China: Rolling out Tax Cuts

Published on November 10, 2015

The weak trade data out of China over the weekend has re-ignited market concerns over the depth of China’s economic slowdown, which contributed to a sell-off on Monday as the global equity markets come to grips with a Federal Reserve that is almost certain to hike rates at its upcoming mid-December meeting.

*** In response to a continued need for economic stimulus, from what we understand, China’s Ministry of Finance will soon roll out the targeted tax cuts to State Owned Enterprises worth approximately 1 trillion Yuan that it prepared as an “if needed” extra dose of stimulus at the bequest of President Xi Jinping in September (see SGH 9/17/2015, “China: Additional Fiscal Stimulus if Needed”). ***

*** Those measures, while not yet publically announced, were formally adopted at the Fifth Plenary Session of the 18th Communist Party of China Central Committee meeting on October 26-29 (see SGH 10/30/15, “China: New Targets and Limited Stimulus”). Our understanding is that the Ministry of Finance will now arrange 300 billion Yuan worth of tax cuts for SOEs in November, with another 350 billion to follow in December. ***

*** These measures are intended to improve the SOEs’ financial condition, reduce potential financial risk from this sector, and further boost the government’s ability to implement reforms down the road. We believe the remainder of the approved tax cuts will be rolled out in the beginning of 2016. ***

While China’s leadership is looking to cut back on its intervention in markets over time, it is nevertheless committed to ensuring economic conditions are in place to manage a transition to a “new normal” economy that is growing at a slightly slower speed – an annual GDP growth between 6.5% and 7% – but with a “higher quality” of growth.

Their expectation is that the moderate downside adjustment to growth targets will leave room for more reforms. And along those lines, Beijing is understood to be planning to implement further, and stronger, “proactive” fiscal policies in 2016 than it did in during 2015.

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