March 27, 2023

China counts on tax cuts to buoy business in tough economic times ahead

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By Jane Cai From South China Morning Post

China’s President Xi Jinping (left) and Premier Li Keqiang arrive for the opening session of the National People’s Congress at the Great Hall of the People in Beijing on Tuesday. Photo: AFP
  • As growth slows and the trade war bites, Beijing aims to reduce levies on key sectors such as manufacturing to keep people employed and ensure social stability

Chinese Premier Li Keqiang delivered a sombre outlook for the year ahead but offered hope in the form of cuts in fees and taxes as he presented the central government’s annual work report to the country’s political elite in Beijing on Tuesday.

On the opening day of the National People’s Congress, Li referred to “risks”, “pressure” and “challenges” more than three dozen times in total, underscoring the hardship China expects in the fallout from slowing economic growth and its trade war with the United States.

The government is counting on lower taxes on business to give the economy a lift, a sharp contrast to a decade ago when the authorities resorted to stimulus to steer the world’s second-biggest economy through troubled waters.

The report included 30 mentions of reductions in taxes, costs and fees, with Li forecasting that planned cuts in areas such as employer contributions to pensions could save businesses as much as 2 trillion yuan (US$298 billion) this year, compared to the 1.3 trillion yuan in savings Beijing said were made last year.

“There will be key measures to relieve companies’ tax burdens and invigorate the market,” the premier said. “We will release the water to nurture the fish.”

The cuts are part of a bigger effort to address “graver and more complex” risks and challenges of a “both predictable and unpredictable” nature, according to the work report.

Li also said Hong Kong and Macau would develop and progress with mainland China as they seized opportunities under the nation’s trade and integration plans.

He made no mention of the pro-independence campaign in Hong Kong, choosing instead to say Beijing will uphold the high autonomy of the special administrative region.

“We will help Hong Kong and Macau access the opportunities from the ‘Belt and Road Initiative’ and the Greater Bay Area, and maximise their potential for further integration with the mainland,” he said. “We believe that Hong Kong and Macau can seek common development with the mainland, and maintain long-term prosperity and stability.”

But he made clear that Beijing would not tolerate Taiwanese independence – Beijing would promote cross-strait cultural exchanges, but would stick to the one-China principle, he said.

As he focused on the year ahead, the premier urged the public to be “prepared to fight tough battles”.

As such, the government has set the economic growth target in a range of 6.0 to 6.5 per cent, compared to last year’s target of around 6.5 per cent. China’s economy grew at 6.6 per cent in 2018, the lowest rate since 1990.

For the first time, the government named employment – a key factor in social stability – as the priority for macro policy.

It also announced a 3 percentage point cut in the value-added tax rate (VAT) for manufacturers to 13 per cent and a 1 percentage point cut in the VAT rate for construction and transport companies to 9 per cent.

The goal is to help domestic businesses, especially the manufacturing sector, which are vital for jobs.

“[These cuts] could help support investment recovery in both the manufacturing and services sectors,” HSBC economists wrote in a research note.

Manufacturing accounts for more than two-thirds of all VAT payments and economists said a tax cut of 3 percentage points in this bracket would bolster China’s efforts to upgrade industry.

The VAT rate cut in the manufacturing, transport and construction sector will generate tax savings of around 800 billion yuan, according to HSBC estimates.

Other measures outlined in the report include lower requirements for employers to pay into pension funds, cuts in road tolls and reductions in utility prices.

Electricity rates for industry will be cut by 10 per cent, broadband internet fees will shrink by 15 per cent and mobile internet fees will be 20 per cent lower, according to the report.

Larry Hu, chief China economist at Macquarie Capital, said the tax cuts were positive “but we don’t want to get too excited as the fiscal deficit target set rather small room for potential cuts”.

“We don’t see the tax cut turning the economy around. It never did in the past,” Hu said.

The fiscal deficit is set at 2.8 per cent of GDP, or 2.76 trillion yuan. The increase of 380 billion yuan from last year is deemed by many analysts as insufficient to accommodate substantial tax cuts.

“While popular, tax cuts tend to be less effective in boosting economic growth than government expenditure increases,” Louis Kuijs, the Hong Kong-based head of Asia research for Oxford Economics, said.

Cheng Shi, chief economist with ICBC International, said the VAT cut pointed to China’s “strategic focus” on developing high-end manufacturing.

China will rely heavily on innovation to upgrade traditional manufacturing industries and bolster the economy, according to the government report.

But there was no mention of “Made in China 2025”, an industrial strategy to promote self-sufficiency and global prowess in core technologies. The programme was among the key tasks listed in last year’s work report for 2018, but dropped this year amid concerns overseas about China’s rise as a technology powerhouse.

While asked by the South China Morning Post about the absence of the strategy, Huang Shouhong, head of the work report’s drafting panel, said space was limited in the report and there was nothing special about policies “being mentioned last year but not this year”.

“Nevertheless, facilitating high-quality growth in China’s manufacturing sector is a must to upgrade and transform the Chinese economy,” Huang said.

Additional reporting by Mai Jun

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