While the Chinese government favored spending on infrastructure as a fiscal stimulus in the past, that led to a sharp rise in local government and state-owned enterprise debt — which Beijing has been trying to keep under control.
So the “the major fiscal effort will be tax cuts this year,” Zhu said. “The government has grasped the problem and is adopting a different style of fiscal stimulus: tax cuts, for both households and corporations,” he added.
Particularly significant would be a cut in VAT, or value-added tax, that’s expected to take place before the annual National People’s Congress meeting in March, said Hao Zhou, senior emerging markets economist at Commerzbank. VAT is China’s largest tax revenue category.
“That will be very important and significant to the market,” said Zhou, who added that VAT accounts for one-third of China’s tax revenue.
Some say, however, that tax cuts could be of limited impact to GDP growth, and Bo Zhuang, chief China economist at TS Lombard, said they may even take six to nine months to create results.
Beyond changes to the tax regime, Chinese policy-makers have already been taking steps to ease monetary policy — including reducing the amount of money banks need to set aside as reserves at least five times in the past year — but those measures have been limited. Beijing has been trying to rein in debt, but a system full of cash would be counterproductive as it encourages debt-laden businesses to borrow more.
There’s also the risk of capital outflows should the Chinese yuan lose its value in an easing exercise, Zhu added.
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