Proactive policies fueling China's personal income tax cut

World
Europe

02:53

Analysts say that Chinese consumers will become more confident in spending money this holiday season and the days to follow as China aggressively cuts personal income taxes and the overall fiscal burden for the economy. At the same time, the market believes that China will rely on fiscal stimulus for stimulating the economy in 2019.

The Ministry of Finance elaborated on China's new personal income tax policy on Monday's press conference.

The cuts are considered aggressive as people who earn less than 10,000 yuan (1,600 U.S. dollars) a month will pay almost no tax, while those in the second tier with monthly earnings of 20,000 yuan (3,200 U.S. dollars) will have a 70-percent tax reduction. Moreover, expats will have greater leeway for waiving taxes.

Behind the rhetoric is a more proactive policy tone – "Main measures include value-added tax reduction to support the real economy, more precise spending in important sectors and stricter control on day-to-day expenses," said Cheng Lihua, vice finance minister of China.

Cheng Lihua, vice finance minister of China, attends the press conference in Beijing, China, December 24. /Photo from Ministry of Finance

"The gate for local government debt issuance will be more open with higher debt level limit. The Central Economic Work Conference has made it clear that there will be much more special purpose bond issuance," Cheng added.

The market is already pricing in the risk of a China slowdown in 2019 because of trade fears and domestic consumption concerns. But Dan Wang from the Economist Intelligence Unit said there's no need to be overly worried.

"The direct impact from the trade war, in terms of the tariffs, would be minor. But China's collaboration with the rest of world will pick up and that would counteract some negative impact," she explained.

Meanwhile, Wang believes in the country's ability to reach the growth target for this year and is positive about reforms coming up next year.

VCG Photo

"For the growth this year, I think China can reach the target for sure. And for several reforms up front, I think it actually developed faster than I've expected. In terms of state-owned enterprises (SOE) reform, many people [feel] pessimistic when they look at [how] low mix-ownership is proceeding. But when I look at how local SOEs are doing the reform, I am a bit more optimistic," she told CGTN.

And the private sector also won't be left out of the fiscal stimulus. "A couple of days ago, there were new policies reduce tax for venture capital in China. And I expect more similar measures will come out in 2019. In this way, there will be more funds [going] into the private sector, targeting smaller companies," Wang claimed.

China is likely to favor fiscal stimulus over monetary easing for the year to come. Some analysts believe that China's central bank is tied up in widening yield spreads with the U.S. pressuring the yuan.

That means the central bank isn't in a good position to loosen the monetary strings. And it is why China will continue fiscal spending and infrastructure investment, with a potentially higher target for a fiscal deficit.