January 29, 2019 / 6:34 AM / 3 months ago

Breakingviews - China’s next stimulus plan looks to the tax man

People visit heavy machinery of Caterpillar at Bauma China, the International Trade Fair for Construction Machinery in Shanghai, China November 27, 2018. Picture taken November 27, 2018. REUTERS/Aly Song

HONG KONG (Reuters Breakingviews) - China’s next phase of stimulus depends on the tax man. Industrial bellwether Caterpillar warned this week of cooler mainland demand for its diggers and trucks - a reminder that Beijing will not be building its way out of economic trouble. Monetary policy has remained cautious too. That leaves efforts to reduce the fiscal burden as the best way to get companies spending again.

    Alibaba Executive Vice Chairman Joe Tsai has been among those dismissing the idea that China’s current malaise can be tackled with old-school tactics: “Just turning on the liquidity and using monetary policy to grow the economy is not going to work,” he said at a Breakingviews event on Friday. “The place to focus on is fiscal policy.”

    The People’s Bank of China may very well agree. Regulators have repeatedly lowered the amount banks need to keep in reserve, and have invented new mechanisms to spur lending. That includes offering lower rates to banks extending credit to small companies, and allowing perpetual bonds to be swapped for low-risk central bank bills. But that hasn’t boosted investment much, and the PBOC has otherwise stayed cautious. Investors betting on aggressive moves to support the property sector, for example, or another round of aggressive infrastructure spending in the mould of what was seen after the 2008 financial crisis, have been disappointed.

     The Ministry of Finance has also kept a tight rein on state coffers, planning a deficit equivalent to 2.8 percent of GDP for this year, compared to 2.6 percent in 2018. That’s understandable: local governments already owe nearly $6 trillion, according to estimates from S&P. They rely heavily on land sales to meet obligations, but property investment is weakening and land auctions have dropped off. Tax cuts would erode these finances further.

Fiscal incentives also take time to filter down: a personal income cut worth an annual $47 billion that came into effect in China in October has yet to translate into better consumption figures.

Yet there may be little alternative. Beijing is holding back on hopes the current slowdown will prove manageable, allowing it to avoid radical measures and keep cleaning up balance sheets. But if taxes are the next lever to be pulled, better to pull it soon.    

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