China's $300 Billion Tax Cut Is Key Growth Stabilize

04:15' PM - Tuesday, 15/01/2019

China’s government is turning increasingly to tax cuts as the first line of defense against a slowing economy, in a departure from the infrastructure binges of the past.

Further evidence of the shift emerged Tuesday, as senior policy officials pledged that tax reductions on a “larger scale” are in the pipeline, amid worsening economic data. JPMorgan Chase & Co. economists estimate the total impact will be around 2 trillion yuan ($300 billion), or 1.2 percent of gross domestic product.

Last May the government cut value added taxes for manufacturing, transportation, construction, telecommunications and farm produce industries, followed by a cut in personal income taxes and the introduction of more deductions. Earlier this month, the State Council announced a $29-billion annual tax cut plan for small companies.

The change of approach is being driven largely by China’s large debt load, which makes funding a splurge on bridges and railways -- like that following the 2008 financial crisis -- dangerous for financial stability. Against the backdrop of slowing global growth and the trade war with the U.S. though, it’s not clear whether the new approach will be enough to stabilize the economy.

The government “has grasped the problem” after years of over-investment led to low efficiency and surging debts,” JP Morgan economists led by Zhu Haibin wrote in a report. The impact on growth could be modest though, they wrote as more vigorous tax collection can dampen the benefit and the transmission of tax cuts to the economy is uncertain.

In all, the reductions may boost gross domestic product growth by 0.46 percentage point, the economists said. The world’s second-largest economy is being hit by a confluence of slowing global growth and by uncertainty linked to the trade war -- factors that are expected to linger in the near term, at least.

Zhu Hexin, deputy governor of the People’s Bank of China, Xu Hongcai, assistant minister of the Ministry of Finance and Lian Weiliang, vice chairman of the National Development and Reform Commission briefed reporters on Tuesday in Beijing, and also pledged to support consumption of cars and household goods. China vehicle sales fell for the first time in 28 years, data released Monday showed.

“Tax reduction is almost the only way to boost personal consumption and private businesses" which are the main worries in the current slowdown, said Wang Jian, a Shanghai-based economist at Shenwan Hongyuan Group Co. "The government is very reluctant to go back to the big stimulus, and relaxing property policy is unlikely."

The nation’s augmented fiscal deficit -- taking into account quasi-fiscal efforts such as special bonds and land sales -- will jump to 11.3 percent of the economic output this year from 10.7 percent last year, JPMorgan forecast. Bloomberg reported that China will widen its fiscal shortfall earlier this month.

China also announced three rounds of import tariff cuts last year, in an effort to cut costs for consumers, and implement President Xi Jinping’s promises to open up further.

Worse-than-expected trade data published Monday underlines the risk to the economy in the first quarter. There’s little sign that the incremental stimulus so far has turned around sentiment in the real economy, which could register the slowest growth in nearly three decades in data scheduled for release next week. The government is likely to set a growth target of between 6 and 6.5 percent for this year, Reuters reported last week.

At the same time, credit data due for release later Tuesday may show some progress. China’s new yuan loans in 2018 increased 2.64 trillion yuan from the previous year to 16.17 trillion yuan, according to a statement by the PBOC before the press conference, signaling that December lending exceeded most economist estimates. - Bloomberg -

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