Premier Li Keqiang announced an unprecedented package of tax cuts worth 2 trillion yuan (US$297.93 billion) in his annual work report. Unlike credit easing or infrastructure investment, tax cuts may take a longer time to work, but the effects can last longer, and there would be less side effects.
The value-added tax (VAT) rate for manufacturers will be cut from 16 percent to 13 percent this year, and the VAT rate for the transport and construction sectors from 10 percent to 9 percent.
The business sector’s social security contributions will also come down to 16 percent from 20 percent.
By comparison, the United States under President Donald Trump pledges to cut taxes by US$1.5 trillion in a decade, which translates to around 1 trillion yuan per year.
The lowering of VAT and social security contribution rates will take effect from April 1 and May 1 respectively.
In response, leading foreign automakers in China, including Mercedes-Benz, BMW and Volvo, announced price cuts over the weekend. The price cuts amount to several tens of thousands of yuan.
Economists estimate that the tax cuts and their multiplier effects will boost China’s GDP growth by 0.5 percentage point.
I believe Beijing has further room to cut taxes if there is a need.
Tax cuts may give a boost to the stock market in the short term, particularly to the shares of those in sectors that are the main beneficiaries such as manufacturing, transportation and construction.
Recent initiatives like those in support of the private economy, respect for private property and intellectual property rights, as well as encouraging foreign investment would make China a more attractive destination for investments.
They also demonstrate the authorities’ flexibility in shifting gears in response to new challenges.
This article appeared in the Hong Kong Economic Journal on March 18
Translation by Julie Zhu
[Chinese version 中文版]
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