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China Tax Reform & Stimulus Package August 6, 2018
What we saw right now is that Beijing is walking on a tightrope to push ahead with deleveraging in the face of a trade war while maintaining decent growth with rounds of fiscal stimulus.
Author : Sherman Tam Cheng Wei


 China Tax Reform & Stimulus Package

What Has Been Done

In order to improve business sentiment and bolster domestic companies’ competitiveness as an investment destination, China authorities have revised the Value Added Tax (VAT) regime since May 2018 as part of a tax reduction package amounting to RMB 400 billion this year:

  • Manufacturing Sector – reduced to 16% (previously 17%)

  • Transportation, Construction, Telecommunication & Agricultural – reduced to 10% (previously 11%)

China will adopt a more vigorous fiscal policy to help tackle external uncertainties without resorting to strong policy stimulus. Source: South China Morning Post.

Fiscal Measures

Tax Cut

  • Tax cut of RMB 65 billion by expanding a preferential policy for all companies to spend more on R&D, on top of an initial goal of cutting taxes and fees by RMB 1.1 trillion (USD 175 billion) this year;

  • Proposed Income Tax Reform (expected to be effective from October 2018) where almost all individual taxpayer will receive a tax cut.

Table 1: Proposed Income Tax Regime

  Current Tax Brackets Proposed Tax Brackets
  Monthly Taxable Income Monthly Taxable Income
Tax Rate (%)
Lower Bound
Upper Bound
Lower Bound
Upper Bound
3 -
1,500
- 3,000
10 1,500 4,500 3,000 12,000
20 4,500 9,000 12,000 25,000
25 9,000 35,000 25,000 35,000
30 35,000 55,000 35,000 55,000
35 55,000 80,000 55,000 80,000
45 80,000 - 80,000 -

Source: China International Capital Corp, iFAST Compilations. Data as of 1 August 2018.

Table 2: Tax Exemption Criteria

 
Current
Proposed
Tax Exemption
3,500
5,000

Source: China International Capital Corp, iFAST Compilations. Data as of 1 August 2018.

Liquidity Injection

  • RMB 502 billion (USD 74 billion) has been injected into China banking system using its medium-term lending facility (this policy tool was created back in 2014 to provide loans to commercial banks for 3 to 12 months);

  • PBoC has directed commercial banks to use the facility to invest in bonds graded AA++ or lower;

  • A signal that the central bank is intervening directly in the bond market to stimulate economy.

Infrastructure Spending

  • Issuing RMB 1.4 trillion (USD 207 billion) in special bonds for local governments, designated to be spent on infrastructure projects (69% increase over last year’s RMB 800 billion);

  • The policy comes at a time where slowing infrastructure spending has dragged down the growth of fixed-asset investment, a key driver of China’s economy. It is intended to bolster infrastructure investment;

  • A signal that the central bank is intervening directly in the bond market to stimulate economy.

Main Takeaway

China’s tax reform and stimulus package is not a policy-reverse of deleveraging campaign but a fine-tuning move to boost consumption, in line with the target to increase the contribution of consumption to GDP. It also aims to bolster infrastructure investment during the period where China tighten controls on local government borrowing which has slowed the government-driven sector.

To be sure, we don’t expect aggressive policy loosening is on the card given Beijing’s deleveraging pledge and fears of doing so will further hit the Chinese Yuan thus triggering more capital outflow. What we saw right now is that Beijing is walking on a tightrope to push ahead with deleveraging in the face of a trade war while maintaining decent growth with rounds of fiscal stimulus.

See: FSM Fund Choice: CIMB-Principal China Direct Opportunities Fund


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