(Yicai Global) Dec. 14 -- The Chinese government has recently held two important meetings in the runup to the annual Central Economic Work Conference. These conferences, which sent signals as to next year's economic work, have attracted great attention.
The Political Bureau of the Communist Party of China Central Committee met yesterday on the government's economic work next year, stressing the need for efforts to seek an optimal policy mix with maximal effects. The CPC Central Committee convened a symposium for non-party members in Beijing on Dec. 11, at which Xi Jinping, general secretary of the CPC Central Committee, President of China, and chairman of the Central Military Commission, declared that China will continue to implement a proactive fiscal policy and a prudent monetary policy, seek new growth impetus from reform, and enhance the social policies' functions of helping those most in need.
The Political Bureau meeting is a principled interpretation of next year's main economic work, specific deployment will be discussed at the Central Economic Work Conference, as well as given on the government work report released at next year's two annual sessions. The economic work direction the Political Bureau meeting indicated still warrants attention, however, Zhou Jingtong, director of the Institute of International Finance at Bank of China, told Yicai Global.
A more active fiscal policy prioritizing tax and administrative fee reductions
Governments utilize fiscal policy to make macroeconomic adjustments, and to regulate economic operations through taxes, subsidies, deficits, national debt, income distribution, transfer payments and other means. China's fiscal policy generally falls into three categories: a moderately tight fiscal policy, a proactive fiscal policy with expansionary features, and a stable fiscal policy that tends toward neutrality.
"The proactive fiscal policy instituted next year will differ from its predecessors and will put tax and administrative fee reductions first and infrastructure construction second. The fiscal deficit rate next year may well be higher than this year's and may return to but will not exceed 3 percent; this not only reflects a more proactive fiscal policy, but also ensures that financial operations remain within a secure perimeter, while instilling stable expectations in society," is the view of Feng Qiaobin, an economics professor at the Party School of the CPC Central Committee.
The proactive fiscal policy should be even more so, the State Council executive meeting of July 23 proposed. Authorities have also repeatedly publicly asserted that larger, substantial and inclusive tax and fee cuts will be implemented next year, including substantial cuts in value-added tax, with lower tax rates and an inclusive exemption for small and micro enterprises and technology-based start-ups, and a reduction of social insurance fees, among others.
The amount of tax and administrative fee reductions will jump next year and are estimated at between CNY1.5 trillion (USD217.7 billion) and CNY2 trillion, Shi Zhengwen, director of the Research Center for Fiscal and Tax Law of China University of Political Science and Law, told Yicai Global. Substantial tax and fee cuts will be emphasized to enhance enterprises' and other market entities' sense of gains, Shi said, adding the cut will center on VAT, individual taxes and social insurance premiums.
VAT will undergo the largest decrease of all next year, and enable enterprises' financial pressure to ease, Shi explained. Input tax of enterprises' financing loan interest may be deducted to reduce their financing costs, he noted.
The State Council has already made clear that the social insurance premium rate will fall to ensure that the overall burden of social insurance premiums on enterprises will not rise or even substantially decline.
Social insurance premiums will see the biggest of all the fee cuts next year, Feng believes. The specific rate of the reduction remains to be calculated, but the academic community this likely be to 20 to 25 percent from the current approximate 39 percent, but the period within which to arrive at this goal still requires circumspect assessment, she noted.
In addition to VAT and social insurance, the deduction scheme for personal income tax has concluded its public comment period and will shortly be officially announced and will formally come into force from January 1 next year. This is a new tax relief measure for next year over and above the raised threshold and new tax rate.
The fiscal policy will exercise a greater function in structural adjustment, Feng indicated. The previous policy of subsidizing sectors cannot apply again, but instead preferential tax policies will be accorded to specific sectors, which is more in keeping with fairness. For example, the tax incentives the State Council grants to venture capital firms has lightened the tax burden on these firms' individual partners, she said.
Financial, Monetary Policies Form Synergies
China's economy will confront a more complex environment in the next year, and macro policies must soundly manage the relations between stabilizing economic growth, deleveraging and risk prevention to overcome the new challenges emerging in economic operations, Zhou told Yicai Global, addressing the question of hewing to implementation of positive financial and prudent monetary policies.
China has placed more emphasis on the tempo and intensity of deleveraging since the start of this year's second half and started to embark at all levels on a phase of stabilizing leverage, with a 'one size fits all' approach untenable, Zhou noted. With the exposure of risks in private firms' refinancing, micro, small and mid-sized companies and the People's Bank of China and other financial regulators have adopted a series of policies and measures to forcefully support the real economy through the 'three prongs' of credit, bonds and share equity.
The growth rate of the country's social financing, newly-added loans in Chinese yuan currency and M2 (broad money) has stayed low, nevertheless, Zhou said. "The pressure of economic fluctuations will be greater next year, with the continuing reduction of the cost of nongovernment financing. Next year's monetary policies will afford even greater leeway for and offer the probability of further loosening, considering the relatively small pressure exerted by rises in commodity prices," he added.
Economic performance must moreover be kept within a reasonable range to further stabilize employment, finance, foreign trade, overseas investment, investing and market expectations and thereby uplift market confidence, in an effort to seek an optimal policy mix and maximum effects, the Political Bureau meeting stressed.
"Insufficient coordination and cooperation between controlling and regulatory policies has been present in the past few years, and this has caused these measures to overstep or fall short of their positive effects. Reinforcing the collaboration between different regulators and policies is quite vital in consequence," Zhou noted.
Editor: Ben Armour