China Thrives on Tax Cuts

China Thrives on Tax Cuts

The epidemic-induced lockdowns loomed over China's economy in the first half of 2020, but with quick emergency response and government-aided stimulus package, the country's economy roared back.

Massive tax cuts and increased government spending have helped the economy recover faster. The market is also closely watching over the country's fiscal policy in 2021: Would the country withdraw its financial support straight away? And how strong would its economic recovery be?

The country's annual key meeting on economic work has boosted market confidence. China would keep its macroeconomic policies consistent next year by not making any "sudden turns" as the foundation of its economic recovery is "not yet solid." That means the government will stick to its proactive fiscal policy in 2021.

OPTIMIZED FISCAL SPENDING

The World Bank (WB) pointed out in its latest report on China's economy that the country's gross domestic product is expected to grow 2 percent in 2020 and further rebound to 7.9 percent in 2021.

The bank has attributed the "faster than expected" recovery of economic activities to China's effective epidemic-control strategy, strong policy support and resilient exports.

According to China's tax authorities, tax and fee cuts in the first 11 months of 2020 totaled 2.37 trillion yuan (about 363.22 billion U.S. dollars), out of which 1.64 trillion yuan was saved under the preferential tax and fee measures unveiled in 2020 to bolster economic development and COVID-19 containment.

Besides, buoyant fiscal spending was seen in social welfare, health care and education sectors.

In the first 11 months of 2020, the country's fiscal expenditure grew by 0.7 percent from a year earlier to over 20.78 trillion yuan, with positive year-on-year growth seen in social security and employment, education, as well as hygiene and health sectors.

Considering the sound economic recovery, analysts expect that the focus of fiscal spending would shift from epidemic prevention to infrastructure construction.

China could use its fiscal space to hedge against downside risks to growth, said the WB, "but the focus should shift from traditional infrastructure to more social spending and green investment."

In keeping with one of the primary tasks listed in the annual economic meeting, China will adopt a fiscal policy that offers stronger financial guarantees to major national strategies as well as promote science and technology innovations, with more investment expected in the digital economy and new infrastructure sectors.

Zhang Yiqun, a scholar in financing and taxation, believes that more financial support will go to fields such as new infrastructure, 5G and chips.

At a recently-held national fiscal work conference, Finance Minister Liu Kun stressed giving priority to improving investment structures, encouraging consumer spending, and facilitating a new-type of people-centered urbanization.

Efforts will be made to guarantee the people's well-being, improve policy support for agriculture, rural areas and farmers, as well as for rural vitalization, Liu said.

The country will also spend more on pollution control to support green development, he added.

SUSTAINABLE GROWTH AMID RISK PREVENTION

In 2020, China raised its deficit-to-GDP ratio from 2.8 percent in 2019 to above 3.6 percent, moving away from its longstanding practice of a ceiling of 3 percent.

In the first 11 months of last year, bonds issued by local governments jumped 44.76 percent year on year to 6.26 trillion yuan, according to the finance ministry.

The total outstanding debt of the local governments stood within the official limit at 25.56 trillion yuan by the end of November last year, data by the ministry showed.

Impacted by COVID-19 and downward pressure of the economy, local governments have seen a decline in revenue and faced greater pressure on defusing hidden debt risks, said Ji Fuxing, a professor with the Chinese Academy of Social Sciences.

In 2021, the proactive fiscal policy will be "more sustainable" in terms of expenditure scale and policy strength to leave more policy space in addressing future risks and challenges, Liu said in his latest interview with Xinhua.

He said that the country should rationally set the target of fiscal deficit ratio and the scale of government special bonds, as well as keep the macro government leverage ratio at a stable level to leave policy space in combating future risks and challenges.

Currently, the debt risks of local governments are generally controllable. However, hidden government debts and default risks are increasing in certain regions, Liu said.

He said that the government would pay "close attention" and stay on "high alert" for the debt problems.

Though China will adopt a proactive fiscal policy, the country may not issue special treasury bonds for epidemic control again in 2021, said Bian Quanshui, chief analyst with Sinolink Securities.

The deficit-to-GDP ratio is expected to be less than 3 percent this year, and the scale of special bonds for local governments would shrink to around 3 trillion yuan, Bian said.

China should withdraw some of the temporary aid packages safely and cautiously to achieve a balance between sustainable growth and risk-prevention in the long-term, said Han Wenxiu, an official of the Central Committee for Financial and Economic Affairs