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Economic Update

2019/03/07

Beijing Steps Up Economic Stimulus

Mainland China has lowered its GDP growth target for 2019 to a range of 6-6.5%, compared to “around 6.5%” in 2018, as announced in Premier Li Keqiang’s report delivered at the opening of the annual session of the 13th National People's Congress in Beijing.

The announcement came after the Mainland registered its slowest economic growth in almost three decades last year (Figure 1). As uncertainty surrounding the China-U.S. trade war continues to concern businesses, it is not surprising that the Chamber’s roundtable luncheons on the subject recently have attracted a full house.


Source: International Monetary Fund

To support the economy, which is on a slowing trajectory, the Central Government announced a fiscal package including cuts in taxes and other fees that targets to save businesses about 2 trillion RMB. Among the measures, the value-added tax rate that covers the manufacturing sector will be reduced from 16% to 13%.

This major tax cut is good news for manufacturers as industrial profits in the Mainland have come under pressure, as reflected by the weak producer price index (PPI). In January, PPI edged up 0.1% from a year earlier, the slowest since September 2016, indicating that manufacturers are unable to raise prices.

The quota for local governments’ special bond issuance is set at 2.15 trillion RMB, much higher than 1.35 trillion RMB last year.

As for monetary policy, Premier Li said that China would continue to carry out a prudent policy. Although the dovish turn of the Federal Reserve should provide more room for the People’s Bank of China (PBoC) to manoeuvre, high levels of corporate debt and the political reasons to avoid an RMB slide during negotiations with the U.S. are still placing constraints on PBoC to easing monetary policy aggressively.

Any measure will take time to have an impact on the real economy. For the Chinese economy, the second half of 2019 is likely to be better than the first half, thanks to the Central Government’s supportive measures.

However, the pro-growth policies will not come without cost. For instance, fiscal deficit is expected to widen, albeit modestly, to 2.8% this year from last year’s 2.6%. The deleveraging campaign over the past few years to curb excess credit might come to a halt or even reverse course. The world has become more unpredictable lately, but it is more certain that Beijing’s balancing act has become more difficult than ever.

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