The SECRET Tax Ruining Chinese Stocks

The SECRET Tax Ruining Chinese Stocks
This is a Guest Post by AK of Fallible
AK has been an analyst at long/short equity investment firms, global macro funds, and corporate economics departments. He co-founded Macro Ops and is the host of Fallible.

To learn more about China’s Downfall, make sure you read Macro Ops’ article:
Make sure to watch our entire series here too :



In this video we’ll discuss how China has executed the Gerschenkron growth model perfectly.

Now that we know how the Gerschenkron model of growth works, here’s a quick rundown on how China implemented it and where things stand today.

China increased its savings and investment rate through a number of means, the primary method being a hidden tax on households.

They implemented this tax by keeping interest and deposit rates well below growth and inflation rates. For instance, in the early 2000s, nominal GDP growth was roughly 18% and inflation averaged around 8-10%. While at the same time, the lending rate averaged only 6% and the deposit rate just 2.5%.

This meant that it was essentially free to borrow money. With the lending rate well below inflation, the policy greatly favored debtors. However, households, who were mostly locked out of the lending market, held the Lā shǐ end of the stick, because the amount they earned on deposits was only a fraction of the inflation rate.

Economist, Michael Pettis, estimates that during this time, the Chinese government was able to transfer roughly 5-8% of GDP a year, from the household sector to large businesses and borrowers (local governments). That’s a massive transfer of wealth from households to business and government.

Now, since China as a whole was growing in the double digits each year, household income still went up. But its share of GDP shrank each year while that of borrowers (ie, businesses, SOEs, local governments etc…) grew much larger.

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