China cuts tax and boosts lending

China will cut billions of dollars in taxes and fees, increase infrastructure investment, and step up lending to small firms, Premier Li Keqiang said Tuesday, as the world’s second-largest economy looks set to slow further this year.

The government aims to expand its economy by 6.0 to 6.5 percent in 2019, Li said at the opening of the annual meeting of China’s rubber-stamp parliament, less than the gross domestic product growth of 6.6 percent reported last year.

China has lowered its GDP growth target for 2019, as the country seeks to maintain stable growth amid downward economic pressure and as it continues to pursue major policy goals, according to a Government Work Report on Tuesday.

Adopting a range as a target instead of the previous practice of using an exact figure gives policymakers room to maneuver amid uncertainties and reinforces the country’s goal to focus on quality growth, analysts said. A range target was previously set for 2016 at 6.5-7 percent.

“I think this is a very prudent target,” Cao Heping, a professor of economics at Peking University told the Global Times on Tuesday, noting that the target range takes into account all the challenges China is facing, while also leaving policymakers room to maneuver in pursuit of different goals this year.

The cuts to the GDP growth target came as the Chinese economy faces pressure from a persistent slowdown, as well as a worsening external environment marked by rising trade tensions and a slowing global economy.

GDP last year expanded at its slowest pace since 1990 due to the trade war and Beijing’s crackdown on financial risks, which raised corporate borrowing costs and hurt investment.

A longer-term campaign to curb polluting and low-value industries also slowed China’s vast manufacturing sector.

“The target falls in line with market expectations, while also shows the central government’s pragmatic attitude amid the downward pressure in the domestic economy and global uncertainties,” Dong Dengxin, director of the Finance and Securities Institute at Wuhan University, told the Global Times on Tuesday.

Cao said GDP growth in the first half of the year will further slow due to the impact of the China-US trade war and other domestic challenges, but will likely stabilize in the second half of the year as the effect of the new policies kicks in.

“No one is underestimating the challenges we face, but we should not worry about the trimmed growth target,” he said, noting that even the lower end of the target range would still mean the Chinese economy is still among the fastest-growing major economies.

In its latest forecast, the IMF said the average growth speed for emerging markets and developing economies is expected to slow to 4.5 percent in 2019 from 4.6 percent in 2018. Average global growth would be 3.5 percent, while the US economy is expected to grow at 2.5 percent, according to the IMF.

Premier Li said China’s fiscal policy would become “more forceful”, with planned cuts of nearly 2 trillion yuan ($298.31 billion) in taxes and fees for companies.

Those tax cuts are more aggressive than the 1.3 trillion yuan delivered in 2018 and include reductions aimed at supporting the manufacturing, transport and construction sectors.

To support growth, Li said China would closely monitor employment at exporting companies heavily exposed to the U.S. market and cut the value-added tax (VAT) for the manufacturing sector to 13 percent from 16 percent. VAT for the transport and construction sectors will be cut to 9 percent from 10 percent.

China aims to create more than 11 million new urban jobs this year and keep the urban unemployment rate within 4.5 percent, in line with its 2018 goals. At the same time, it will cut the social security fees paid by companies.

In a push to ramp up infrastructure investment, China’s finance ministry raised the special bond issuance quota for local governments to 2.15 trillion yuan ($320.79 billion) from 1.35 trillion yuan last year.

The lower tax revenue and higher government spending push China’s budget deficit target for this year up to 2.8 percent of GDP from last year’s 2.6 percent.

The government has also set a consumer inflation target of around 3 percent despite a recent softening in price rises to less than 2 percent, which gives Beijing some room to stimulate consumption.

Li said on Tuesday monetary policy would be “neither too tight nor too loose” and that the government would not resort to a flood of liquidity. Growth targets for M2 money supply, which includes cash in circulation and deposits, and total social financing this year would be in line with nominal GDP growth.

To support private and smaller firms, Li said Beijing will step up targeted cuts in the reserve requirement ratio for smaller and medium-sized banks with an aim to boost lending to small companies by large banks by more than 30 percent.