Date
19 February 2019
The central government has rolled out a raft of measures to boost liquidity in the system, but the investment appetite has barely improved. Photo: AFP
The central government has rolled out a raft of measures to boost liquidity in the system, but the investment appetite has barely improved. Photo: AFP

Improving business environment key to China economic revival

As downward pressure mounts on China’s economy, Beijing has announced a raft of measures to boost liquidity in the financial system.

However, offering more liquidity does not necessarily guarantee that people will borrow. 

The People’s Bank of China has reduced the reserve requirement ratio four times over the last 12 months. The central bank also used medium-term lending facility and repo programs to inject 5 trillion yuan (US$738.1 billion) worth of liquidity into the system. 

Indicating ample liquidity in the market, the Shanghai interbank offered rate has tumbled below 2 percent, the lowest level in more than three years. 

Nevertheless, the new loans and social aggregate financing levels remain lackluster in recent months, underscoring weak credit demand. 

To revive the economy, the government has also introduced tax breaks worth nearly 3 trillion yuan, but still, the investment appetite has barely improved. 

The problem is that China’s domestic business environment has been deteriorating since 2016. Issues include rising labor costs, higher social security fund contributions, and stringent environmental protection requirements

The cyclical economic downturn and external shock from the country’s trade war with the United States have made things even worse. 

So far, the profit tax on small businesses has seen the biggest cut, but they can only benefit from that if their business is making money. 

What Chinese corporates badly want is for the government to reduce their contributions to the social security fund and the value-added tax (a tax based on turnover). 

Some local governments have already rolled out relevant measures such as giving back to businesses 50 percent of the unemployment benefits fund and providing other forms of subsidies. This assistance, however, remains limited in scale. 

The good news is that further tax reductions will be announced soon, according to a spokesman for the Ministry of Finance. 

It is most likely that substantial tax cuts will be unveiled during the parliament season in March. 

This article appeared in the Hong Kong Economic Journal on Jan 17 

Translation by Julie Zhu 

[Chinese version 中文版] 

– Contact us at [email protected] 

RT/CG

Hong Kong Economic Journal columnist

EJI Weekly Newsletter

Please click here to unsubscribe