BEIJING: TheChinese government has additional monetary policy measures that it can take tosupport economic growth this year, and will even cut "its own flesh"to help finance large-scale tax cuts, Premier Li Keqiang said on Friday. Chinahas promised billions of dollars in tax cuts and infrastructure spending tohelp businesses and protect jobs, as economic momentum is expected to coolfurther due to softer domestic demand and the trade war with the United States.
Li's commentssuggest Beijing is ready to roll out more stimulus measures to ensure theeconomy grows within a targeted range of 6.0 to 6.5 percent. Gross domesticproduct grew 6.6 percent in 2018 - the least in 28 years. Shares on Chinesestock exchanges climbed after the government reaffirmed its commitment toboosting growth. The yuan recovered from a three-week low against the dollarafter Li's comments.
"Of course,we are faced with many uncertain factors this year. We have to prepare more andwe have reserved policy room (to address uncertainties)," Li told a newsconference after the annual parliament meeting ended. "Moreover, we candeploy quantity-based or price-based policy tools such as reserve requirementsand interest rates. This is not monetary easing but to more effectively supportthe real economy." The support measures rolled out so far are taking timeto kick in and most analysts believe activity may not convincingly stabilizeuntil the middle of the year.
The central bankhas cut banks' reserve requirement ratios (RRR) five times over the past year,with a two-stage RRR cut in January releasing a total of 1.5 trillion yuan($223.23 billion) into the financial system. Further cuts in RRR had beenwidely expected this year, after fresh data pointed to persistently soft demandin the Asian economic giant, raising fears of a sharper slowdown.
Sources toldReuters in February that the central bank is not yet ready to cut benchmarkinterest rates to spur the slowing economy, but is likely to cut market-basedrates.
The premier saidthe government would take multiple measures to lower funding costs for smalland micro firms by 1 percentage point this year. An across-the-board cut inborrowing costs could also risk another flare-up in debt and speculativeactivity like that in the wake of the 2008-9 global financial crisis.
Cutting taxes,slitting wrists
To help financethe tax cuts, the government would need to tighten its belt, Li said. Chinawill bolster its national coffers by collecting more of the profits earned bysome financial institutions and centrally-owned firms, while generalexpenditure will be cut, Li said. That will collectively cover 1 trillion yuanof the government's planned tax cuts, he said. "Large-scale tax cuts andfee reductions would affect the government, cutting its own flesh," Lisaid. "This kind of reform is equivalent to turning one's blade inward andslitting one's wrist."
Promised cuts invalue-added tax (VAT) for manufacturing and other sectors will take effect fromApril 1, while social security fees will be reduced from May 1, Li said. Thepremier announced on March 5 that the VAT for the manufacturing sector would becut to 13 percent from 16 percent. VAT for the transport and constructionsectors will be reduced to 9 percent from 10 percent.
Li's comments"reconfirm a consistent pro-growth stance, with clarity on fiscal easingand an earlier-than-expected effective date for tax cuts," Morgan Stanleysaid in a note, adding that it expects improved growth from the second quarter.Beijing's tax cut efforts have focused on the manufacturing sector and smallbusinesses that are vital for economic growth and employment. Li said thegovernment hopes to create 13 million jobs this year, the same as last year.
"Notallowing the economy to slip out of a reasonable range, that is to say we willnot allow waves of layoffs," said Li, adding the government will providesupport to firms creating the most jobs. Data on Thursday showed that China'ssurvey-based jobless rate rose to 5.3 percent in February, from 4.9 percent inDecember, partly due to job shedding by export-oriented companies.
Trade war
China is stillnegotiating with the United States to resolve their trade frictions, Li said,adding both sides have far more shared interests than conflicts, and it wouldbe "unrealistic" to decouple the world's two largest economies."We hope that the consultations will be fruitful and will achieve mutualbenefit and win-win. I believe that this is also the expectation of theworld," Li said.
A summit to seala trade deal between US President Donald Trump and Chinese President Xi Jinpingwill not happen at the end of March as previously discussed, Treasury SecretarySteven Mnuchin said on Thursday. Washington and Beijing have been locked in atit-for-tat tariff battle as U.S. presses China for an end to practices andpolicies it argues have given Chinese firms unfair advantages, includingsubsidizing of industry, limits on access for foreign companies and allegedtheft of intellectual property.
On Friday,China's parliament approved a new foreign investment law that promises tocreate a transparent environment for foreign firms, though there is skepticismabout its enforceability. The law, designed to ease concerns among foreigncompanies about the difficulties they face in China, will ban forced technologytransfer and illegal government "interference" in foreign businesspractices. Li stressed that China did not, and would never, ask Chinesecompanies to spy on other countries. His comments came after increasedinternational scrutiny of Chinese telecommunications giant Huawei TechnologiesCo Ltd, which has been caught in the cross-fire as trade tensions ratcheted up.- Reuters