China
Financing innovation in China
Author: Xun Wang, Peking University
China’s economic development and financial opening are now at a crucial turning point.
External downside risks now dominate due to the COVID-19 pandemic and trade tensions, and domestic markets urgently need upgrading to lift technological innovation. The recently drafted 14th Five Year Plan emphasises an innovation-oriented development strategy. Although many measures have been adopted, how to effectively finance innovation remains one of China’s primary challenges.
Research and development (R&D) expenditure is a common measure of investment in innovation. Innovation investment is usually long term and tends to run down firms’ internal funds. The availability of external finance is critical for firms trying to innovate.
According to the World Bank, China’s expenditure on R&D as a percentage of GDP experienced steady growth between 1996–2017, rising from 0.56 per cent to 2.12 per cent. Compared to leading industrial countries in 2017, China’s R&D ratio was 0.7 percentage points less than that of the United States and 1.1 percentage points less than that of Japan. More resources have been allocated to capital expenditure over the past few decades.
The key question in coming decades is how China’s financial system can better support innovation investment. Evidence shows that better access to equity market financing leads to substantially higher long-run R&D investment and better innovation performance. Credit market development has a positive impact on fixed investment but zero or negative impact on R&D.
Recent evidence suggests that credit market development has a positive effect on incremental innovation, which are proxied by the count and citation of utility model patents. But it has a negative effect on substantive innovation, proxied by the count and citation of patents of inventions. Equity market development leads to higher substantive innovations but is unimportant for incremental innovations.
China’s financial market is still dominated by the banking sector, especially state-owned banks. The market for direct financing is less developed. The share of bank financing — including bank credit, trust loans, entrusted loans and banker’s acceptances — in the country’s total social financing declined from 87.2 per cent in 2002 to 70 per cent in 2019.
The proportion of direct finance, including corporate bonds and equity financing, in the country’s total social financing increased from 5 per cent in 2002 to 12.3 per cent in 2019. But the role of the stock market has not risen in line with China’s rapid economic growth, probably due to stringent financial regulations. According to PBOC’s statistics, the share of financing through the stock market dropped from 4.6 per cent in 2002 to 2.9 per cent in 2019.
Capital account liberalisation might play an important role in innovation, by facilitating external finance, promoting competition and enhancing corporate governance. Since 2019, China has adopted several measures to ease restrictions on ownership and licenses to foreign financial institutions. This financial opening-up has led to a significant increase in the number of wholly or majority foreign-owned financial institutions operating in China. But these foreign financial institutions still face operational problems such as uncertainty about capital outflow, inflexibility of the renminbi exchange rate and the segmentation of bond markets.
The evidence also shows that the innovation-enhancing effects of capital account liberalisation might be affected by country-specific characteristics such as financial development and institutional quality. This means that countries would have to reach a certain threshold of financial and institutional development before they can expect to benefit from financial openness.
Looking forward, improving access to external finance will play a crucial role in fostering innovation in China.
China should steadily open domestic financial markets more widely to both foreign and domestic private capital. This includes completing interest rate liberalisation, achieving a clean floating exchange rate, facilitating cross-border capital movements and lowering entry barriers for both private and foreign financial institutions.
China also needs to restructure its financial system by enhancing the role of direct financing. It should eliminate restrictions in equity markets and promote the development of multilayered equity markets. Equity markets, including stock markets as well as venture capital and private equity markets,…
Business
China’s Golden Rooster Film Festival Kicks Off in Xiamen – Thailand Business News
The 2024 China Golden Rooster and Hundred Flowers Film Festival began in Xiamen on Nov 13, featuring awards, cultural projects worth 31.63 billion yuan, and fostering international film collaborations.
2024 China Golden Rooster and Hundred Flowers Film Festival Opens
The 2024 China Golden Rooster and Hundred Flowers Film Festival commenced in Xiamen, Fujian province, on November 13. This prestigious event showcases the top film awards in China and spans four days, concluding with the China Golden Rooster Awards ceremony on November 16.
The festival features various film exhibitions, including the Golden Rooster Mainland Film Section and the Golden Rooster International Film Section. These showcases aim to highlight the achievements of Chinese-language films and foster global cultural exchanges within the film industry.
On the festival’s opening day, a significant milestone was reached with the signing of 175 cultural and film projects, valued at 31.63 billion yuan ($4.36 billion). Additionally, the International Film and Television Copyright Service Platform was launched, furthering the globalization of Chinese film and television properties.
Source : China’s Golden Rooster film festival opens in Xiamen – Thailand Business News
China
Italy and China New DTA Set to Take Effect in 2025: Important Changes and Implications
Italy ratified an upgraded Double Tax Agreement (DTA) with China, effective in 2025, to reduce tax burdens, prevent evasion, and enhance investment. The DTA introduces modern provisions aligned with international standards, targeting tax avoidance and improving dispute resolution for Italian businesses.
Italy recently ratified the upgraded Double Tax Agreement (DTA), which will finally take effect in 2025. This agreement was signed in 2019 and was designed to reduce tax burdens, prevent tax evasion, and promote Italian investment in China.
On November 5, 2024, Italy’s Chamber of Deputies gave final approval to the ratification of the 2019 Double Tax Agreement (DTA) between Italy and China (hereinafter, referred to as the “new DTA”).
Set to take effect in 2025, the new DTA is aimed at eliminating double taxation on income, preventing tax evasion, and creating a more favorable environment for Italian businesses operating in China.
The ratification bill for the new DTA consists of four articles, with Article 3 detailing the financial provisions. Starting in 2025, the implementation costs of the agreement are estimated at €10.86 million (US$11.49 million) annually. These costs will be covered by a reduction in the special current expenditure fund allocated in the Italian Ministry of Economy’s 2024 budget, partially drawing from the reserve for the Italian Ministry of Foreign Affairs.
During the parliamentary debate, Deputy Foreign Minister Edmondo Cirielli emphasized the new DTA’s strategic importance, noting that the agreement redefines Italy’s economic and financial framework with China. Cirielli highlighted that the DTA not only strengthens relations with the Chinese government but also supports Italian businesses, which face increasing competition as other European countries have already established double taxation agreements with China. This ratification, therefore, is part of a broader series of diplomatic and economic engagements, leading up to a forthcoming visit by the President of the Italian Republic to China, underscoring Italy’s commitment to fostering bilateral relations and supporting its businesses in China’s complex market landscape.
The newly signed DTA between Italy and China, introduces several modernized provisions aligned with international tax frameworks. Replacing the 1986 DTA, the agreement adopts measures from the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project and the OECD Multilateral Instrument (MLI), targeting tax avoidance and improving dispute resolution.
The Principal Purpose Test (PPT) clause, inspired by BEPS, is one of the central updates in the new DTA, working to prevent treaty abuse. This clause allows tax benefits to be denied if one of the primary purposes of a transaction or arrangement was to gain a tax advantage, a move to counter tax evasion through treaty-shopping.
| This article was first published by China Briefing , which is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in in China, Hong Kong, Vietnam, Singapore, and India . Readers may write to info@dezshira.com for more support. |
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Business
China’s New Home Prices Stabilize After 17-Month Decline Following Support Measures
China’s new home prices fell for the 17th month in October, declining 0.5% from September, but slowing, indicating potential market stabilization amid supportive measures. Second-hand home prices showed mixed trends.
Decline in China’s Home Prices Stabilizes
China’s new home prices continued to decline in October for the 17th consecutive month, although the drop showed signs of slowing. Recent support measures from Beijing appear to be inching the market toward stabilization, as evidenced by a lighter decline compared to earlier months.
Monthly and Yearly Comparisons
According to the latest data from the National Bureau of Statistics, new home prices across 70 mainland cities fell by 0.5% from September, marking the smallest decrease in seven months. Year-on-year, prices dropped by 6.2%, slightly worse than the September decline of 6.1%. In tier-1 cities like Beijing and Shanghai, prices decreased by 0.2%, a smaller fall than 0.5% in the previous month.
Second-Hand Home Market Trends
Second-hand home prices in tier-1 cities experienced a 0.4% increase in October, reversing a 13-month downward trend. Conversely, tier-2 cities observed a 0.4% drop in second-hand prices, while tier-3 cities faced a similar 0.5% decline. Overall, recent trends indicate a potential stabilization in China’s property market.
Source : China’s new home prices slow 17-month decline after support measures kick in
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