPS)

project), which are already agreed by

G20/OECD platforms in recent years. In

a joint letter to the US Treasury

Secretary6, the finance ministers from

the five biggest EU economies expressed

their concerns over GILTI, BEAT and

other US tax reform provisions, which

may be out of step with the WTO rules

and the OECD’s BEPS project. It is yet

certain how the US would respond to

these challenges and interact with the

global tax reforms at large.

Overall, this round of US tax reform is

very comprehensive and next to the last

significant tax reform about 30 years

ago. Given the US’s influential position

in the international economy, the

spillover effects to the other economies

should not be under-estimated.

2 The Joint Committee on Taxation (JCT) is a nonpartisan committee of the United States

Congress, which assists Members of the majority and minority parties in both houses of Congress

on tax legislation. For details of the JCT estimation, please refer to

https://www.jct.gov/publications.html?func=startdown&id=5053

3 IMF World Economic Outlook Update (January 2018)

http://www.imf.org/en/Publications/WEO/Issues/2018/01/11/world-economic-outlook-update-

january-2018

4 No surprise: Apple’s repatriation Bill is huge: http://www.taxanalysts.org/content/no-surprise-

apples-repatriation-bill-huge

5 Broadcom lays plans for US arrival: https://www.taxnotes.com/tax-notes-international/tax-

reform/broadcom-lays-plans-us-arrival/2018/01/29/26t84

6 EU Finance Ministers fire warning shot on US tax reform: http://www.taxanalysts.org/content/eu-

finance-ministers-fire-warning-shot-us-tax-reform

PwC 15

China’s responses to US tax reform

As the biggest developing country and

second largest economy in the world,

China would face new challenges brought

by the US tax reform. Among others, two

key questions were constantly raised to

Chinese policy makers.

1. Will the US tax reform diminish the

attractiveness of China to

international investors? China’s

Ministry of Commerce spokesman

did not think so. In a press

conference7, he pointed out that tax

policy is a key factor but not the

only factor to be considered when

businesses choose investment

locations. They should consider all

relevant factors such as economic

stability, market potential,

production costs, business

environment, etc., based on their

own long-term development

strategies. Meanwhile, China will

continue to improve its business

and investment environment and

ease market access for foreign

investors. It is believed that China

will continue to be an attractive

investment destination.

2. Will China also cut its taxes? The

Deputy Commissioner of China’s

Ministry of Finance8 responded in a

conservative way, indicating that

China will study the spillover effects

of the US tax reform and review its

own tax policies to make sure they

would help boost China’s

productivity and competitiveness,

and benefit the people. In fact,

China has been dedicated to

reducing the tax burden for years.

The Value-Added Tax (VAT)

Transformation Reform has cut

taxes by more than one trillion

yuan. According to the head of the

Chinese Academy of Fiscal

Sciences9, unlike the US tax regime

which relies on income (direct) taxes

as the main source of tax revenues,

China has turnover (indirect) taxes

as the main source of tax. Hence,

instead of income taxes, China

should further focus on the reform of

turnover taxes, especially VAT as a

follow-up step.

7 商务部回应美国税改对中国吸引外资影响:

http://www.xinhuanet.com/fortune/2017-

12/14/c_1122111952.htm

8 美国税改为何成为“全球话题”:

http://www.xinhuanet.com/world/2017-

12/04/c_129755533.htm

9 美国税改为何成为“全球话题”:

http://www.xinhuanet.com/world/2017-

12/04/c_129755533.htm

16 China Economic Quarterly Q4 2017

Chinese tax authorities’

pro-business initiatives

China has been devoted to improving its

business environment for foreign

investors in recent years, e.g. the

issuance of “20 Measures” and “22

Measures”10, the new version of Industry

Catalogue Guide for Foreign Investment,

etc. to further relax the access restriction

on foreign capital and encourage capital

inflow. At the end of 2017, the State

Administration on Taxes (SAT) issued a

long-awaited policy, allowing foreign

investors to enjoy withholding tax

deferral treatment on the profits

distributed from Chinese subsidiaries to

their foreign parents, as long as they are

directly re-invested into China’s

“encouraged projects”, so as to retain the

foreign capital in China. It is expected

that more business-friendly tax policies

and administrative measures like this

will be released in 2018 and beyond.

Meanwhile, China is expanding its

influence in international taxation policy

making process and strengthening

global collaboration to better serve

Chinese enterprises’ “going abroad”.

Supporting the “Belt & Road Initiative”

is one of the key tasks of Chinese tax

authorities. As noted by Mr. Liao

Tizhong, Director General of the SAT’s

International Taxation Department11,

China will keep on improving tax

collaboration with the countries along

the “Belt & Road”, including facilitating

the tax dispute resolution, signing more

tax treaties, helping the enterprises

“going abroad” and managing

cross-border investment risk.

What to expect for the next step

There is widespread consensus that this

round of the US tax reform is a must for

the US as its tax burdens (in particular

reflected by its CIT headline rates) and

systems are out of step with the rest of

the world and not supportive of the US

economic developments and US MNCs’

international competitiveness. The TCJA

is badly needed for the US to catch up

with many developed and developing

economies, move to a modernised tax

system, and fuel up the US economy and

US MNCs.

Unlike the pressing need for the tax

reform in the US, China has been

constantly moving forward at its own

pace to further open up its markets and

enhance its competitiveness in the world

through various means. Taxation is one

of them. We do not believe it is

necessary for China to cut its taxes

simply to match the US tax cut or even

the tax reforms of other jurisdictions.

We believe China shall continue

pursuing its own national goals through

its own tax strategy at its own pace. We

expect that China would continue to

improve its tax systems and

administration efficiency, and even roll

out some types of tax incentive measures

with specific targets (e.g. encouraging

high-tech developments) in due course.

However, such actions will be carried

out in a balanced manner, benefiting all

domestic and international factors. In

addition, China has publicly stated that

it is keen to take the lead in the revamp

of international tax rules along the BEPS

project backed by G20.

(For enquiries or questions, please

contact Matthew Mui, Partner of

National Tax Policy Services at

matthew.mui@cn.pwc.com; Bo Yu,

Partner of China Investment Business

Advisory at bo.yu@cn.pwc.com; Peter

Kao, Partner of US Tax Consulting Team

at peter.c.kao@cn.pwc.com)

10 Pls refer to Guofa [2017] No.5 and Guofa [2017] No. 39 for “20 Measures” and “22 Measures”

respectively.

11 推动全面开放新格局开创国际税收新局面:

http://www.bjsat.gov.cn/bjsat/qxfj/zsefj/zcqqy/gzdt/201801/t20180118_353462.html

PwC 17

● What is the impact of real estate macro control on

China’s economy?

In the past two years, China’s central

and local governments had issued

probably some of the strictest macro

control and regulation policies on the

real estate market. For instance, some

local governments not only

implemented property-purchasing

limitations, but also placed restrictions

and controls that prohibit selling new

properties to the first buyers within two

to five years. In many major cities, it has

become almost impossible to buy an

apartment without local household

registration system (hukou) or

registered permanent residence or for

an individual not paying income tax and

social insurances in that city for certain

number of years.

The main theme of China’s macro

control on property market can be

summarised largely by the words of

President Xi Jinping that “housing

should be for living, not for

speculation”. This theme had been

further adopted as the guiding principle

for real estate sector reform at the 19th

National Congress of the Communist

Party of China held last October.

There is no doubt that preventing

speculation on the property market is the

right approach to curb real estate

bubbles. However, what is the impact of

real estate macro control and regulation

on China’s economy? Is China ready to

face the consequence of these measures?

China GDP and Completed Investment in Real Estate Development (1998-2017)

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Completed Investment in Real Estate Development (YOY Growth) GDP (YOY Growth)

Completed Investment in

Real Estate Development

GDP

Source: Wind

18 China Economic Quarterly Q4 2017

It is widely believed that the rapid

growth of the real estate market and its

related sectors has been and still is one

of the most important drivers of China’s

economic prosperity, especially since the

reform of China’s housing system in 1998.

As shown in Chart 1, the growth rate of

China’s gross domestic product and

investment in real estate development in

the past twenty years are closely linked,

as both rates shared a similar growth

path.

Some might argue that before China’s

real estate boom, the GDP growth rates

had already sustained a high level for

nearly two decades. It is true that

economic reform and opening up,

expansion of foreign trade, especially

China’s accession to the World Trade

Organisation, large scale fixed asset

investment in industrial production and

infrastructure projects are all important

factors that contributed to China’s

economic miracle. But very few would

ignore the importance of the property

market in the process.

Furthermore, in addition to GDP growth,

China’s boom in real estate market has

also created enormous wealth for the

property owners, including individuals

and institutions. For example, a decent

100 square meter apartment in the

centre of Beijing or Shanghai would be

worth at least 10 million yuan today. But

twenty years ago, the purchasing price

would be merely around 200,000 yuan.

In fact, for the majority of Chinese urban

families, property has already become

the main part of their fortunes.

There is a popular joke on China’s

publicly listed companies. In the face of

financial troubles, a company could

immediately become profitable on its

balance sheet by selling a large

apartment from tier one cities (Beijing,

Shanghai, Shenzhen and Guangzhou).

Indeed, a healthy and stable property

market is extremely critical in preserving

China’s economic achievement and

sustaining its growth in the future.

PwC 19

China Real Estate Industry YOY Growth (1998-2017)

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

the Total Investment in Real Estate Development This Year (YOY Growth)

Sales of Commercial Buildings (YOY Growth)

Floor Space of Commercial Buildings Sold (YOY Growth)

Nonetheless, how serious is the impact

of real estate macro control and

regulation on China’s economy,

especially when policies have become

stricter in the last two years?

In a longer perspective, the total sales of

housing increased from 250 billion yuan

in 1998 to 13.37 trillion yuan by the end

of 2017, expanding by 53 times. Over the

past twenty years, the average annual

growth rate of housing sales was nearly

26%, a very high rate compared to

average GDP growth rate of 9.1% in the

same period.

For the last two years, real estate

investment had dropped to less than

10%, but sales of housing (measured by

price) still increased by 35% in 2016 and

14% year-on-year in 2017, while housing

sales and floor space sold went up by

22% and 8% respectively.

By comparing 35% growth of housing

sales to 22% of floor space sold,

obviously, macro control policies had

almost no effect on nationwide housing

prices in 2016. But the effect started to

kick in after entering 2017 as both

figures fell to 14% and 8%. As a mix of

stricter macro control measures has been

gradually adopted by central and local

governments, the property market is

expected to cool down further in 2018.

20 China Economic Quarterly Q4 2017

1997-2017 Sales of Commercial Buildings in China (CNY billion)

0.00

2,000.00

4,000.00

6,000.00

8,000.00

10,000.00

12,000.00

14,000.00

Sales of Commercial Buildings (CNY billion)

For the impact of real estate industry on

China’s overall economy, according to

Professor Chen Jie, director of the Institute

of Real Estate Research at Shanghai

University of Finance and Economics,

investment in real estate sector accounts

for about 10% of China GDP. His research

suggests that when real estate investment

drops by 1% in China, GDP growth rate

would be 0.1% less.

Furthermore, according to official data, real

estate industry accounted for about 6.5% of

China’s GDP in 2016 and 2017. If the most

related construction sector is included, the

two industries would account for about 13%

of China’s GDP.

By tracking the relationship between real

estate development and GDP growth for

the last twenty years, it might not be

enough to draw a sensible conclusion on

how much China’s macro control would

affect the overall economy. Besides, it is

complicated to estimate the impact of

macro control of real estate on construction

industry, home appliances, furniture and

other related sectors.

Many believe that when the growth of real

estate market starts to decline, it would

bring significant influence over the

economy. More specifically, a decline in

real estate investment would bring down

GDP growth, and directly and indirectly

affect other sectors.

However, it needs to be recognised that

about half of China’s 1.39 billion population

live in rural areas, and in the longer term

urbanisation will continue to drive

domestic demand for housing.

Finally, the macro control policies are likely

to reshape China’s property market and

substantially reduce speculations. They

would help the market return to an

equilibrium of normal supply and demand,

and eventually build up a property market

which mainly serve people’s needs for

comfortable living, instead of speculation.

In any case, the macro control policies may

adversely affect China’s economic

performance in the short term, but a

reasonable and affordable (for the majority

household) property market will be more

beneficial for China’s long term economic

prosperity.

Source: Wind

PwC 21

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

© 2018 PwC. All rights reserved. PwC refers to the China member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity.

Please see www.pwc.com/structure for further details. CN-20180119-6-C1

www.pwccn.com/ceq

Authors

Allan Zhang Chief EconomistPwC China+86 (10) 6533 7280allan.zhang@cn.pwc.com

G. Bin ZhaoSenior Economist PwC China+86 (21) 2323 3681bin.gb.zhao@cn.pwc.com

Acknowledgements

Special thanks to Sanjukta Mukherjee, Lan Lan and Shan Liang for their contributions to the report.