Investment
Consumption, not investment, now key to growth
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Scholars and policymakers in China have not yet reached a consensus on whether stimulating consumption is the top priority for the Chinese economy at the moment. Some economists argue more about the need to boost growth by expanding investment, as they believe that stable investment will be the fastest way to encourage economic expansion.
My understanding is that competent policymaking departments and economists need to better realize and identify the importance of boosting consumption. Under China’s 20 years of stabilizing investment through infrastructure construction, it is necessary to completely change such concepts and realize the significance of encouraging consumption. There is still a lot of work to be done on this front. If this year’s policy is still the same as last year’s and the year before, it will affect growth stabilization performance in 2023.
What makes stimulating consumption for growth so important? The main reason behind it is that China’s economic structure has changed. In normal situations, consumption contributes about 65 percent of GDP growth in China. Therefore, as the proportion of fiscal funds spent to stabilize growth conforms to the economic structure, roughly 65 percent of fiscal funds are used to stabilize consumption, and the remaining 35 percent are put toward stabilizing investment. Yet, in practice, most of the fiscal funds are used to stabilize investment. This disrupts the overall growth structure.
With China’s economy developing and upgrading rapidly, consumption has now become the core factor in economic growth. The country has moved beyond the stage of 20 years of rapid urbanization and rapid industrialization, and infrastructure investment has been oversaturated. Therefore, if the method of stabilizing investment is once again applied to stabilize growth, it will seriously distort the driving force of China’s economic growth. However, I think such understanding has not yet been widely recognized by economists and policymakers, and therefore, further study on this matter is needed.
China’s previous strategy of stabilizing investment has caused distortions in the overall fiscal expenditure structure. Last year, China’s total GDP reached 114 trillion yuan ($16.2 trillion). The total amount of investment in fixed assets was 55 trillion yuan, while fixed-asset investment accounted for 48 percent of GDP. In comparison, in developed countries such as the United States, Australia, Japan and European nations, the annual total investment in fixed assets accounts for only about 20 percent of the country’s GDP.Long-term distorted structure caused by China’s large proportion of fixed asset investment in GDP is unsustainable.
I would argue that if the current economic structure is corrected and adjusted in the next 10 years, investment in fixed assets will drop from 55 trillion yuan to 30-40 trillion yuan and then decline further. Its high growth will undoubtedly crowd out consumption in the economy, and have a negative impact.
Here are some ways to boost consumption:
First, efforts should be made to promote consumption in terms of raising incomes, instead of working from the production standpoint. Since 2020, in Europe and the United States, the key measure to stabilize consumption has been to issue consumption vouchers to residents, and this has generated a notable effect in boosting the economy. If people’s disposable incomes decline, consumption will definitely drop. Therefore, efforts must be made to find a way to increase disposable income of Chinese consumers. However, if we talk about increasing disposable incomes and only work on stabilizing employment, it would not be sustainable over the long term. It is a long-term policy to stabilize employment as well as improve the social security system, medical system and education system, whatever the circumstances are. The core of stabilizing consumption is to increase household incomes. One way to bring this about is to increase current incomes; that is, issue consumption vouchers or money to residents. It is the correct way to stabilize consumption from the income side. Another way of effecting this is to increase investment income, such as making the stock market more prosperous, so that everyone makes money, thus leading to higher consumption.
Second, efforts should be made to increase the public’s marginal propensity to consume by cutting interest rates. The best way to increase the marginal propensity to consume in the short term is, in fact, by reducing interest rates, which frees up credit. The two methods for stabilizing consumption in Europe and the US in 2020 were distribution of money and lowering of interest rates. By raising incomes through distribution of money and lowering of interest rates, it is possible to increase the general public’s marginal propensity to consume. People’s incomes are divided into two parts. One part is used for saving and the other part is used for consumption. When savings increase, consumption decreases. Savings are closely related and very responsive to interest rate changes. When Europe and the US faced economic downturn pressure in 2020 and wanted to stabilize consumption, they once lowered interest rates to zero or even negative. But China seems to be more conservative with regards to cutting interest rates.
There are many reasons for China to be shy about cutting interest rates. These include the need to prevent real estate bubbles, avoid a stock market sell-off, safeguard against rampant inflation, and stabilize the RMB exchange rate. The goal of monetary policy is complicated and has many facets. It needs to work not only to maintain economic growth, but also to stabilize prices, support the capital market, undergird the housing market and stabilize the exchange rate. Currently, in terms of the stock market, the Chinese bourse has a flat performance during the past 10 years, and share prices of many listed companies have fallen to historic lows. A rise in the stock market can increase investment income and benefit consumption. In terms of prices, China’s producer price index has entered negative growth since October. Currently, we do not have serious inflation, so from the perspective of prices, cutting interest rates will also work. In terms of the RMB exchange rate, now that the appreciation of the US dollar has ended and interest rate hikes outside China have slowed, the pressure of RMB appreciation is gradually picking up. Therefore, to increase the public’s marginal propensity to consume and to stabilize consumption, we should cut interest rates.
In addition, it is also very important to boost consumption by creating consumption scenarios with engaging consumption activities, where consumers can truly interact with shops and products. If consumers cannot have such interactions, contact consumption in many scenarios will not be realized. This involves the impact of COVID-19 and how to contain the pandemic in a science-based, accurate way, instead of a one-size-fits-all approach.
To sum up, only by realizing the importance of consumption and work on the income front, cutting interest rates and creating more engaging scenarios for consumption can the Chinese economy likely see a rebound in the first quarter of next year.
The views don’t necessarily reflect those of China Daily.
The author is the director of the Wanbo New Economic Research Institute.
Investment
TFSAs, RRSPs and more could see changes in allowed investments – Investment Executive
“It’s a useful and probably much needed exercise,” said Carl Hinzmann, partner with Gowling WLG in Toronto. “If they can get the [qualified investments definitions] down to a singular definition, I think it would be significantly easier for the investment community that’s trying to provide advice and develop products.”
Holding a non-qualified or prohibited investment can lead to severe tax consequences: the plan would incur a 50% tax on the fair market value of the non-qualified or prohibited investment at the time it was acquired or changed status, and the investment’s income also would be taxable.
The consultation asked stakeholders to consider whether updated rules should favour Canada-based investments. Hinzmann likened this to the debate about whether pension funds should invest more domestically.
“I don’t think tax legislation is the appropriate way to tell pension funds to invest their money, so why [do that to] ordinary Canadians?” he said.
To achieve the goal of favouring Canadian investments, Hinzmann said the government could either require a certain percentage of domestic investments or treat domestic investments more favourably within a plan. Canada had a foreign content limit for RRSPs and RRIFs from 1971 to 2005, which ranged from 10% to 30%.
The budget acknowledged that the qualified investment rules “can be inconsistent or difficult to understand” due to their many updates since their introduction in 1966.
For example, different plans have slightly different rules for making investments in small businesses; certain types of annuities are qualified investments only for RRSPs, RRIFs and RDSPs; and certain pooled investment products are qualified investments only if they are registered with the Canada Revenue Agency.
“There’s no good policy reason” for the inconsistencies, Hinzmann said, adding that the purpose of the rules is to ensure registered plans hold stable, liquid products and that the planholder does not gain a personal tax advantage.
By having unwieldy, inconsistent rules, “all you’re really doing is increasing costs for the people offering these investment services to Canadians,” he said.
The budget asked for suggestions on how to improve the regime. In addition to questioning whether the rules should favour Canadian investments, the budget asked stakeholders to consider the pros and cons of harmonizing the small-business and annuities rules; whether crypto-backed assets should be considered qualified investments; and whether a registration process is indeed required for certain pooled investment products.
Hinzmann said the consultation’s highlighting of crypto-backed assets suggests the government may be questioning whether investment funds that hold cryptocurrency should be included in registered plans, though he acknowledged the government also could wish to expand the types of crypto products allowed.
Cryptocurrency itself is a non-qualifying investment in registered plans.
The qualified investments consultation ends July 15.
Qualified, non-qualifying and prohibited investments
Registered plans are allowed to hold a wide range of investments, including cash, GICs, bonds, mutual funds, ETFs, shares of a company listed on a designated exchange, and private shares under certain conditions. These are called qualified investments.
However, investments such as land, general partnership units and cryptocurrency are generally non-qualifying investments. (A cryptocurrency ETF is qualified if it’s listed on a designated exchange.)
A prohibited investment is property to which the planholder is “closely connected.” This includes a debt of the planholder or a debt or share of, or an interest in, a corporation, trust or partnership in which the planholder has an interest of 10% or more. A debt or a share of, or an interest in, a corporation, trust or partnership in which the planholder does not deal at arm’s length also is prohibited.
A registered plan that acquires or holds a non-qualified or prohibited investment is subject to a 50% tax on the fair market value of the investment at the time it was acquired or became non-qualified or prohibited. However, a refund of the tax is available if the property is disposed of, unless the planholder acquired the investment knowing it could become non-qualified or prohibited.
Income from a non-qualified investment is considered taxable to the plan at the highest marginal rate. Income earned by a prohibited investment is subject to an advantage tax of 100%, payable by the planholder.
A non-qualified investment that is also a prohibited investment is treated as prohibited.
Investment
Bill Morneau slams Freeland’s budget as a threat to investment, economic growth
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Finance Minister Chrystia Freeland’s predecessor Bill Morneau says there was talk of increasing the capital gains tax when he was on the job — but he resisted such a change because he feared it would discourage investment by companies and job creators.
He said Canada can expect that investment drought now, in response to a federal budget that targets high-end capital gains for a tax hike.
“This was very clearly something that, while I was there, we resisted. We resisted it for a very specific reason — we were concerned about the growth of the country,” he said at a post-budget Q&A session with KPMG, one of the country’s large accounting firms.
Morneau, who served as Prime Minister Justin Trudeau’s finance minister from 2015 to 2020 before leaving after reports of a rift, said Wednesday that Freeland’s move to hike the inclusion rate from one-half to two-thirds on capital gains over $250,000 for individuals, and on all gains for corporations and trusts, is “clearly a negative to our long-term goal, which is growth in the economy, productive growth and investments.”
Morneau said the wealthy, business owners and corporations — the people most likely to face a higher tax burden as a result of Freeland’s change — will think twice about investing in Canada because they stand to make less money on their investments.
“We’ve created a disincentive and that’s very difficult. I think we always have to recognize any measure that creates a disincentive for investment not only impacts us within the country but also impacts foreign investors that are looking at our country,” he said.
“I don’t think there’s any way to sugarcoat it. It’s a challenge. It’s probably very troubling for many investors.”
KPMG accountants on hand for Morneau’s remarks said they’ve already received calls from some clients worried about how the capital gains change will affect their investments.
Praise from progressives
While Freeland’s move to tax the well-off to pay for new spending is catching heat from wealthy businesspeople like Morneau, and from the Canadian Chamber of Commerce, progressive groups said they were pleased by the change.
“We appreciate moves to increase taxes on the wealthiest Canadians and profitable corporations,” said the Canadian Labour Congress.
“We have been calling on the government to fix the unfair tax break on capital gains for a decade,” said Katrina Miller, the executive director of Canadians for Tax Fairness. “Today we are pleased to see them take action and decrease the tax gap between wage earners and wealthy investors.”
“This is how housing, pharmacare and a Canada disability benefit are afforded. If this is the government’s response to spending concerns, let’s bring it on. It’s about time we look at Canada’s revenue problem,” said the Canadian Centre for Policy Alternatives.
The capital gains tax change was pitched by Freeland as a way to make the tax system fairer — especially for millennials and Generation Z Canadians who face falling behind the economic status of their parents and grandparents.
“We are making Canada’s tax system more fair by ensuring that the very wealthiest pay their fair share,” Freeland said Tuesday after tabling her budget in Parliament.
WATCH: New investment to lead ‘housing revolution in Canada,’ Freeland says
The capital gains tax, which the government says will raise about $19 billion over five years, is also being pitched as a way to help pay for the government’s ambitious housing plan.
The plan is geared toward young voters who have struggled to buy a home. Average housing prices in Canada are among the highest in the world and interest rates are at 20-year highs.
Tuesday’s budget document says some wealthy people who make money off asset sales and dividends — instead of income from a job — can face a lower tax burden than working and middle-class people.
Morneau, who comes from a wealthy family and married into another one, is on the board of directors of CIBC and Clairvest, a private equity management firm that manages about $4 billion in assets.
According to government data, only 0.13 per cent of Canadians — people with an average income of about $1.4 million a year — are expected to pay more on their capital gains as a result of this change.
But there’s also a chance less wealthy people will pay more as a result of the change.
Put simply, capital gains occur when you sell certain property for more than you paid for it.
While capital gains from the sale of a primary residence will remain untaxed, the tax change could affect the sales of cottages and other seasonal and investment properties, along with stocks and mutual funds sold at a profit.
A cottage bought years ago and sold for a gain of more than $250,000 would see part of the proceeds taxed at the new higher rate.
But there’s some protection for people who sell a small business or a farming or fishing property — the lifetime capital gains exemption is going up by about 25 per cent to $1.25 million for those taxpayers.
Freeland said Tuesday she anticipates some blowback.
“I know there will be many voices raised in protest. No one likes paying more tax, even — or perhaps particularly — those who can afford it the most,” she said.
“Tax policy is not only, or chiefly, the province of accountants or economists. It belongs to all of us because it is how we decide what kind of country we want to live in and what kind of country we want to build.”
Morneau had little praise for what his successor included in her fourth budget.
Morneau said Canada’s GDP per capita is declining, growth is limited and productivity is lagging other countries — making the country as a whole less wealthy than it was.
Canada has a growth problem, Morneau warns
The government is more interested in rolling out new costly social programs than introducing measures that will reverse some of those troubling national wealth trends, he said.
“Canada is not growing at the pace we need it to grow and if you can’t grow the size of the pie, it’s not easy to figure out how to share the proceeds,” he said.
“You think about that first before you add new programs and the government’s done exactly the opposite.”
The U.S. has a “dynamic investment culture,” something that has turbo-charged economic growth and kept unemployment at decades-low levels, Morneau said. Canada doesn’t have that luxury, he said.
He said Freeland hasn’t done enough to rein in the size of the federal government, which has grown on Trudeau’s watch.
The deficit is now roughly double what it was when he left office, Morneau noted.
“There wasn’t enough done to reduce spending,” he said, while offering muted praise for the government’s decision to focus so much of its spending on the housing conundrum. “The priority was appropriate.”
Investment
Saudi Arabia Highlights Investment Initiatives in Tourism at International Hospitality Investment Forum
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RIYADH, Saudi Arabia — The Saudi Ministry of Tourism is currently taking a prominent stage at the International Hospitality Investment Forum (IHIF), presenting a unique opportunity for global investors to dive into the thriving tourism landscape of the Kingdom. With the spotlight on the Tourism Investment Enablers Program (TIEP), that was recently announced, Saudi Arabia is aggressively pushing towards its Vision 2030 goal of being a top global tourism destination for investors and tourists alike.
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This strategic presentation comes at a time when Saudi Arabia’s tourism sector celebrates an incredible milestone of 100 million visitors in 2023, seven years ahead of schedule, marking a significant stride towards economic diversification and emphasizing the sector’s growing contribution to the national GDP. The flagship Hospitality Investment Enablers (HIE), one of TIEP’s initiatives, aims to leverage this momentum, planning an investment infusion into the hospitality sector of up to SAR 42 billion in key destinations, which alone is anticipated to create 120,000 new jobs by 2030.
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The IHIF audience is getting a close look at Saudi Arabia’s plans to expand its accommodation capacity dramatically. The Kingdom is targeting an increase in hotel rooms to over 500,000 and aiming to welcome 150 million visitors annually by 2030. The HIE stands at the core of these ambitions, designed to energize the hospitality sector by introducing a new wave of supply in targeted tourism hotspots, significantly enriching the Kingdom’s diverse tourism offerings.
The initiative is supported by a suite of strategic enablers, including access to government-owned land under favorable terms, streamlined project development processes, and regulatory adjustments aimed at reducing barriers to market entry and operational costs. This comprehensive approach is expected to catalyze a significant socio-economic transformation within the Kingdom, with private sector investments projected to reach SAR 42.3 billion and a forecasted annual GDP increase of SAR 16.4 billion by 2030.
Saudi Arabia’s active participation in IHIF aims to showcase the Kingdom as an enticing investment frontier for international investors, emphasizing the lucrative opportunities within the tourism and hospitality sectors. This global stage provides the perfect platform for the Ministry of Tourism to forge lasting partnerships and highlight the Kingdom’s commitment to elevating its tourism industry standards, fostering sustainable growth, and offering robust support to investors.
Through this engagement, the Saudi Ministry of Tourism is not just showcasing investment opportunities; it is inviting the world to be a part of Saudi Arabia’s ambitious journey towards redefining global tourism norms. Investors are encouraged to seize this unparalleled chance to collaborate with the Kingdom, as it paves the way for a new era of tourism excellence aligned with Vision 2030’s transformative objectives.
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