China eases government procurement rules after U.S. pressure (Reuters)

BEIJING (Reuters) – China will drop some of the "indigenous innovation" rules for government purchases that have riled foreign companies, the Ministry of Finance announced, a step a U.S. business group called an important concession.

Beijing's policies making foreign companies' access to government equipment and technology orders hinge on their transferring patents and other intellectual property to China have been a sore point with Washington and other Western capitals.

They have been keen for greater access to a sector that some have estimated is worth $1 trillion a year.

The Obama administration has repeatedly taken up the complaint with China, and Beijing told Washington in May that it would not use government technology purchases to back Chinese firms at the expense of American companies.

A brief announcement on the Chinese Ministry of Finance's website (www.mof.gov.cn) on Tuesday appeared to follow through on that concession. It said that starting from Friday China would stop enforcing three regulations linking government procurement contracts to "indigenous innovation" rules.

The U.S.-China Business Council, a Washington D.C.-based organization that represents U.S. companies active in China, said the dropping of the rules was a partial victory.

"Though the measures represent only a portion of the full list of regulations that tie indigenous innovation and government procurement, (their) elimination ... is an important step toward fulfilling pledges" made by the Chinese government, the council's president, John Frisbie, said in an emailed statement.

Frisbie said China's ending of the rules applied to all levels of its government, which he called "an important development given that companies encounter indigenous innovation policies and barriers to sales at multiple PRC government levels." The PRC is the People's Republic of China.

In May, the then U.S. Commerce Secretary Gary Locke -- who has been appointed Washington's next ambassador to Beijing -- said a key challenge for access to the Chinese market was "indigenous innovation policies that shut foreign companies entirely out of industries or make unacceptable technology transfer provisions a condition of operating in China."

During a visit to Washington in January, Chinese President Hu Jintao said that his government would not discriminate against products made with foreign technology when awarding government procurement contracts.

Despite these promises, a growing number of foreign businesses have said the polices persist, according to results from an EU Chamber of Commerce survey released in May.

Foreign corporate executives have griped bitterly in private about China's public procurement deck being stacked against them, but often let chambers of commerce publicly voice their complaints for fear of drawing the government's ire.

Bids on China's government projects, from rail to roads and stadiums, are often tendered in murky regulatory spaces at sub-central government levels. It remains to be seen whether local officials will follow through on the central government's mandate.

"In a nutshell, this is very good," Christian Murck, the president of the American Chamber of Commerce in China, said. "But we will still have to see how it is implemented at the local level now that it has been approved by Beijing."

(Reporting by Chris Buckley and Michael Martina; Editing by Jonathan Hopfner)

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China eases tax burden on poor with law change (AP)

BEIJING – China's legislature raised the threshold for paying income tax, effectively exempting tens of millions of workers in a new effort Thursday to defuse tensions over surging inflation and a yawning wealth gap.

The change comes on the eve of celebrations of the 90th anniversary of the founding of the ruling Communist Party, which faces public rancor over high prices and corruption and protests over minority and migrant worker rights.

The Standing Committee of China's legislature raised the minimum personal income required to pay taxes from 2,000 yuan ($300) a month to 3,500 yuan ($540).

That will reduce the number of taxpayers from 84 million, or 28 percent of workers covered by the law, to about 24 million, or just 7.7 percent, said a tax official, Wang Jianfan. The income tax law covers about 300 million urban workers but not most of China's hundreds of millions of farmers, who pay tax under a different system.

The change is meant to ease the tax burden on low-income workers, Wang said at a news conference. The official Xinhua News Agency said lawmakers also wanted to "adjust the distribution of income" — a reference to narrowing the gulf between China's elite who have benefited from economic reform and the poor majority.

"It is a serious attempt to maintain social stability and redress the problems of inflation," said Steve Tsang, director of the China Policy Institute at Britain's University of Nottingham.

Inflation jumped to a 34-month high of 5.5 percent in May, driven by a double-digit jump in food costs and some economists forecast a bigger jump for June.

High prices are dangerous for the authoritarian government because they erode economic gains that underpin the ruling party's claim to power. Food costs are especially sensitive because poor families in China spend up to half their incomes on food.

Communist leaders declared controlling inflation their priority this year but prices have continued to climb despite four interest rate hikes since October and curbs on lending and investment.

The government also has promised hefty increases in social spending to help narrow the gap between an elite who have profited from three decades of economic reform and China's poor majority.

Thursday's announcement highlights the extremes of wealth and poverty in a society that had 115 billionaires in Forbes magazine's 2011 list of the world's richest.

The figures cited by Wang would mean only 24 million workers earn more than 42,000 yuan ($6,500) a year, while millions of families get by on less despite rapid economic growth.

The investment bank UBS said this week that June inflation might rise as high as 6.5 percent after the cost of vegetables and pork jumped following floods that damaged crops in China's south and east.

"A steady improvement in living conditions is what people have been led to take for granted" as part of an unspoken "social contract" under which the communists remain in power, said Tsang.

"If you were earning enough to pay tax so you are not at the bottom of the pile but what you can really afford has been eroded in the last couple of years, then this could not have come soon enough," he said.

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AP researcher Yu Bing contributed.

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