15 March, 2019
In an effort to prop up its sluggish economic growth, the Beijing administration announced a series of measures including tax cuts and infrastructure spending last week. The announcement comes as the world’s second largest economy has been battling a slower pace of GDP growth amid the prospects of re-negotiating trade deals with the United States.
Economic growth in China has been the weakest in nearly thirty years. This is largely due to softening domestic demand and the trade wars with the United States since the Trump administration took over in 2016.
The Chinese Premier, Li Keqiang said last week that the government was targeting a growth rate of 6.0% – 6.5% for 2019. The announcement came after Keqiang gave his opening remarks at the annual meeting in the parliament.
The target is lower than the 6.6% growth rate seen in 2018. However, the GDP targets were broadly in line with the general expectations on lower domestic demand and trade war concerns which remain a major drag on the economy.
This year, China is aiming for a budget deficit target that is higher than that of the year before. They stated that the fiscal policy would be more proactive and effective. China’s Ministry of Finance claimed last week that it was aiming for a budget deficit of 2.8% of its GDP this year.
The budget deficit was slightly higher compared to 2018’s target of 2.6% of the GDP. Investors remained clued for signs of fiscal policy easing that would be aimed towards reviving growth amid uncertain global trade conditions.
We can consider the announcement as the Beijing administration stepping up its efforts to shore up the cooling economy. This comes after 2018 saw a cut back in the bank’s reserve requirements and lower taxes.
The Chinese Premier, however, cautions the parliament about the challenges facing the world’s second-largest economy. He pledged parliament’s commitment to keep it on a safe footing through the series of stimulus measures that it announced. Li said:
“The environment facing China’s development this year is more complicated and more severe.”
He warned that there would be more risks and challenges, both predictable and unpredictable. He went on to state that the economy must be prepared for a “tough battle.”
China’s administration was also seen easing its fiscal policy somewhat by announcing planned tax cuts to the tune of 2 trillion yuan or about $298.3 billion. The tax cuts were primarily aimed at the corporate sector by reduced fees and tax benefits.
Premier Li said that his administration would also monitor employment in industries at the forefront of exports that expose them to proposed U.S. trade regulations. In addition, they cut the value-added tax (VAT) for companies in the manufacturing sector. This came down from 16% to 13%, while the transportation and construction sector’s VAT will decrease from 10% to 9%.
The latest tax cut announcements come on top of the 1.3 trillion yuan tax cuts implemented in 2018. The manufacturing, transportation, and construction sectors were the primary beneficiaries of these tax cuts.
The move came after Beijing initially cracked down on the financial risks by raising corporate borrowing costs which were hurting business investment in the economy. Besides the above, the administration also cracked down on industries they considered of low value. They did this in a bid to clamp down on pollution, something that affected the manufacturing sector.
Following the announcements, some analysts noted that the move to target a GDP range of 6.0% – 6.5% would give Chinese officials room to maneuver its fiscal policies. However, the planned fiscal cuts are a strong signal that officials were concerned about the pace of GDP growth.
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