Why do Chinese people love spending money abroad?

0 Comment(s)Print E-mail People's Daily, July 15, 2014
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In recent years the number of Chinese outbound tourists has surpassed 100 million. They now lead the world in terms of their purchases. For example, Chinese tourists - who make up only 1% of the total passenger traffic in Heathrow airport in UK - represent about 25% of total duty-free sales. Data indicates that Chinese tourists, with their purchasing power of US$ 70 billion, have become a much sought-after 'cake' for foreign countries.

Why do Chinese people love spending money abroad? The main reason is that many products in China are too expensive.

These high prices stem from the tax structure in China. 95% of the country's tax revenues come from the movement of goods, while only about 5% comes from income tax. In taxation terminology, the government prefers indirect tax rather than direct tax.

The main tax in western countries is personal income tax. For example, 75% of the U.S. federal government's tax revenues come from individual incomes, with the result that western people are very happy to make purchases, but very unhappy to pay personal income tax from their pockets. In contrast Chinese people with ordinary incomes don't pay too much direct tax, but spending money becomes something painful.

Specifically, for every dollar of goods we will pay 17% VAT. After entering the mall, we still have to pay an additional 5 to 10% in sales tax. The duties on many imported products exceed 30%. The tariff for some products, such as tobacco, alcohol, cosmetics and luxury products, is higher than 50%. This is why Chinese choose to spend money outside of China.

The second reason for high prices is the low efficiency of China's logistics and retail system. China is improving the situation by reducing logistics costs and sales costs through e-commerce.

China has improved the quality of its products, but because of high taxes, the internal price of the goods becomes less competitive. If we want to encourage consumers to spend more at home, we must reduce taxes on the movement of goods and improve the efficiency of logistics.

The article is written by Li Daokui, the director of Center for China in the World Economy of Tsinghua University

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