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Inflation in China about to lead to civil unrest?

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By Huang Zhen 12.03.2010 19:29

Here Comes Inflation

How far does a middle class man's salary go in China today?


Recently, I met a project manager at a foreign company in Beijing. He is 35, a graduate from one of China's most prestigious universities and possesses nearly a decade of work experience in foreign enterprises.


But he looks a little glum these days. Why? Because he says the recent price increases are affecting his nerves. Frankly, I was confused by this. The company he works for isn't small, and he has a senior position in the company with a decent salary. But if prices these days are inducing worry in him, what about the rest of us?


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So I drew up a breakdown of his expenditures. His annual salary before taxes is 480,000 yuan, equivalent 40,000 yuan per month. His wife is a full-time, stay-at-home mother. She has recently begun to complain that prices have risen too much and it's become increasingly difficult to make ends meet. As one can see in the chart below, the remaining 2,000 yuan is barely enough for red envelopes with cash to give as wedding presents or other celebrations, the tradition in China. With the price rises in gasoline, housing maintenance, vegetables and other daily necessities, his life has begun to feel the squeeze.


I was dumbstruck after completing the chart. An annual salary of half a million, or more than US$ 70,000, is enviable anywhere on this planet. It is hard to understand why people with such means have begun to worry about how to live a comfort life.


Based on his monthly mortgage payments of 11,000 yuan, his apartment should be valued at around 3 million yuan in total. If this house was bought in 2009, it could be close to the Fourth Ring Road in Beijing and sized at around 120 square meters. A rough estimation can also be shown in the same chart from what he actually spent on housing. According to China's Urban Land Price Monitoring Report of 2008, released by China Land Survey, the average price ratio of land to housing was 31.8 percent in China's 29 major cities. In fact, the 13 percent spread is ultimately borne by the owner including sales tax, land value-added tax and income taxes etc. One may also tell from the chart that approximately 47 percent of the total housing costs are paid to the government, which means that along with his monthly loan repayment, excluding taxes, at least 5,000 yuan was turned over to the government.


I then checked the personal income tax rate table and found out that deducting personal insurance, his personal income tax reaches almost 8,000 yuan. Please do not forget we are paying consumption tax as well. China's consumption tax is included in the commodity prices which is levied only at the production, processing and importing phases of taxable consumer goods but ultimately paid for by consumers. When he purchases food, clothing, cigarettes and alcohol and even when he is driving, he is paying taxes. Due to the trivial nature of this complex tax and its rates, I cannot make further detailed calculations. But even counting the minimum, the tax imposed on his personal consumption every month would be as mush as 1,000 yuan.


In sum, 35 percent of his annual income goes to the government. I guess in any case a citizen one-third of his income should have a life free of worries from the government.


But in fact, he does live in fear. If prices rose by 3 percent, he would no longer sponsor poor students; if it rose by 5 percent, he would have to cut extra curriculum courses for his child; if it rose by 8 percent, he would have to reduce his pocket money and living expenses for his aging parents; if it rose by 10 percent, I am afraid we all would begin to panic.


The National Development and Reform Commission (NDRC) recently issued three documents in a row in an attempt to stabilize prices and made it clear that the government is confident of putting price increases under control. On November 20, the State Council also released 16 measures to stabilize the general consumer price level. The historical experience has repeatedly proven that administrative mandates have enormously negative effects new rounds of economic cycles. Why can't we try to make adjustments using market instruments, especially for taxes?


Higher property prices have ignited public resentment to a fever pitch. It is indisputable that local governments are the momentum behind the phenomenon. Although local governments have introduced a variety of price control measures because the central government has been pressing hard, property prices were only kept from rising further for the time being. One recommendation for governments in Beijing, Shanghai and Shenzhen where housing prices have risen to fantastic heights would be that, after years of increasing taxes, they would do well to give reductions a second glance. For example, they can try to introduce tax rebates or subsidy policies for those who have purchased a home for more than one year for personal use at a carefully selected time to alleviate inflation pressures.


The national tax revenue in 2009 stood at a total of 6.3 trillion yuan, of which personal income tax revenue was 394.4 billion, accounting for only 6.25 percent. As our taxation system is very different from Europe and America, personal tax is not a major source of revenue for the government. In the context of soaring prices, it may be the best time to release the long-awaited personal tax reform to improve China's status as a "rich country of poor people" and boost consumer confidence.


"Confidence comes before gold and currency." I believe these remarks by Premier Wen Jiabao have wisdom not just for the world but also policies that affect the Chinese people.


The author is an independent professional investor

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Ambrose Evans-Pritchard

China's credit bubble on borrowed time as inflation bites

The Royal Bank of Scotland has advised clients to take out protection against the risk of a sovereign default by China as one of its top trade trades for 2011. This is a new twist.


It warns that the Communist Party will have to puncture the credit bubble before inflation reaches levels that threaten social stability. This in turn may open a can of worms.


"Many see China’s monetary tightening as a pre-emptive tap on the brakes, a warning shot across the proverbial economic bows. We see it as a potentially more malevolent reactive day of reckoning," said Tim Ash, the bank’s emerging markets chief.


Officially, inflation was 4.4pc in October, and may reach 5pc in November, but it is to hard find anybody in China who believes it is that low. Vegetables have risen 20pc in a month.



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With the alleged murder of the patriot Qian Yunhui (who fought against land theft by the local officials), I see a communist revolution coming closer in China. Apparently the censors have problems controlling the public outcry.


Advice: Please google "Qian Yunhui" only if you have a strong stomach. He got rolled over by a truck.

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"Inflation is a redistributive mechanism in favour of the few that can protect living standards, against the large majority who cannot. The political leadership cannot, will not, take risks in that regard," said Mr Ash.


RBS recommends credit default swaps on China’s five-year debt. This is not a forecast that China will default. It is insurance against the "fat tail risk" of a hard landing, with ramifications across Asia.

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