China’s freedom from dependence on tax income will change economic history

The Chinese population stands at just over 1.3 billion people, but only 26 million pay any income tax. So although the income tax cut approved by by the country’s legislature yesterday should become law this year, its effect – despite a hike from £225 a month to just over £300 tax-free allowance – will be near homaeopathic economically. The Beijing Government almost certainly did this to increase its popularity rather than calm wage inflation….although it is worried about inflation, most of that is coming from food price rises – and a worrying degree of runaway speculation. (Hence the recent edict about bank lending on property…which was swiftly circumvented by developers borrowing more from abroad).

In percentage terms, China is thus by far the biggest low-tax economy on the planet: even the rates themselves start as low as 5%, and hardly anyone pays the top rate of 45%.  But that doesn’t mean what it usually does: chiefly, it reflects the fact that 98% of Chinese are living at or slightly above what we in the West would regard as abject poverty.

This represents both weakness and strength for the Beijing regime. Wages are low and therefore exports are cheap – but the real home consumption market is very limited indeed, and the G20 is getting tougher by the month about floating the Yuan properly to increase China’s export prices. Finally, the 98% at the bottom of the heap are showing increasing signs of truculence about not being part of the 2% further up.

Above all, however, the situation hands the Politburo a unique strength in global economics: it is almost entirely free of dependence upon taxing its citizens.

Think about this a little: the ramifications could be very far-reaching indeed.

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First and foremost, it means the old guys in Beijing can be as autocratic as they like without having any real effect on public unrest. As the Slog has asserted previously, only dictatorships doing badly fail: the Chinese leaders could make all salaries below £500 a month tax free, and it wouldn’t so much as bruise their Treasury. And nor would it produce anything but a tiny rise in inflation. So anyone optimistically expecting China to enter the democratic libertarian fold some time soon is living on cloud cuckoo. (Don’t forget too that the Chinese are intensely patriotic: dissidents are a tiny proportion of the total population).

Second, the war-chest available for overseas exploitation – and any military confrontation that came with it – is of almost unimaginable size. In terms of armed forces killed and injured, or strains on the fiscal situation and tax rises at home, the CPR could lose a dozen Vietnams, and 90% of citizens wouldn’t feel a thing.  (They wouldn’t lose, of course: the Chinese play to win – as their accelerating influence in Black Africa demonstrates frighteningly well).

I mention these first, because popularity at home and military expansion abroad have been the basis of every successful Empire in history. But the end goal – ever since the Roman concept of Elysian Fields glory went out of fashion – has always been mercantilist: more trade with, and exploitation of, the territories annexed, controlled or influenced. The possibilities here should make every Western business quake with fear: if that is the Chinese goal. But I don’t think it is.

There is a third freedom offered to China by its huge surplus wealth. The total wealth of the country (gdp + private wealth + natural resources) is estimated to be $44 trillion. The two key things to remember here are (a) US natural resources are largely known, but new natural resources are being found in China every week – gold and new-age metals are now increasingly mined at home; and (b) while still enjoying a vastly smaller wealth total than the US, it doesn’t have America’s costs….or a debt currently at $13 trillion and rising. Whereas China has a near zero dependence on domestic tax receipts, interest rates normalising at around 3-4% by mid 2012 would gobble up one US tax Dollar in three.

That normalisation of rates wouldn’t worry the Chinese overmuch: they’d be glad of the slowing effect on domestic inflation. As the Western banks and sovereigns reel this way and that in the face of such a thing, China will be almost immune to it.

But potential wealth delivers more than just protection from ill winds. It also means, in time, a vastly reduced dependence on exports. This is, for me, the big insight that most Western observers have missed to date.

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China may exist in what is a globalist world, but engaging in it is a means to an end. China is protectionist: globalist free trade is anathema to Beijing.

More than two years ago, the American Chamber of Commerce stated that ‘China’s national innovation program has led to protectionist telecoms and IT policies’. Last year, Ron Kirk, the US trade representative at the US-China strategic and economic dialogue in Beijing, frankly observed that “Myriad internal regulations discriminating against foreign companies do more to increase the US-China trade imbalances than yuan reforms…it’s really about our underlying ability to come in and fairly compete in this market.” Rupert Murdoch is known to be voluble in private about Chinese double-dealing against Newscorp set-ups in China. And only yesterday, the Daily Telegraph reported the oft-heard complaints from UK and EU companies trading in the CPR: ‘Chief among the concerns was that Chinese companies very often received early warning of upcoming contracts, giving them an unfairly long time to prepare their bids….Another protectionist measure, often used by local governments and big state-owned companies, is to invent impossible standards for basic items that effectively exclude foreign companies…’

Google ‘Chinese protectionism’, and 839,000 results will come up. There is thus little further need to establish that protectionist mentality as a fact.

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Chinese thinking – especially at governmental level – is infinitely longer-term than the Bourse/shareholder short-termism so ubiquitous in the West these days. For me – and I’ve had a long time to observe, measure and think about this – China’s rulers do not have an aim of global economic dominance via globalism: their mission is to achieve complete self-sufficiency by exploiting the madness of globalism.

Britain’s greatest mistake in the first half of the Twentieth Century was to export its technical know-how. Its grave error in the last quarter was to export its financial expertise. Anything that can be learned can be copied, adapted – and then shunned. For a huge nation where the military retain serious political influence, the long-term goal is always going to be exporting the trivial and generic, while hanging on to the advanced: the cyber element in war kills few people, but it can neuter even the biggest nations.

Translate that into a consumer context, and you have a Chinese citizenry quickly realising that it has higher technology than the  fangwois. The bottom line would be a delighted population with justified feelings of superiority (something that is central to the Chinese psyche) and a government/military complex in Beijing smiling quietly as the rest of the world remains in debt….and falling further and further behind technologically.

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In summary, my contention is this. The cost overheads of physical imperialism did for the Roman, Spanish and British empires. And the post-imperial cost of competing with expertise they gave away wound up ruining them. For the US – a virtual empire based solely on multinational sales influence and access to energy – this syndrome has been far more marked over a much shorter time period.

The West has imported cheap Asian goods to keep its populations happy with a low cost of living; but the State losses in terms of output costs and imports have been ruinous. More dependent than ever on electorates to bail them out – a crisis made deeper by reckless banking behaviour – the income from such taxation is dwindling. They must export or die by debasing their currencies….but one country above all will not want their exports.

The Chinese have observed history and developed a different model. This is one in which they create an enormous internal market self-sufficient in raw materials and energy, and with an all-important technological lead. As long as Beijing needs to exploit Africa and gouge minerals out of Australian soil, it will do so. But once internal material exploitation and technical energy advance have rendered such tactics irrelevant, they will rapidly be dropped.

It is nothing more or less than an extension of their cultural Xenophobia. And this isn’t racism on my part: I admire the Chinese for thinking it through so thoroughly.

But it does add to the case I have been trying to build for several years here at  The Slog: that globalism is doomed, and nations must look far, far beyond mercantilism……….towards a similar goal of minimal dependence on others.

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