80 Finance & economics The EconomistSeptember 21st 2019
1C
hina lovespolitical slogans expressed
as numbered lists. There are, to name a
few, the Two Centenaries, the Three Repre-
sents and the Four Comprehensives (not to
be confused with the Four Modernisations
or, heaven forfend, the Four Olds). In a new
report the World Bank has made its own
contribution to Chinese numerology, in-
troducing the “three ds”. These, it says, re-
fer to what China must do to become more
productive and innovative: remove eco-
nomic distortions, diffuse technology and
foster discovery. That might sound hokey,
but it highlights a basic challenge for any
external actor in China today: how to con-
vey new ideas and criticism to a govern-
ment that is increasingly set in its ways.
The World Bank has more experience
than most in this, having loaned cash
(more than $60bn) and expertise to China
over nearly four decades. Its report, “Inno-
vative China”, published on September
17th, reflects a slightly different approach.
It is the third time since 2012 that it has
jointly written a policy blueprint with the
Development Research Centre, a think-
tank under the State Council. It is, in the-
ory, a way to put recommendations into the
prime minister’s hands, and perhaps into
the next five-year plan.
This report came with more controver-
sy than the previous two. In March the
Washington Post reported that it had been
ready for a year, but that Chinese authori-
ties had blocked its release because they
objected to some of its contents, notably a
section on reforming state-owned enter-
prises. People involved have disputed that
account, saying that there were indeed de-
bates but that these are normal for any re-
port with high-level involvement.
A closer look does reveal a striking
change in tone. The first report, published
in 2012, spoke of “the need to accelerate re-
forms in the state-owned sector”. The latest
reads in parts as a restatement of Chinese
policy: “state-owned enterprises are at the
core of the co-existence between the state
and the market.” The 2012 report recom-
mended a big change to sasac, the agency
overseeing state firms, calling for it to be
limited to regulation rather than asset
management. The latest mentions sasac
only once, in the acknowledgments.
But despite its cautious wording, “Inno-
vative China” still has much to offer. It pre-
sents plenty of evidence of flaws in the Chi-
nese economic model: a much-puffed risein business creation has probably been
overstated; the allocation of capital has be-
come less efficient in recent years; and the
number of bankruptcies is tiny—lower
than in Romania (see chart), leaving China
with zombie firms. In formulating its
“three ds” the Bank is trying, gently, to
warn the government that it is focusing too
much on shiny new inventions at the ex-
pense of basic policy settings that ought to
yield more productive growth.
As for the fraught question of the state’s
role in the economy, the Bank is making a
subtle point when it echoes official lan-
guage. Over the past five years China has
laid out plans to limit subsidies to state
firms and help private-sector rivals fight
them on a level terrain. “If China were actu-
ally implementing official policy, such as
on fair competition, we would be making a
lot of progress,” says Martin Raiser, the
World Bank’s director for China. Perhaps a
fourth dwould help: China must deliver on
its promises.^7SHANGHAI
The World Bank tries its hand at subtle
persuasion in ChinaChina’s statist modelGot your number
Creative obstructionSource:WorldBankNumber ofinsolvencycases,m
2017
0 5 10 15 20 25
United StatesBritainJapanRomaniaChinaO
ccasionally martin shields slips
into the jargon of financial markets:
otc (over-the-counter), for trades between
banks and private customers); kd-1-11, a
code for payments, which confuses his
translator. But on September 18th, the first
of two days’ testimony at a court in Bonn,
the British investment banker does his
best, with slides and a laser pointer, to ex-
plain to the judge the complexities of divi-
dend arbitrage in general and “cum-ex”
deals in particular. Even the most basic
cum-ex deal, he says, involves 12 steps and
a web of bankers, brokers, investors, asset
managers, lawyers and consultants.
Mr Shields and Nicholas Diable, anoth-
er British banker, are the main defendants
in Germany’s biggest post-war tax-fraud
trial. They are accused of “aggravated tax
evasion” for helping engineer 33 deals that
cost taxpayers almost €450m ($494m) be-
tween 2006 and 2011. The charge sheet runs
to 651 pages. Cum-ex trades are share tran-
sactions done at high speed on or just be-
fore the day dividend payments are record-
ed. Before payment, shares come with
(cum) dividends, which are reflected in
their prices; after, they come without (ex).
A flurry of deals may allow two or more in-
vestors to reclaim tax on dividends, even
though it has been paid just once.
Mr Shields describes the pressure on
traders in London’s investment banks 15
years ago to make juicy profits, in part by
exploiting tax loopholes. He refers fre-
quently to Paul Mora, his boss when he
started, aged 23, at Merrill Lynch, an Ameri-
can investment bank. The pair then
worked together at HypoVereinsbank, a
German bank, and Ballance Capital, a fund
they set up. Also mentioned is Hanno
Berger, a tax lawyer known in Germany as
“Mr Cum-Ex”, who wrote legal opinions in
support of reimbursements for tax never
paid. Mr Mora is thought to be in his native
New Zealand and has not been charged
with any offence. Mr Berger awaits trial in a
German court at his home in Switzerland.
All deny any wrongdoing.
Also in the courtroom were representa-
tives of M.M. Warburg, Warburg Invest,
Hansainvest Hanseatische, bny Mellon
and Société Generale. All five banks played
parts in cum-ex deals masterminded by Mr
Shields, with Mr Diable in a supporting
role. If the court rules that the tax reim-
bursements were fraudulent, they may be
on the hook for tens of millions of euros.BONN
Two British bankers are on trial in
Germany’s biggest tax caseCum-ex deals in court12-step programme