China unveils measures to boost economy

By Simon Rabinovitch in Shanghai

China has unveiled measures to boost its sluggish economy, in the strongest indication yet of the leadership’s concern about the slowdown and one that also underscores a shift in Beijing’s approach to managing its economy.

The “mini stimulus”, though limited in size, could herald more policy moves to prop up growth. The government will eliminate taxes on small businesses, reduce costs for exporters and line up funds for the construction of railways.

Unlike 2008 when China deployed a gargantuan stimulus package to fend off the global financial crisis, it is instead using a series of targeted reforms to reduce the power of the government and give companies more space to operate.

The State Council, China’s cabinet, said late on Wednesday it hoped to “arouse the energy of the market”.

It announced a three-pronged approach. First, it has temporarily scrapped all value-added and operating taxes on businesses with monthly sales of less than Rmb20,000 ($3,250). It said the tax cuts, which go into effect at the start of August, would help more than 6m enterprises which employ tens of millions of people

Second, the government pledged to simplify approval procedures and reduce administrative costs for exporting companies. Among the various moves, it said it would temporarily cancel inspection fees for commodities exports and streamline customs inspections of manufactured goods.

Third, it said it would create more financing channels to ensure that the country can fulfil its ambitious railway development plans. More private investors will be encouraged to participate and new bond products will be issued.

“You can call this a mini-stimulus. It’s quite small but it’s on the supply side, and that’s more efficient,” said Lu Ting, an economist with Bank of America Merrill Lynch

The policy package followed yet more evidence of China’s deepening downturn. A preliminary survey of the country’s manufacturing sector in July, published on Wednesday, fell to an 11-month low.

Chinese growth slowed to 7.5 per cent growth year-on-year in the second quarter and most analysts expect it to weaken further over the rest of the year. But earlier this week Li Keqiang, the premier, made clear that the official growth target for the year remained at 7.5 per cent, comments which some observers read as a sign that the government was ready to intervene to pull the economy out of its funk.

In announcing the reforms, the State Council said the economy was in reasonable shape but that it needed to push forward reforms to “stabilise growth”.

A day earlier the State Council had decreed a ban on the construction of all new government buildings for the next five years. The ban was the latest step in a campaign by Xi Jinping, China’s president, to rein in ostentatious spending by Communist party officials, a major source of public discontent.

But it was also a sign of how the government is trying to direct public money towards more productive ends as growth slows. “We must really use our limited funds and resources for the development of the economy and the improvement of people’s lives,” the State Council said.

Copyright The Financial Times Limited 2013.