Tax cuts could throw China trade lifeline

26 Jul 19

Tax cuts are increasingly being seen as the key to protecting China from the worst effects of US protectionism.

A senior Chinese economist has added her voice to those who believe tax cuts in the country could support growth even in the absence of progress in talks to ease trade tensions with Washington.

The position chimes with the view of World Bank economists who said in June that China’s economy will need to rely on domestic demand to sustain rapid growth.

Calls for greater efforts by Beijing to stimulate the economy have proliferated as trade tensions with the US have eaten into growth.

Both countries have imposed tariffs on each other’s imports in a tit-for-tat trade war sparked by US president Donald Trump.

Earlier this month China reported that second-quarter GDP growth was 6.2% – its slowest quarterly rate in 27 years – in a clear indication that demand at home and abroad has faltered in the face of mounting US pressure.

Speaking to CNBC, Liang Hong, chief economist of China International Capital Corporation, said the country’s government has done “enough” to support the economy and that tax cuts could support growth even if trade tensions do not ease.

In March China’s Premier Li Keqiang announced tax cuts worth nearly 2 trillion yuan ($291bn) among a range of stimulus measures to boost the economy.

Liang predicted that the effects of the tax cuts – the impact of which will be gradual – will strengthen confidence sufficiently to offset the slowdown caused by US tariffs on Chinese exports.

She pointed to Chinese estimates that put the impact of the trade war at 0.5–1% of GDP but said the tax cuts amount to more than 1% of GDP.

In June, the World Bank pointed to the positive potential value of stimulus measures that emphasise tax incentives in China.

It said policymakers still have catching up to do to improve levels of productivity and efficiency that will bring the country in line with higher-income economies.

The bank added that higher spending on health, education, and social protection could help boost demand and improve the quality of services, if combined with reforms to increase efficiency.

  • Gavin O'Toole, expert on Latin America
    Gavin O'Toole

    A freelance journalist. He has written six books about Latin America and taught the politics of the region at Queen Mary, University of London.

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