Wed, Mar 06, 2019 page10

• China lowers growth target, cuts taxes

  PRODUCTION PUSH: Premier Li Keqiang announced VAT cuts to the top brackets equivalent to 800 billion yuan that are aimed at benefiting the manufacturing sector

  • Bloomberg
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  China lowered its goal for economic growth and announced a major tax cut, as policymakers seek to pull off a gradual deceleration while grappling with a debt legacy and a trade dispute with the US.

  The GDP growth target released yesterday morning in Chinese Premier Li Keqiang’s (李克強) annual work report to the Chinese National People’s Congress was set at a range of 6 to 6.5 percent for this year.

  The shift to a band from the previous practice of using a point figure gives policymakers room for maneuvering and compares with last year’s “about” 6.5 percent goal.

  The lower bound of the GDP target would be the slowest pace of economic growth in almost three decades, a consequence of China’s long deceleration as policymakers prioritize reining in debt risks, cleaning up the environment and alleviating poverty.

  Warning of a “tough economic battle ahead,” Li announced tax cuts worth 2 trillion yuan (US$298.4 billion) for the year.

  “These targets accommodate structural deceleration, but not cyclical, which means that policymakers will need to flex their muscles to stimulate the economy,” said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA in Hong Kong. “It’s good news for the market in the short term, bad news for China in the medium term, as more leverage will need to be piled up.”

  Chinese stocks continued rising yesterday after climbing to their highest level since June last year on Monday, as signs of progress in trade talks buoyed investors. Other Asian indexes fell after the S&P 500 Index dropped the most in a month.

  Economists surveyed by Bloomberg see output growth slowing to 6.2 percent this year from 6.6 percent last year, before easing further next year and in 2021.

  The report pledged to keep China’s leverage ratio “basically stable” this year.

  Policymakers are trying to rekindle lending to the private sector while avoiding an accelerated run-up in debt, with the total debt pile now approaching 300 percent of GDP.

  Unlike in previous years, there were no targets for retail sales growth or fixed-asset investment in the reports.

  In his speech, Li said that the government would “improve the exchange-rate mechanism,” phrasing that was missing from the reports last year and in 2017.

  He also pledged to keep the currency “generally stable and at an adaptive and balanced level.”

  A cut of 3 percentage points to the top bracket of the value-added tax (VAT) was announced in a move aimed at benefiting the manufacturing sector. That plan was reported by Bloomberg News on Monday.

  In addition, a 1 percentage point cut to the 10 percent VAT bracket was announced. Combined, the VAT cuts are equivalent to as much as 800 billion yuan and would boost corporate earnings, Morgan Stanley said.

  The target budget deficit was set at 2.8 percent of GDP, versus last year’s goal of 2.6 percent.

  The report pledged a “noticeable decrease” in the tax burdens of major industries, with the total of reductions in tax and social security fees coming to 2 trillion yuan.

  The more modest growth target paired with further targeted stimulus measures typifies the government’s attempt to steady the economy after a bruising year last year and marks a shift from last year’s edition, when the emphasis was on reining in financial risks and trimming budget outlays.

  Maintaining employment was given a higher priority than last year.

  The report reiterated that monetary policy would remain “prudent,” while fiscal policy would be “proactive, stronger and more effective.”

  Further cuts to the required reserves ratio for smaller banks are planned, the work report said.

  The US and China are close to a trade deal that could lift most or all US tariffs as long as Beijing follows through on pledges ranging from better protecting intellectual property rights to buying a significant amount of US products.

  While that would remove one cloud hanging over the economy, debt risks and signs of weakening consumption at home remain.
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