(The content contained in this article represents the opinions, commentary, analysis and viewpoints of Fisher Investments as of July 2011 and should not be regarded as personal investment advice. No assurances are made Fisher Investments will continue to hold these views, which may change at any time without notice. In addition, no assurances are made regarding the accuracy of any forecast made herein. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets.)
Needless to say, China’s semi-command economy differs in many material ways from America’s capitalist system, but there are few universal truths that stretch beyond borders in Fisher Investments’ view: People don’t like taxes, and tariffs make goods more expensive—meaning consumers will seek to avoid them. Ongoing developments in China help illustrate both points.
Recently, China’s autocratic government put forward proposals seeking to target their “wealth gap” by increasing the minimum income levels excluded from income taxes. (It’s somewhat ironic even in communist China there’s a wealth gap to be discussed.) More interesting than the rationale was how China sought to raise the income tax threshold.
At the start of 2011, China floated a proposal to raise nontaxable income by 50%—from 2,000 yuan per month (roughly $310) to 3,000 yuan per month (roughly $542). As part of the proposal, China initiated an online survey to gauge its citizens’ feedback. Now, knowing the track record of this authoritarian regime (e.g., Tiannanmen Square), you might assume folks would shy away from voicing opposing views. But the results show otherwise. China’s citizenry spoke up, and most responses voiced displeasure the exclusionary amount wasn’t higher. Apparently, even citizens from a totalitarian, communist country don’t like giving their share to the government.
In order to appease disgruntled citizens, China’s government responded by boosting the threshold to 3,500 yuan, which will begin September 1. In Fisher Investments’ view, China’s leadership shift—about a year from now—largely explains their rationale. Even these autocrats want to curry as much favor as possible—even though there’s no true democratic election. Chinese leaders would like to avoid (at any cost) having to roll out the tanks and economic methods are some of the most effective.
While China’s tax code is shifting to seemingly favor more at the lower end of the income spectrum, in late June, state-run newspaper China Daily reported import tariffs on luxury goods may soon be slashed. A study from China’s Ministry of Commerce shows stiff tariffs like a 50% charge on cosmetics and 30% on watches are passed on to consumers—resulting in a basket of luxury goods for sale in China (including watches, suitcases, clothes, liquor and electronics) costing roughly 45% more than in Hong Kong, 51% more than in the US and 72% higher than in France.
Unsurprisingly, a separate study by China’s Ministry of Commerce showed their citizens outspent any other nationality in France last year on duty-free goods. That’s something of a point of contention in China’s domestic politics—most Chinese would prefer these consumers spend at home—but it also speaks to how consumers behave. If there’s a non-economic force (like government tariffs) jacking up local prices, they’ll likely do what they can to find cheaper prices elsewhere.
China’s economy is a long way from being as liberalized as the US. And while Chinese consumers have grown in importance, they’re far from the average wealth of Americans. But behaviorally, Chinese consumers seem to demonstrate a similarity to Americans when given the chance—abhorring taxes (except when they’re on someone else) and seeking the best possible prices (regardless of where they are).