China says it needs ‘stronger’ responses to support its slowing economy

  • Chinese Premier Li Keqiang, in his opening remarks at the annual National People’s Congress, announced cuts in taxes and fees worth nearly 2 trillion yuan ($289.28 billion).
  • Li also said monetary policy will neither be too tight nor too loose, and pledged to keep exchange rate of the Chinese yuan stable.
  • The Chinese government budget deficit in 2019 is expected to widen to 2.76 trillion yuan, representing around 2.8 percent of the country’s gross domestic product, Li said.

Chinese Premier Li Keqiang said on Tuesday that risks threatening the world’s second-largest economy may warrant “stronger mitigating action” as growth is expected to slow further this year.

Beijing is attempting to maintain stable growth, while reducing the economy’s reliance on debt. At the same time, China and the U.S. have been embroiled in a trade war that saw the world’s two largest economies slap tariffs on each other’s imports — which analysts said partly hurt business activity worldwide.

China hasn’t been spared, Li said at the opening of the annual National People’s Congress. He announced the official economic growth target is 6 percent to 6.5 percent this year, down from the 6.6 percent expansion in 2018.

“The many risks and potential problems that have built up over the years demand stronger mitigating action, but in doing so we need to observe objective laws and take the right approach,” said Li, according to the official English version of his prepared remarks.

“Our approach must be firm, controllable and systematic, and it should be applied with the right degree of intensity,” he added.

During his opening speech, Li announced cuts in taxes and fees worth nearly 2 trillion yuan ($289.28 billion). In particular, the premier said the value-added tax rate for the manufacturing sector will be reduced from 16 percent to 13 percent, while the duty for transportation and construction will be cut from 10 percent to 9 percent.

In addition, Li announced plans to increase the country’s infrastructure financing: Around 2.15 trillion yuan worth of local government special bonds will be issued this year to meet spending needs for key projects. A special bond is a type of debt asset, which Beijing created after an earlier crackdown on non-bank lending, so projects such as railways and roads can still secure funding.

Partly due to greater fiscal support to the economy, the Chinese government budget deficit in 2019 is expected to widen to 2.76 trillion yuan, representing around 2.8 percent of China’s gross domestic product, Li said. The country’s 2018 budget deficit accounted for around 2.6 percent of GDP, according to official figures.

“These arrangements meet the demands of spending across various areas, send a signal of proactive and vigorous fiscal policy, help to better guide enterprise expectations, more strongly boost market confidence, and also take into consideration the importance of keeping policy options open in case there is a need to respond to risks in the future,” said the Chinese premier.

Analysts have largely expected China to cut taxes as the ongoing trade war takes a toll on its economy. Last year, Beijing cut taxes and fees worth 1.3 trillion yuan and allowed local governments to issue 1.35 trillion yuan in special bonds to fund key projects.

Avoiding ‘a deluge of stimulus’

China has over the past year implemented a series of monetary stimulus measures to encourage banks to lend to small and medium-sized enterprises. Those measures include a reduction to the amount of reserves that banks must hold.

Li said Chinese authorities will continue to use monetary policy tools, especially those targeted at small and medium-sized lenders so that they can provide loans to more private companies.

The premier also said monetary policy will neither be too tight nor too loose, and pledged to keep the exchange rate of the Chinese yuan stable.

China will “refrain from using a deluge of stimulus policies,” Li said, adding that China’s “prudent monetary policy will be eased or tightened to the right degree” in order to keep major economic indicators “within an appropriate range.”

Source: CNBC