China says ready to use more policy tools to help economy

NANTONG: A worker welds a liquefied natural gas (LNG) tank at a factory in Nantong in China’s eastern Jiangsu province. – AFP

BEIJING: The
Chinese government has additional monetary policy measures that it can take to
support economic growth this year, and will even cut “its own flesh”
to help finance large-scale tax cuts, Premier Li Keqiang said on Friday. China
has promised billions of dollars in tax cuts and infrastructure spending to
help businesses and protect jobs, as economic momentum is expected to cool
further due to softer domestic demand and the trade war with the United States.

Li’s comments
suggest Beijing is ready to roll out more stimulus measures to ensure the
economy grows within a targeted range of 6.0 to 6.5 percent. Gross domestic
product grew 6.6 percent in 2018 – the least in 28 years. Shares on Chinese
stock exchanges climbed after the government reaffirmed its commitment to
boosting growth. The yuan recovered from a three-week low against the dollar
after Li’s comments.

“Of course,
we are faced with many uncertain factors this year. We have to prepare more and
we have reserved policy room (to address uncertainties),” Li told a news
conference after the annual parliament meeting ended. “Moreover, we can
deploy quantity-based or price-based policy tools such as reserve requirements
and interest rates. This is not monetary easing but to more effectively support
the real economy.” The support measures rolled out so far are taking time
to kick in and most analysts believe activity may not convincingly stabilize
until the middle of the year.

The central bank
has 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 been
widely expected this year, after fresh data pointed to persistently soft demand
in the Asian economic giant, raising fears of a sharper slowdown.

Sources told
Reuters in February that the central bank is not yet ready to cut benchmark
interest rates to spur the slowing economy, but is likely to cut market-based
rates.

The premier said
the government would take multiple measures to lower funding costs for small
and micro firms by 1 percentage point this year. An across-the-board cut in
borrowing costs could also risk another flare-up in debt and speculative
activity like that in the wake of the 2008-9 global financial crisis.

Cutting taxes,
slitting wrists

To help finance
the tax cuts, the government would need to tighten its belt, Li said. China
will bolster its national coffers by collecting more of the profits earned by
some financial institutions and centrally-owned firms, while general
expenditure will be cut, Li said. That will collectively cover 1 trillion yuan
of the government’s planned tax cuts, he said. “Large-scale tax cuts and
fee reductions would affect the government, cutting its own flesh,” Li
said. “This kind of reform is equivalent to turning one’s blade inward and
slitting one’s wrist.”

Promised cuts in
value-added tax (VAT) for manufacturing and other sectors will take effect from
April 1, while social security fees will be reduced from May 1, Li said. The
premier announced on March 5 that the VAT for the manufacturing sector would be
cut to 13 percent from 16 percent. VAT for the transport and construction
sectors will be reduced to 9 percent from 10 percent.

Li’s comments
“reconfirm a consistent pro-growth stance, with clarity on fiscal easing
and an earlier-than-expected effective date for tax cuts,” Morgan Stanley
said 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 small
businesses that are vital for economic growth and employment. Li said the
government hopes to create 13 million jobs this year, the same as last year.

“Not
allowing the economy to slip out of a reasonable range, that is to say we will
not allow waves of layoffs,” said Li, adding the government will provide
support to firms creating the most jobs. Data on Thursday showed that China’s
survey-based jobless rate rose to 5.3 percent in February, from 4.9 percent in
December, partly due to job shedding by export-oriented companies.

Trade war

China is still
negotiating with the United States to resolve their trade frictions, Li said,
adding both sides have far more shared interests than conflicts, and it would
be “unrealistic” to decouple the world’s two largest economies.
“We hope that the consultations will be fruitful and will achieve mutual
benefit and win-win. I believe that this is also the expectation of the
world,” Li said.

A summit to seal
a trade deal between US President Donald Trump and Chinese President Xi Jinping
will not happen at the end of March as previously discussed, Treasury Secretary
Steven Mnuchin said on Thursday. Washington and Beijing have been locked in a
tit-for-tat tariff battle as U.S. presses China for an end to practices and
policies it argues have given Chinese firms unfair advantages, including
subsidizing of industry, limits on access for foreign companies and alleged
theft of intellectual property.

On Friday,
China’s parliament approved a new foreign investment law that promises to
create a transparent environment for foreign firms, though there is skepticism
about its enforceability. The law, designed to ease concerns among foreign
companies about the difficulties they face in China, will ban forced technology
transfer and illegal government “interference” in foreign business
practices. Li stressed that China did not, and would never, ask Chinese
companies to spy on other countries. His comments came after increased
international scrutiny of Chinese telecommunications giant Huawei Technologies
Co Ltd, which has been caught in the cross-fire as trade tensions ratcheted up.
– Reuters