The World’s Fastest Growing Economy Getting Smarter

How smart can the Chinese get?

China’s economic growth has been steady at about 10% per annum over the past four years — a growth rate other countries could only dream of.

It’s been called the fastest growing economy in the world. Countless articles and books have been written about how the Chinese economy will overtake the U.S. economy, in terms of size, this century. Will it happen? I don’t know. But what I can tell you is that the Chinese have been very smart with their growth plan.

To lure foreign investors to the country, back in the 1980s, China introduced lower tax rates for foreign investors with direct investment in China. Foreign companies were offered tax rates well below 20% in development zones of China in an effort to open plants and create jobs for Chinese citizens.

With foreign companies dumping an estimated $70 billion in investment into China in 2006, China has realized that it no longer needs cheap taxes to woo foreigners, and it is about to end its tax breaks for foreign companies.

Lure the multinationals in with cheap labor and cheap tax rates — then take them away. Smart. Very smart. Pressure on cheap labor prices in China continues to build. Now, tax rates are going up for foreign based companies.

Personally, I believe China’s motive in raising the tax rates of foreign companies in China is not just an effort to curb growth. I believe that Beijing could be saying “enough with foreigners opening up plants here… we’ve got some of our own domestic companies growing quite well… why not groom our own?”

I doubt the higher tax rates will deter foreign companies from setting up in China because the cheap labor is just too tempting. But it will mean even more cash for the Chinese government’s social programs. China: One smart growing economy.

NEWSFLASH — Merrill Lynch has increased the pay of its Chairman and CEO to $48 million. The pay-outs at the big Wall Street firms just continue to increase. A sign of the times, or simple excessiveness? History will tell. The increase Merrill Lynch gave Stanley O’Neal over his last year’s pay was 30% — a far cry from the gains Wall Street retail investors have made since the tech bubble of 1999.