July 24, 2018 / 4:38 AM / 3 months ago

Breakingviews - China’s fiscal nudge betrays growth jitters

HONG KONG (Reuters Breakingviews) - A fiscal nudge in China betrays some underlying growth jitters. The government is adding corporate tax cuts and other steps to support an economy that seems to be humming along. Bureaucratic tussles that preceded the policy changes suggest speed is as much a priority as rebalancing growth.

A woman rides past the headquarters of the People's Bank of China (PBOC), the central bank, in Beijing, April 3, 2014. The rare and dramatic slide in the yuan exchange rate that has shaken the outlook for the currency is unlikely to last long as trade rebounds and capital inflows resume. Picture taken April 3, 2014. REUTERS/Petar Kujundzic

The State Council said on Monday that the government would extend a tax programme originally designed for small tech firms to all companies, creating some 65 billion yuan ($9.6 billion) of savings on top of 1.1 trillion yuan of reductions in levies and fees already planned for this year. Beijing also intends to accelerate issuance of 1.35 trillion yuan of special local bonds and a fund for lending to small companies.

A surprisingly bitter, and public, fight informed the decision. One official from the People’s Bank of China on July 13 accused the Ministry of Finance of not doing enough to help the economy, pointing to a shrinking national deficit. A pseudonymous official responded by defending the agency’s policy and blasting the central bank’s lack of progress on issues such as currency reforms. Each also accused the other of trying to shift responsibility for the country’s debt problem.

The outcome indicates that the central bank’s case prevailed. In reality, though, both institutions are rapidly moving toward a pro-growth stance. Guo Shuqing, the top banking regulator and party secretary at the PBOC, last week called for more credit to be made available for small enterprises, while officials injected eyebrow-raising sums into the financial system this week.

Despite recent pledges to the contrary, growth targets are also clearly on the agenda. President Xi Jinping said last year that officials are prioritising “quality” economic expansion. That implied a slowdown would be tolerated to slash debt and undertake reforms.

China’s GDP increased by 6.7 percent in the second quarter, down a tick from earlier in the year but above the official aim of “around” 6.5 percent. Yet officials already seem to be worried. And with trade tensions on the rise, it’s easy enough to expect more easing efforts. The only lingering question is whether it will amount to a “fine-tuning” or outright stimulus.

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