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Never Trust Your Money To A Nation State

Penelope Wise
10 July, 2007

The news that the Chinese government is arbitrarily demanding back taxes from a range of state companies just underlines the dangers of investing in anything to do with nation states, which are totally unethical (ok, pragmatic) in their financial dealings with citizens, whether their own or not.

In this particular case, the authorities dished out tax breaks to encourage investors to buy the companies' shares when they listed in Hong Kong in 1993. Now they have taken back the tax breaks, which is fair enough in the light of China's WTO commitments and its plan to level up taxation for all companies, foreign and domestic.

What is not fair is to demand back taxes for some or all of the intervening period, which is what they seem to be doing. Investors bought the shares on certain information, and now have the rug pulled from beneath their feet.

Well, 'she who sups with the devil needs a long spoon', we say where I come from. Although governments make law, and are often good at applying it to everyone else, they normally consider themselves above the law, especially when it suits them financially. The history of currencies is a case in point: governments issue money at a certain price, but then undermine its value by reneging on their promises of fiscal rectitude. Almost all currencies have lost value very heavily over time, leaving their holders with losses. Zimbabwe is a current example, but it stands out only by its particular egregiousness.

Markets function fairly only under the rule of law, and an investor will be smart if she puts her money only where she can be sure that the law will apply. That excludes dealings with government, whether it be to hold their currencies, buy their bonds or invest in their projects.


About the Author

Penelope Wise

Penny Wise but not Pound Foolish! But remember: I am not offering investment advice. My comments are just for your general information; I do not recommend investments, and you should take professional advice before entering any investment contract.


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