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China's lawmakers may end tax breaks, protect property rights

Foreign investors will likely find themselves enjoying fewer favors in China as the nation's leaders propose laws next week that would end tax breaks for overseas companies, strengthen labor rights, restrict monopolies and protect private property.

The moves reflect the Chinese government's increasing confidence in the country's financial strength. They also demonstrate rising concern about the costs of economic growth, which include damage to the environment, corruption and a widening income gap. President Hu Jintao and Premier Wen Jiabao have adopted the slogan „harmonious society” to emphasize the importance of social stability in China. The number of mass protests in the country reached 87,000 in 2005, many sparked by industrial pollution and the government's seizure of farmland for development. The proposed laws will „further establish proper market behavior and strengthen the rights of ordinary citizens,”said Hu Biliang, a senior economist with the Chinese Academy of Social Sciences. The National People's Congress convenes on March 5 for its annual meeting, bringing almost 3,000 lawmakers from around the nation to Beijing's Great Hall of the People. Members have never rejected laws proposed by China's Communist government. Wen will probably set a target of 8% growth for this year's economy in a speech that will open the congress. He is expected to call for „smooth and sustainable” expansion, announce measures aimed at helping millions of people in rural areas and encourage the passage of the proposed laws, according to analysts.

China's economy has grown more than 10-fold since late leader Deng Xiaoping ditched predecessor Mao Zedong's hard-line communism in favor of pro-market policies in the late 1970s. Last year, the economy expanded 10.7%, the fastest pace in 11 years. Urban incomes are three times those in rural areas, a gap that doubled in the past 25 years. The private-property law - the first of its kind for China since the 1949 communist revolution - will allow people to own and sell assets such as land-use rights for up to 70 years in cities. If passed, the law will implement a 2004 constitutional change that legalized individual private property. The proposed tax law would charge foreign and domestic companies the same corporate rate of 25%. Domestic businesses currently pay 33%, while foreign firms pay an average of 15%.

The unified tax code will „level the playing field for everyone,” said Alexander May, an American lawyer with Beijing-based law firm Shuang Cheng Attorneys at Law. Foreign direct investments in China may reach about $60.3 billion in 2006, the same level achieved in 2005, the official China Securities Journal reported on December 25, citing a forecast by the Ministry of Commerce. European companies don't oppose a unified tax code as long as it is „implemented based on the WTO principle of transparency throughout the country,”said Ian Kay, Beijing-based secretary general of the European Union Chamber of Commerce in China. „That is critical: equal implementation.'' James Zimmerman, chairman of the American Chamber of Commerce in China and a Beijing partner with US-based law firm Squire, Sanders & Dempsey LLP, said legislators should „grandfather'' existing foreign investors for up to five years to avoid major disruption in operations.

The new labor law would require employers to offer their workers contracts that specify terms of employment such as wages and benefits, Hu Biliang said. Some foreign companies are accepting unions at their China operations while resisting them elsewhere, to avoid jeopardizing their access to cheap labor and the world's fastest-growing economy. Last August, Wal-Mart Stores Inc. said it would allow its 33,000 workers in China to organize after initially objecting to unions. The world's largest retailer has 60 stores in China and plans to open 20 more by year-end. Eastman Kodak Co.; Dell Inc.; and Taiwan-owned Foxconn Technology Co., Apple Inc.'s main supplier of iPod music players, have also been targets of union drives, said Guo Jun, deputy legal director of the All-China Federation of Trade Unions.

The congress also will review a draft proposal for an anti-monopoly law, which would target state-owned companies and foreign firms that dominate a particular industry in China. The law may force businesses such as General Electric Co., Microsoft Corp. and China Petroleum & Chemical Corp. to give up leading market shares in the world's fastest-growing economy. Under the proposal, the government will investigate any company that has more than a 50% share of the Chinese market for a product, according to a draft obtained by Bloomberg News. The government will also fine businesses that use a dominant market position to set unfair prices. The fines could be as much as 10% of annual sales. The congress probably won't pass the proposed anti-monopoly law in the coming session because it remains a major source of contention among foreign investors, Kay said. Even though the new laws would remove some incentives for foreign companies, May doesn't think the legislation will scare off businesses.  „China remains a place where people want to be,”he said. (Bloomberg)