China may try and boost its economy by cutting taxes as trade fears intensify

(China Photos / Getty Images)
  • China may choose to prop up its economy with tax cuts in the coming months, Nomura says.
  • Nomura says policy makers will focus on the Value Added Tax (VAT) first, with possible changes to corporate tax and social security taxes.
  • They estimate VAT cuts will reduce the tax burden on Chinese business by around 1.1 trillion renminbi ($US160 billion).

  • Instead of boosting liquidity, China is more likely to introduce tax cuts to boost economic growth, Nomura says.

    It’s been a rough year for China’s economy, amid a deleveraging push at home and the US trade war threat abroad.

    The benchmark Shanghai Composite index has fallen into a bear market, down more than 20% from its January highs.

    And a number of analysts have speculated whether policy makers will deploy more stimulus measures, in order to maintain economic growth in line with Beijing’s target.

    Last week, Chinese premier Li Keqiang said authorities would hold off on a big liquidity push in response to the latest US trade tariffs.

    And according to Nomura analysts, “the room for Beijing to step up its conventional stimulus measures – which rely on pumping credit and ramping up infrastructure spending – is rather limited”.

    Instead, they suggested China may introduce a broad range of tax cuts, starting with the VAT (Value Added Tax — similar to the GST in Australia).

    “Corporate income tax and social security tax cuts are also likely,” the analysts said.

    Here’s Nomura’s calculation of the current breakdown for China’s tax revenues:

    Nomura

    “We think VAT cuts are at the top of the policymaker to-do list for tax reforms,” Nomura said.

    Based on their estimates, Nomura said VAT cuts “could lead to a reduction in the tax burden of 1.1 trillion renminbi ($US160 billion) for all business entities, while widening the fiscal deficit by 1.3% of GDP.

    China’s corporate tax rate is currently 25%, which isn’t particulary high by global standards.

    However, “its social security tax rate is much higher than that of other major economies,” Nomura said.

    Nomura

    In view of that, there will probably be more limited scope for corporate cuts. However, China may opt to reduce taxes for specific sectors, such as high-tech enterprises.

    And Nomura expects a reduction in China’s social security tax will be introduced “in the coming months”.

    “We think Beijing will rely more on treasury and local government bond issuance, with the fiscal deficit widening, to allow for more sustainable tax cuts,” Nomura said.

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