Economists surprised by extent of fiscal measures to bolster...

Economists surprised by extent of fiscal measures to bolster Chinese economy
Chong Koh Ping China Correspondent, Singapore's Straits Times.
PUBLISHED MAR 5, 2019, 8:04 PM SG

BEIJING - China has cut its growth target for this year to between 6 per cent and 6.5 per cent as the economy expands at the slowest pace in nearly three decades. While it was widely expected that the country would roll out more stimulus to prop up the economy, economists told The Straits Times that they were surprised at the extent of what Beijing was prepared to do.

At the opening of China's national Parliament on Tuesday (March 5), Chinese Premier Li Keqiang unveiled a stimulus package that involved cutting trillions of yuan in taxes and fees, stepping up infrastructure spending and increasing loans to small firms."The size of the tax cuts is quite big," said OCBC economist Tommy Xie.

The package that Mr Li outlined included a plan to cut nearly two trillion yuan (S$404 billion) in taxes and fees for businesses, up from the 1.3 trillion yuan last year.Notably, export-oriented manufacturers received a generous tax cut, which would see their value-added tax (VAT) reduced from 16 per cent to 13 per cent. VAT for  the transport and construction sectors was cut to 9 per cent from 10 per cent. Analysts said a larger tax cut was aimed directly at manufacturers, as they were the key victims of the trade war with the United States."The weakening of the economy is largely due to the trade war, and the manufacturers are first in line to be hit," said ING economist Iris Pang.Also, the manufacturing sector was responsible for a lot of jobs, said Mr Xie, and ensuring stability in the employment market was another key concern for the government.

Such massive tax cuts could also boost confidence and give the firms and individuals more spending power, which hopefully could lead to higher growth, he added. But Ms Pang thinks such policies favouring manufacturers may not directly help boost consumption, which is a major driver of the economy.

Economists also pointed out that the quota for local government special bonds, usually set aside for infrastructure spending, had been raised to 2.15 trillion yuan, nearly doubling the quota set in 2018. "This came in towards the higher end of the consensus range, which was encouraging, as we see it providing additional buffer to the economy," said Standard Chartered Bank economist Kelvin Lau. He viewed Beijing's choice to "lean heavily" on fiscal policy to support growth as a sign that the government was still ready to prepare for the worst even though recent news headlines about the trade talks between China and the US had been more positive for the chances of a deal.

In the light of the trade war, where one of the US' complaints was a lack of market access for its companies, observers had expected some new announcements in Mr Li's speech. But on Tuesday, speaking to an assembly of nearly 3,000 lawmakers, Mr Li offered only some vague pledges to further relax market access and open up more sectors for wholly foreign-owned companies. He assured foreign companies that they would be treated as equals of Chinese companies and added that China would further align its policies with internationally accepted trade rules, enhance policy transparency and consistency in implementation.

Economists say they viewed Mr Li's assurances as a precursor of more concrete announcements to come, either during the course of the 10-day parliamentary session or in the trade agreement with the US."These will be items to be included in the trade agreement, if there is any, eventually," said Ms Pang. "If Premier Li were to mention them in the work report, then he can't undo it later." She added: "From the tone of the work report, we can expect China to open up quite a lot."