“The restrictions on monetary policy are obvious,” Guo Lei, analyst at GF Securities Co, wrote in a note, pointing to widening yield spreads with the US and clogged policy transmission in the domestic market. “For fiscal policy, there’ll be but two directions. One is tax reduction, the other is resuming fiscal spending and infrastructure.”
On Wednesday, the nation’s Politburo said that due to increasing economic pressure, more steps to shore up the economy are needed. Here’s a list of policy tools that China can use:
Tax cuts
Policy makers have pledged to further cut the value-added and personal income taxes Economists also expect the government to cut corporate income taxes and social security premiums to lower the burden on companies CICC: “We estimate that a two percentage points cut to the VAT rate in the top bracket corresponds to a 0.4 percentage point reduction in weighted-average effective VAT tax and a total of 400 billion yuan (RM238 billion) in tax cuts” ANZ’s Raymond Yeung: “Tax cuts, or at least some sort of tax reforms, will be the focus”
Bigger deficit
Bigger tax cuts will probably lead to a higher budget deficit Economists estimate China’s actual deficit ratio will rise to 3.8% in 2019, according to a Bloomberg survey CICC: “We estimate that the deficit ratio will need to rise 0.4 percentage point from 2.6% in 2018 to 3% in 2019” if the VAT rate for the top bracket is cut by two percentage points
Off-budget bonds
China has massive ammunition in its off-budget spending, such as local government special bonds.
The quota for special bonds may need to rise further in 2019 from the 1.35 trillion yuan in 2018 With funding via shadow banking being tightly controlled, special bonds are an important tool for local officials to raise funds for infrastructure projects
Reserve-requirement ratios
The PBOC could further lower the reserve requirement ratio, which is the money banks must keep on hand.
Such cuts can supply cash as the current account surplus shrinks, reduce banks’ costs and help them roll over mounting MLF loans ANZ’s Raymond Yeung: “The PBOC will use the triple-Rs in order to guide funding to SMEs” ING’s Iris Pang: “What the central bank can do is, for example, every quarter there will be an RRR cut of one percentage point.”