China’s parliament will urge the government on Wednesday to prohibit the use of state tax breaks to help lure investment and impose restrictions on the movement of capital. This statement, called the white paper, is typically made by the legislature at the start of a key annual gathering.
In the past, Chinese authorities have begun the process of curbing tax breaks offered to select industries to make way for energy-saving and new-energy vehicles, subsidies to computer makers, and preferential loan policies for farmers. Beijing will now address the easing of restrictions that allow Chinese entrepreneurs to allocate their funds internationally.
“In order to tackle China’s outbound investment bottleneck, the government must stop extending tax subsidies for national champions and encourage investment in strategic areas,” said Jiang Jianqing, head of the State Council’s policy planning department, according to China Daily.
It is still unclear how much state tax breaks offered to Chinese companies with foreign subsidiaries or operations total. For example, China was reported to offer one-third of S. Korea’s own tax breaks in 2017, as The Wall Street Journal noted last year. And China’s tax breaks for overseas investments surged from a measly $202 million in 2015 to $3.8 billion in 2016.
Easing restrictions on overseas investment is viewed as critical by the government to protect intellectual property. China has a history of confiscating foreign-owned companies’ assets and using their proceeds to fund local development projects.
Despite concerns that it is less inward-looking than past administrations, President Xi Jinping’s administration appears keen to shift the country away from a model built on acquisitions and transfers of technology to one that emphasizes greater domestic production. Thus far, an outbound investment ban, although on the table, has been avoided as Washington and Beijing remain locked in a trade war. The U.S. imposed tariffs on $250 billion worth of Chinese goods in retaliation for a long list of American technology and industrial strategies that have been deemed predatory to American workers and companies. Chinese officials, meanwhile, have steadfastly defended their industrial development policies — something they say is necessary to develop their low-tech and low-wage technology industries.
China’s focus on inward investment has also come under sharp attack from environmental groups, who complain that China often abuses tax incentives as a way to secure or develop clean tech companies. The United States is the world’s largest holder of offshore cash and has not banned offshore investments since the 1980s.