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China Briefings

Reports on China issued by Samsung Economic Research Institute

China Business Intelligence No. 22

China Business Intelligence No. 22

Samsung Economic Research Institute Beijing Office

Mar. 12, 2007

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Highlights

I. Fiscal Spending and Taxes to Cool Economy

  • The Chinese government faces complex decisions regarding fiscal policy. On one hand, the government needs to increase outlays in critical areas such as health care, environmental protection and pensions. On the other hand, it also needs to closely monitor spending that could further stimulate the overheating economy. In this context, the government wills likely use taxes to remove excess liquidity and to boost public coffers.
  • Overall, tax revenues have increased substantially over the past four years. According to the General Administration on Taxation, tax revenues totaled 3.76 trillion yuan in 2006, a 22% increase over 2005 levels. From 2003-2006, tax revenues increased 20% year-on year.

II. Economic Policy and Implications in 2007

  • China is poised to make substantial changes to its commercial law this year. Most notably, preferential treatment to multinational companies (MNCs) will be altered, putting them on the same tax level as domestic companies. In addition, the government is strengthening the nation's nascent competitive law framework to increase its role in market oversight. The drive for legal change is notable in that it represents a change in the government's thinking towards the economy and market regulation. While previously, the Chinese economy experienced fast growth through attracting foreign investment and exports, President Hu Jintao has stressed more balanced growth with increased selectivity and supervision of foreign investment. At the same time, the government wants to gain crucial political points by beefing up worker's rights.
  • A milestone Property Rights Law and the Enterprise Income Tax Law, which would restructure levies, are expected to be adopted by the National People's Congress (NPC), which opened its annual session last week. Other far-reaching laws dealing with competition and labor will be discussed by the NPC.

III. Baidu-EMI Music Rivalry Shifts to Friendly Tune

  • EMI Music and Baidu, each with substantial clout in the Chinese market, have traded their legal fight for a strategic alliance that should have a significant impact on how music is distributed. EMI Music, Sony BMG, Warner and Universal total market share in China is roughly 80%. Baidu's has more than 60% of the Chinese search engine market, and accounts for 84% of the MP3 search market.
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