China policies seek to spur investments in R&D, technology upgrade

It also wants faster FAI depreciation.

The State Council recently released policies to encourage Chinese companies to accelerate FAI depreciation and increase investment in R&D and technology upgrade.

According to a research note from CCB International, the key points of such policies include accelerate depreciation of R&D related equipment investment: unit cost below RMB1m can be expensed this year; unit cost above RMB1m can be subject to faster depreciation.

Also, all existing fixed assets with unit value of below RMB5,000 can be expensed in one year, and finally, all FAI in selected sectors are subject to faster depreciation in August 2014, including special equipment, railway equipment, shipbuilding, aerospace, IT and electronics, software and bio-medical sectors.

Here's more from CCB International:

Our view is that, firstly, the government intends to boost R&D and technology upgrade investment in China by adopting fast depreciation policies.

If the companies treat R&D investment as one-off expenses or adopt a fast depreciation accounting policy, their depreciation expenses over the short term (1-2 years) will increase substantially, resulting in lower before-tax profits thus lower tax payments.

Even if corporate profitability decreases due to higher depreciation, their cash flows will be able to improve due to lower tax payments.

Secondly, the government allows all FAI in some growth sectors to enjoy faster depreciation treatment.

This should encourage companies in these sectors to increase investment (such as expanding capacities and building new production lines) and boost FAI growth in these sectors.

Thirdly, the policy is likely to result in a tax reduction in 2014/2015 but also lower profitability for listed companies.

According to our calculation, total tax reduction for non-financial A share listecos would be in a range of RMB160b to RMB180b this year.

The implication is that general sectors with heavy R&D and technology upgrade investment should benefit from fast depreciation policy, including sectors such as pharmaceutical, bio-tech, IT and electronics and high-end equipment (railway, aircraft, shipbuilding, etc).