Death and Taxes

China plans to impose a 20 percent tax on income from bank interest on October 1 in a bid to encourage consumers to loosen their purse strings and help boost sagging economic growth.

A tax official says the long debated policy has been cleared by the State Council, or cabinet, and the rate has been set at 20 percent.

"The central government has issued the policy document," the official says. "We are now working on the implementation details."

While there was no official announcement of the decision, China has been looking for ways to spur its economy after 20 consecutive months of falling retail prices and the absence of taxes on bank savings is an obvious path to pursue. Beijing would like to unleash some of the RMB5.92 trillion (US$714.97 billion) that was parked in bank savings accounts at the end of June, a number that was up from the RMB5.34 trillion at the end of 1998.

Despite a massive infrastructure spending program, China has seen its growth slip back from a year-on-year 8.3 percent in the first quarter to about 7.1 percent in the second quarter. First-half growth was still above the seven percent target for the year, though that level was set below the 7.8 percent growth of 1998. China has cut interest rates seven times since May 1996 in a bid to spur growth, and it now has only limited room for more such reductions.

China's state banks have been stepping up lending for purchases of homes and cars to lure consumers into spending on big ticket items. Beijing has also been hoping tha t some of that money in bank accounts will find its way into the stock market to help allow companies to raise badly needed capital for investment.

But economists say it is unclear whether a tax on bank interest will be
enough to get people to spend.
Many workers save in fear they may be out of a job in the months ahead as Beijing tries to streamline inefficient state companies and halt mounting losses. Consumers are also faced with new financial burdens such as paying for their health care and education as well as unsubsidized rents as China dismantles its socialist system.

"A lot of people will still choose to keep money in the bank," says Huang Zemin, professor of economics at East China Normal University. "Even with zero interest, people will want to save rather than spend."
Other tax officials say the issue will still have to be discussed by parliament next month, though it is unclear what scope for debate remains.

IOU Threatens Unicom IPO

Foreign telecommunications firms say they are threatening to undermine a market listing by China Unicom unless it pays them hundreds of millions of dollars in frozen investments and potential revenues.

"Lots of firms are preparing for litigation on this," says a Beijing-based executive whose company has money tied up in now-defunct joint ventures with Unicom, China's number two telecommunications service provider.

Asked whether his firm would lodge a complaint with the US Securities and Exchange Commission, which must approve initial public offerings in the United States, he says: "You bet."

China Unicom announced this month it is planning to issue shares for listings in Hong Kong and overseas in October.

Market sources say Unicom - whose officials estimate the initial public offer at more than US$1 billion, making it one of China's biggest - was hoping to list on the US Nasdaq. But several of more than 20 foreign and Hong Kong firms which invested about US$1.4 billion in China Unicom in the mid-1990s say they are irate.

The problem centers on a legal loophole that allowed firms including Sprint, Deutsche Telekom, France Telecom and Bell Canada to pour money indirectly into Unicom and skirt an official prohibition on foreign investment in the telecoms sector. China closed the loophole last year and began enforcing a ban on the existing joint-venture contracts in March, barring Unicom from sharing revenues with its foreign partners or repaying them.

Over the past few weeks, Morgan Stanley Dean Witter, which is underwriting Unicom's IPO, has approached many of the firms offering settlements, the foreign executives say. But some said the offers, which included full reimbursement of original investments plus a few percent in interest, fell far short of what they deemed acceptable.

"I believe they have approached almost everybody. I don't think they've met with a lot of warm responses," one executive says.

In addition to the repayment of initial investments, the executives say Unicom should foot the bill for marketing costs, maintenance of the joint ventures and lost potential revenues.

"We're providing a long-term investment for 15 or 20 years,'' the executive says. "Now we're asked to leave in three years. Where are the earnings?

Even if they pay 100 percent or 200 percent on the cost, it's not going to cover it.''
Morgan Stanley says it is forbidden by securities laws from discussing the matter.
An industry analyst who asked not to be identified says the flap will probably postpone Unicom's share offering.
With European, Hong Kong, Japanese and U.S. firms in the imbroglio, there are few stock markets for Unicom to go to for a listing, he says.
"At a minimum it will be postponed, because companies will go to the Securities and Exchange Commission,'' the analyst says. "Just say the word 'litigation' and you've got a dead IPO."

WTO Clinton-Jiang priority

The United States expects China's entry to the World Trade Organization (WTO) to be one of the top issues when the US and Chinese presidents meet in September, the White House says.

The United States and China failed to strike a deal for Beijing to join the 134-nation trade group in April and their talks on the matter were suspended in May after NATO bombed China's embassy in Belgrade, sparking Chinese fury.

Although expert level talks still have not resumed, the White House expects President Bill Clinton and Chinese President Jiang Zemin to discuss the issue when they meet on the sidelines of the annual Asia-Pacific Economic Cooperation (APEC) forum to be held in New Zealand in September.

"We expect WTO will be one of the top agenda items,'' says National Security Council spokesman Mike Hammer. "We are looking for an opportunity to continue to work with China to get the best deal possible for US businesses."

U.S. business executives roundly criticized Clinton in April for his failure to secure a WTO deal for China in Washington talks with Chinese Premier Zhu Rongji, who offered significant concessions that would have given U.S. businesses wider access to China's vast market of 1.2 billion people.

Clinton sought to recover the initiative by scheduling a new round of expert-level talks that never took place because of the North Atlantic Treaty Organization's (NATO) May 7 bombing of the Chinese embassy in Belgrade.

Washington has insisted the bombing was an accident that stemmed from the Central Intelligence Agency (CIA) wrongly identifying the embassy as the Yugoslav Federal Directorate for Supply and Procurement, which was about 300 yards away.

It was the only target selected by the CIA during NATO's 11-week bombardment of Yugoslavia during the Kosovo conflict.

The bombing killed three Chinese citizens and sparked days of mass anti-US demonstrations in China, which last month rejected US explanations of the incident as "unconvincing."

U.S. Secretary of State Madeleine Albright met Chinese Foreign Minister Tang Jiaxuan in Singapore last week in the highest level contact between the two countries since the embassy bombing. Tang told reporters afterwards he was surprised Albright had not raised the WTO during their meeting. Hammer declined comment on this, but said the United States remained "fully committed" to negotiating an accord on China's WTO accession.

Teachers' Colleges Close

All Beijing's primary education teacher-training schools will be closed as the number of children in the capital falls. More than 20 training schools will be phased out and their buildings converted for other educational purposes, the Beijing Morning Post reports.

As a result of family planning and the one-child policy, the number of children entering Beijing's school system has dropped between seven and eight per cent each year since 1995, the paper says. The State Statistical Bureau recorded 124,231 children starting their primary education in 2,696 schools in 1997.

A surplus of primary school teachers had formed over the years, the paper says. There is now an average of 30 to 40 children per class compared to more than 50 in the past. Some primary schools will be merged to cope with the drop in pupil numbers.

Since it was established 41 years ago, Beijing No. 1 Normal School has trained more than 6,000 primary school teachers. In total, more than 100,000 teachers have been trained by the schools.

Most of the training schools will be converted into secondary schools, in line with requests from districts and counties. Some will be used as training centers for teachers at other levels, including those dealing with children who have special needs.

From 2006, all new primary school teachers will be required to have a university education.