Fiscal Policy & Taxation System

China has been using bond issuance to stimulate the economy ever since the government first began issuing bonds over 20 years ago. The bonds have historically been used to offset government budgetary deficits caused by the heavy spending needed to develop the country's infrastructure, a poor tax collection system, and corrupt state officials. Bond issuance has had a positive affect on China's GDP although many in the banking system feel that monetary policies will lead to even greater GDP growth rates over any fiscal policy that might be enacted.

This argument seems valid because 55.6% of every yuan spent by the government in 2003 resulted from revenue stemming from bond issuance. Since the central government can only issue national bonds, the debt burden falls wholly on the central government thereby weakening the state's payment capabilities.

For the last couple of decades, China has been focused on fiscal decentralization as its main economic strategy. This has been one of the most important measures taken by the government to stimulate the economy in accordance with the modernization efforts. Although China's GDP growth has been among the highest in the world, the wealth creation hasn't been enjoyed equally among the country's people. This is due in part to fiscal strategies that flooded regions in the East with money to spur development.

The government fully accepted unequal growth for all the regions so that some would have an opportunity to catch up to the global economy. In fact, Deng Xiaoping put it quite simply stating, "Let part of us be richer first." Today the government is changing its position stating that much more fiscal attention will be focused on poorer regions of the West.

Up until 1984, China used a single tax system for handling tax management, which was based on the state's unified control over income and expenditures. A multiple tax system had been gradually adopted since then to meet the demands posed by economic reform and development. Today this multiple tax system no longer meets the needs of a growing market economy. As such, China's tax laws have once again been revamped to create an overall tax system that conforms to the generally accepted practices of the world's economic community.

To prevent further corruption and tax evasion that's been common over the past few decades, China has broadened its tax collection base and monitoring tools. This has involved close scrutiny of foreign companies, wealthy individuals and high paying professions. The money spent to prevent tax evasions recently has paid off with the government recovering 15.2 billion yuan in unpaid taxes for 2002. It's projected that these and other tax evasion counter measures will be further expanded in the near future to offset losses incurred by reduced tariffs.

Currently the Chinese government is developing a unified corporate tax regime to provide fair and equal treatment between foreign and domestic organizations as required by the WTO. To date there have been two sets of tax laws that have governed the amount of taxes levied against foreign and domestic organizations. Foreign enterprises have been taxed at 15% and above, which is lower than that imposed on domestic companies (33%). It will be a challenge for the state to create the single tax rate system because China doesn't want to discourage foreign direct investment based on the new fiscal policy.


China's economy has been founded on the agricultural business (primary industry) for centuries. Although 20% of the world's population lives in the PRC, it's home to only 7% of the world's arable land. Just over 40% of the 280 millions acres of cultivated land is irrigated, second only to India. China is now able to meet the basic dietary needs of its citizens due to irrigation projects, agricultural reforms and the adoption of advanced farming methods. Agriculture also supplies many of the countries raw materials needed in the industrial markets.

Significant agricultural reforms have increased this industry's development over the past couple of decades. One of the State's first experiences with privatization occurred in the agricultural segment, commonly referred to as the household contracting and responsibility system. This system enabled households the freedom to sell any additional crops they could grow in the open market, after they satisfied their communal requirements. This system was initiated with the intent of eliminating the country's reliance on the commune system, and although it has proved itself successful, the government still operates a number of large scale farms to supplement agricultural production. The following chart details China's 2003 agricultural output.