China Tax Cuts Worth RMB 45 Billion to Support Economy Amid Slowdown
On August 30, China’s State Council announced RMB 45 billion (US$6.59 billion) worth of tax cuts for businesses and investors.
With the tax cuts, the Chinese government hopes to reduce the burden on small and micro-enterprises, encourage investors to continue lending, and ensure capital flow in the economy.
The tax cuts come in the form of three main targeted measures.
- Companies that have suspended production or business due to restructuring or cutting of overcapacity can have their real estate tax and land-use tax either reduced or exempted altogether.Additionally, investors in social security funds and basic pension funds can enjoy tax relief, while postal savings banks with large amounts of agriculture-related loans can pay a preferential value-added tax (VAT) rate of three percent on interest of such loans.
- Lenders to small- and micro-enterprises can enjoy expanded value-added tax (VAT) exemption on loans to such enterprises, with a credit quota of up to RMB 10 million, up from the previous RMB 5 million. This measure is valid from September 1, 2018 to December 31, 2020.
- Foreign institutions can exempt their corporate income tax (CIT) and VAT on interest gains from onshore bond market investments for three years.
The tax cuts come amid a deepening trade war with the US and signs of a slowing economy.
The US has implemented 25 percent tariffs on US$50 billion worth of Chinese goods, and may soon slap tariffs on US$200 billion more.
Meanwhile, the latest Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) showed that manufacturing grew at the slowest pace in 14 months in August, while export orders shrank for the fifth month in a row.
The PMI results are just the latest of several data points that suggest that China’s economy is slowing down.
Other recent initiatives designed to boost the economy amid the US-China trade conflict include increased infrastructure spending, tariff cuts for select Asian countries, and a significant IIT reform that arrived sooner than expected.
Nevertheless, the tax cuts cannot be considered as merely a reaction to the trade war. At this year’s Two Sessions meetings in March, Chinese Premier Li Keqiang promised to cut RMB 800 billion (US$117.06 billion) worth of taxes for businesses and individuals in 2018.
To this end, China has already cut an estimated RMB 400 billion (US$58.53 billion) by lowering its VAT rates in May, and slashed a further RMB 60 billion (US$8.78) for small- and micro-enterprises and high-tech firms in April.
As China’s economy continues its slowdown due to both domestic and international factors, businesses can expect more actions to stabilize the economy. However, with a national derisking campaign in motion to clamp down on debt, significant stimulus measures might not be on the cards.