China to slash taxes, boost lending to shore up slowing economy

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BEIJING (Reuters) – China will cut billions of dollars in taxes and fees, increase infrastructure investment, and step up lending to small firms as the government boosts stimulus to shore up an economy growing at its slowest pace in almost 30 years.

The government is targeting economic growth of 6.0 to 6.5 percent in 2019, Premier Li Keqiang said at Tuesday’s opening of the annual meeting of China’s parliament, less than the 6.6 percent gross domestic product growth reported last year.

Sources told Reuters earlier this year that China would cut its 2019 growth target to 6.0 to 6.5 percent from the 2018 target of around 6.5 percent as global and domestic demand ebbed and a trade war with the United States heightened economic risks.

Analysts say adopting a target range rather than a single growth figure gives policymakers room to manoeuvre.

“A smaller target means the government acknowledged the downside risks that are most likely coming from trade tensions with the United States and sectors involving small- and medium-sized companies,” said Raymond Yeung, Greater China chief economist at ANZ Research.

GDP last year expanded at its slowest pace since 1990 due to the trade war and Beijing’s crackdown on financial risks, which raised corporate borrowing costs and hurt investment.

A longer-term campaign to curb polluting and low-value industries also slowed China’s vast manufacturing sector.

Speaking in Beijing’s Great Hall of the People, Li sought to assure the country the leadership would keep the world’s second-largest economy on a safe footing as risks increased.

China has ramped up the propaganda in the run-up to parliament, with state media releasing English-language videos and even a rap song praising the event as an exercise in Chinese democracy, though the legislature never rejects laws and its members are chosen for their loyalty to the Communist Party.

The annual gathering in the capital includes more than 3,000 delegates, who come from all over China, with ethnic minorities showing up in colourful traditional outfits.

To help shore up the economy, Li said China’s fiscal policy will become “more forceful”, with the government pencilling in cuts of nearly 2 trillion yuan ($298.31 billion) in taxes and fees for companies.

The tax cuts are more aggressive than the 1.3 trillion yuan delivered in 2018 and include reductions aimed at supporting the manufacturing, transport and construction sectors.

Li said China will closely monitor employment at exporting companies heavily exposed to the U.S. market and cut the value-added tax (VAT) for the manufacturing sector to 13 percent from 16 percent. VAT for the transport and construction sectors will be cut to 9 percent from 10 percent.

The government aims to create more than 11 million new urban jobs this year and keep the urban unemployment rate within 4.5 percent, in line with its 2018 goals. At the same time, it will cut the social security fees paid by companies.

DEEPER TAX CUTS, SUPPORT TO SMES

In a push to ramp up infrastructure investment, China’s finance ministry has raised the special bond issuance quota for local governments to 2.15 trillion yuan from 1.35 trillion yuan last year.

The lower tax revenue and higher government spending mean Beijing has increased its budget deficit target to 2.8 percent of GDP from last year’s 2.6 percent.

The government has also set a consumer inflation target of around 3 percent despite a recent softening in price rises to less than 2 percent, which gives Beijing some room to stimulate consumption.

Over the past year, China’s central bank has cut the reserve requirements for commercial lenders five times to spur loans to small and private companies – vital for growth and jobs.

Li said on Tuesday monetary policy would be “neither too tight nor too loose” and that the government would not resort to a flood of liquidity. Growth targets for M2 money supply, which includes cash in circulation and deposits, and total social financing this year would be in line with nominal GDP growth.

To support private and smaller firms, Li said Beijing will step up targeted cuts in the reserve requirement ratio for smaller and medium-sized banks with an aim to boost lending to small companies by large banks by more than 30 percent.

Also on Tuesday, China’s state planner said it would continue to deal with debt risks in an orderly way, resolving issues with shadow banking and local government debt without destabilising economic growth.

TRADE RISKS

Addressing one of the biggest challenges China’s economy faces, the government’s work report to parliament said it would continue to promote Sino-U.S. trade negotiations and was committed to safeguarding economic globalisation and free trade.

Separately, China’s top banking regulator said on Tuesday Beijing could “absolutely” reach an agreement with the United States on opening up its financial sector.

In recent weeks, the United States and China appear to have moved closer to a trade deal that would roll back U.S. tariffs on at least $200 billion worth of Chinese goods.

U.S. Secretary of State Mike Pompeo said on Monday he thought both nations were “on the cusp” of a deal to end their trade war.

(For a graphic on ‘China’s economic trends’ click tmsnrt.rs/2iO9Q6a)

Reporting by Kevin Yao, Lusha Zhang, Min Zhang, Stella Qiu, Hallie Gu, Muyu Xu, Cate Cadell, Xiaochong Zhang, Tom Daly, Yilei Sun, Pei Li, Norihiko Shirouzu, Se Young Lee, Yawen Chen, Dominique Patton, Judy Hua, Tony Munroe and Ben Blanchard; Writing by Ryan Woo; Editing by Shri Navaratnam and Sam Holmes

Our Standards:The Thomson Reuters Trust Principles.

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