Relief for small businesses and raised public spending follow decline in production
China has vowed to take action to support its slowing economy with a package of tax cuts for small businesses and higher public spending.
Officials said they would cut taxes “on a larger scale” in order to boost business activity, announced against a backdrop of disappointing industrial production figures and the first drop in car sales for almost three decades.
The interventions, designed to soothe concerns among international investors, come after official figures on Monday revealed a 4.4% decline in exports in December – the biggest drop since 2016 – on the back of faltering demand in most of its key markets. Imports also fell by 7.6% as domestic appetite waned.
China has been embroiled in a trade dispute with the US, which has put a handbrake on global trade. Although Beijing and Washington are edging closer to a deal, concerns remain the dispute could be reignited.
Financial markets around the world rallied after the announcement from Beijing, with the FTSE 100 closing up more than 40 points and gains on other stock markets elsewhere across Europe. The Dow Jones industrial average had gained about 90 points in afternoon trading in New York.
While exact details of the stimulus package are yet to be unveiled, the Chinese finance ministry suggested the measures would include cutting value added tax for some companies, particularly in the manufacturing sector, as well as rebates for other businesses to ward off a more damaging slowdown.
China’s National Development and Reform Commission said the country had seen “a good start” to the year, despite weak readings on the Chinese economy published in recent weeks.
In a coordinated response, the Chinese central bank also promised to provide “enough” support for the economy without further fuelling the country’s debt boom.
Economists have previously said Beijing has limited scope for stimulating the economy without raising borrowing to dangerous levels, given the rapid escalation of debt to the highest levels on record following the stimulus package it used to ward off the worst effects of the 2008 financial crisis.
The International Monetary Fund has said global economic growth is forecast to slow this year as a consequence of the standoff, with the Chinese economy expected to grow by 6.2%, down from 6.6% in 2018.
Reuters reported that Beijing planned to lower its growth target to 6-6.5% this year, a measure due to be unveiled at an annual parliamentary session in March.
Paul Donovan, the chief economist at UBS Wealth Management, said while the comments from Chinese officials were an example of “cheerleading”, China would likely succeed in stabilising the economy.
“It certainly seems they’re trying to stabilise growth and sentiment in the economy without utilising credit. Probably quite rightly, as they feel further credit growth could build bubbles and be destabilising,” he said.