GBA Brief

Oh what a lovely war – how the trade row is putting Shenzhen’s workers in line for tax cuts

A new pledge to cut income taxes in key sectors in Shenzhen is a sign of how the implications of the trade war with the US are reverberating through the city. Employees in areas like electronics and telecoms are set to benefit most.

Convention has it that trade conflicts like the one being contested between Beijing and Washington end up with more losers than winners. 

But for people with the right skills in Shenzhen, there may be a few more immediate positives, following news that the city is going to slash income taxes to 15% for qualified candidates in innovative sectors. 

Most of the talk about income taxes in the GBA in recent months has focused more on how to change them in a way that encourages the workforce to be more mobile –particularly in getting more people from Hong Kong to commit to jobs elsewhere in the region. 

The sticking point is that China’s top rate of tax is almost three times that of the former British colony, meaning that Hongkongers wanting to work in other parts of the GBA have to shoulder a significantly higher burden.

Officials have tried to soften the blow in special economic zones like Hengqin and Qianhai, with tax breaks that bring down the burden to something closer to the Hong Kong situation. 

What’s different about this week’s announcement is that the authorities in Shenzhen now seem ready to grant more favourable rates to local (i.e. mainland Chinese) workers. 

That’s probably been accelerated by the trade and tech rows with Washington and the fears that Chinese firms are going to be locked out of the supply chain for key components. 

Shenzhen is feeling the heat of the row rather personally, of course. Homegrown giant Huawei is public enemy number one of the Trump administration and DJI, a drone-maker headquartered in the city, is rumoured to be high on the hit list if the row worsens.

However, there’s more of a national imperative at play in taking a step towards capturing as much of the supply chain inside China as possible.

Zeng Zhen, an official at China Development Institute, a think tank based in Shenzhen, said as much in comments to the South China Morning Post this week, highlighting that the key goal of the campaign was the recruitment of professionals in electronics and telecommunications.

“We need to fill all the links in the supply chain. Then we are truly competitive in the world, and can truly have the power of say,” he added.

The Brief also wonders if Shenzhen’s offer could end up pulling in candidates from other parts of the country, triggering a round of more domestically-focused conflict.

Tensions with the US are making most of the headlines but cities across China have been waging their own ‘war for talent’ and some of them will feel compelled to respond to Shenzhen’s gambit if they think their own economies are suffering as a result.

Not that all of them are in the same financial position as Shenzhen, which says it will use its other income to make up for the shortfalls in tax revenue. 

But rivals like Hangzhou and Shanghai still might want to make similar offers. Next-door neighbour Guangzhou won’t want to risk a brain drain either. 

It then becomes a question of whether the central government is going to be happy about a brutal round of tax warfare between the domestic rivals – or whether Shenzhen is being singled out as a special case, because of its status as a champion in sectors like tech and advanced manufacturing.