CHINA: Lower Taxes and Boosts to Fight Lowest GDP Growth in 30 Years

FAHAD ALSUDAIS WRITES– On March 5, China’s Prime Minister Li Keqiang unveiled plans to introduce tax cuts and credit reform measures intended to sustain and fuel Chinese private investment, job growth and domestic consumption, without relying heavily on US export revenues.

In particular, the manufacturing sector is expected to see a 3% decrease in what it owes to the Chinese national government on Value-Added Taxes (VAT), while the transportation and construction sectors would see a 1% decrease in their respective VAT bills, reports Japan’s Asahi-Shimbun.

The nationwide VAT system has largely replaced the gross yearly revenue, whereby Chinese firms are taxed only on the value added to a transaction or production phase. This in turn encourages Chinese firms to gain more through the hiring and retention of China’s own innovation-driven, higher-skilled workers, according to China Briefing.

With Li’s decreed tax cut on an already streamlined VAT system, China’s manufacturing sector alone will have an additional US$90 billion that can be use to improve competitive operations and staffing, as noted by Bloomberg News. Additional 2019 tax cuts and business fee waivers, even to other Chinese business sectors, will immediately result in $298.31 billion that can significantly boost private sector capitalization as well as increase worker wages and disposable income-based, domestic spending cash for China’s population of one billion.

What’s more, commercial bank loans to Chinese start-ups and small-to-medium sized enterprises (SMEs) in various industries will likely increase by 30% this year, since the Chinese government is planning to roll out further cuts in interest rates and lower the reserve ratio requirement for banks.

Li’s announcement came in response to a GDP growth rate forecast of just 6.0% to 6.5% this year— the lowest China’s economy has seen since 1990, when its GDP was only 3.9% (but in the fiscal years since, the GDP ranged between a low of 6.7% in 2016 to a high of 14.2% in 1992, according to trackings of the World Bank).

The dismal 2019 GDP forecast is apparently linked to progressively decreasing export orders from China’s long-time trade partner, the USA, and trade tariffs on an expanding array of Chinese goods, China Briefing reports. With the conservative Republican party-led US government insisting that China correct its allegedly unfair trade practices undermining US worker interests, the Chinese economy has lost approximately US$250 billion in export revenues. With US-China trade talks still ongoing, an additional hit of US$267 billion on Chinese exports to the USA is expected this year.

These developments in turn have led to a drop in Chinese export manufacturers’ orders by as much as 50%, since their long-time US buyers have been turning to alternate trade partners like Vietnam and Cambodia — not just to avoid tariffs but to take advantage of lower wage costs compared to those of the more industrialized and urbanized China, as reported by Forbes.

The same report also points out that, in 2018, the rapid drop of U.S orders for Chinese exports have had a negative domino effect throughout the Chinese economy—specifically, the small-to-medium sized enterprises (SMEs) that provide services and consumer goods to Chinese factory workers endured double-digit rate layoffs. In addition, 24 of China’s 31 provincial governments have significantly lowered their economic growth targets.

A promising trend for Chinese manufacturing, though, is that despite all this there was a slight increase in Chinese factory goods for February 2019, CNBC analyzed. This shows that China’s diverse services sector and other SMEs have adapted well to budget-conscious and increasingly import-averse Chinese consumers. After all, China has imposed its own retaliatory tariffs against the USA, as Chinese consumers did not buy US$110 billion worth of goods.

Overall, these proposed tax cuts, business fee waivers, and generous lending terms are designed not just to help it survive the loss of US export revenue but to help China shift away from labor-intensive, low-value export goods processing and into high-value, innovative technology-driven services for its own people as well as other non-US markets.

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