Breakingviews - Beijing strikes the right balance on stimulus

Military band members rehearse ahead of the opening session of the Chinese People's Political Consultative Conference (CPPCC) at the Great Hall of the People in Beijing, China March 3, 2019. REUTERS/Jason Lee

BEIJING (Reuters Breakingviews) - Beijing is striking the right balance on stimulus. The government lowered its growth target at the opening of its annual parliament and rolled out a big tax cut. It also signaled that officials will keep a hawkish eye on debt. It’s an effective, if awkward, way to support the economy.

Premier Li Keqiang, who delivered his usual state-of-the-union style address to delegates of the National People’s Congress on Tuesday, was expected to announce slower growth and fewer taxes. He delivered. GDP growth should come in between 6 percent and 6.5 percent this year, per the plan, down from last year’s goal of around 6.5 percent. That surprised few. But less expected was the decision to slash nearly 2 trillion yuan ($300 billion) from corporate taxes and fees, much deeper than last year’s 1.3 trillion yuan cuts.

Other measures, including plans to issue more than 2 trillion yuan of special local government bonds, will provide additional juice. But the credit spigot is not being opened wide. The fiscal deficit was set at 2.8 percent of GDP, two-tenths of a percentage point higher than last year. That figure is largely symbolic, because it fails to capture plenty of government borrowing. But some analysts predicted a higher number. The caution in part highlights the depth of the government’s reluctance to let loose. Local shares, which tend to rally on signs of easy government money, stayed mostly flat in morning trade.

Altogether, the right message has been sent. Beijing needs to revive private investment, but the stimulus playbook from the global financial crisis, which caused total debt to soar from 174 percent of GDP in 2009 to more than 250 percent by the middle of last year, won’t work a second time. Tax cuts will. The corporate burden is eye-wateringly high: UBS estimates total taxes and fees amount to almost 70 percent of commercial profits of a standard mid-sized company in 2016, putting it well ahead of many rich countries.

The process of threading the needle between growth and financial discipline started last year, and it has been hard to read the government’s signals at times. Now that parliament has stuck to the deleveraging script, it reads clearer, and better.


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