Putting a price on foreign investment

Scott Tong Mar 16, 2007

KAI RYSSDAL: China’s National People’s Congress wrapped up its annual two weeks of work today in Beijing. And almost 30 years after Deng Xiaoping first said that to get rich is glorious, there’s a law on the books to protect private property. It passed yesterday.

We don’t know exactly what it says yet — the final text hasn’t been released yet — but the law is a pretty big leap forward. There’s a new corporate tax law, too. Not for Chinese companies. It’s for foreigners who want to do bsuiness there. Marketplace’s Scott Tong went down to Hunan Province in southern China.

SCOTT TONG: Hunan’s favorite son is Mao Zedong, leader of what’s known as the 1949 communist “liberation.”

These days, a feisty local company is also stoking up the masses, preaching economic nationalism.

The firm Sany quite literally makes the earth move: it produces cranes, drilling rigs and cement mixers. Sany pays taxes at a rate of 33 percent — that’ roughly double that of competitors like Caterpillar of Peoria, Illinois.

How’s that play in Hunan?

Lousy. Sany President Xiang Wenbo.

XIANG WENBO (voice of translator): Competition doesn’t scare us. Unfair competition does. If I went to the U.S., I don’t think the Americans would give us a special tax rate.

Chinese lawmakers last Friday voted to phase out the foreign tax break. And looking back, it’s a policy widely seen as a key to China’s economic explosion.

In the late 1970s, China first used the tax breaks to lure foreign manufacturers — to import their expertise, and ideas, and money.

There’s even a patriotic song about all this: “The Story of the Spring,” as in emerging from the economic winter.

Since then, China has lifted half a billion people out of poverty — many of whom work for foreign bosses today. But now, though, it’s time to take off the training wheels, says Chip Chaikin. He’s with a private equity firm called Blue Point Capital.

CHIP CHAIKIN: Clearly, China’s getting to the point where, in some industries, they don’t need us any more. The management talent is beginning to grow domestically. Capital certainly isn’t a problem. People are starting to ask the question, do we really need to make it so easy for foreigners to come here and invest?

Chinese leaders describe the new tax rules as unified, equal. Not everyone buys that.

Attorney Lester Ross advises U.S. multinationals in China — firms that he says actually pay their taxes.

LESTER ROSS: Many Chinese domestic companies actually don’t pay at the full tax rate. Or if they do pay at the full tax rate, they don’t report all of their income.

Ross thinks something bigger may be going on here: protectionism, promoted by Chinese industry.

ROSS: As one would expect elsewhere in the world, people are looking to use the political process to their own advantage. If one can keep out a competitor who might have better technology, or more capital or more experience, well people will do that.

And “people” means Sany, that heavy equipment maker in Hunan province.

Sany President Xiang Wenbo writes a sharply-worded blog — it’s filled with references to foreign firms playing unfair.

WENBO BLOG: We have an “employee economy.” We all work for someone else. We’re not our own bosses. China’s a haven for foreign firms and capital. They’re like migratory birds, swooping in to cash in our resources.

How much traction is he getting? That’s up for debate. But at the very least, foreign companies sense that the climate is changing.

CHAIKIN: I’d say it’s a little chillier than before. You know, if you were wearing a fleece parka now, maybe you need to put a sweater on under it now.

Again, private equity investor Chip Chaikin. He says it’s especially chilly when American companies try to buy Chinese firms. Sometimes new rules get in the way. And sometimes bureaucrats just sit on proposed acquisitions, and stall.

CHAIKIN: You know, like my wife. If I come home with a vacation plan that she doesn’t like, it rarely gets shot down, I just don’t get an answer. It’s sort of more like that. Every step of the process takes an incredibly long time, and basically until they’ve played the clock out.

Even if China is getting pouty toward foreign investors, Chaikin says it’s not like most companies are gonna just pull out and say, go to Vietnam.

China’s still plenty alluring: it still boasts the world’s largest consumer market and what seems an endless supply of low-cost labor.

In Hunan, Southern China, I’m Scott Tong for Marketplace.

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