Market Beats

China to Tax Its Way into Economic Growth

MioTech Team 2019-03-20

In this report, we look into China’s upcoming VAT reforms and find out which sectors look to gain and which are poised to lose in the country’s bid to boost economic growth.

China’s got rocky roads ahead, with Premier Li Keqiang stating that there will be a “tough economic battle ahead”. The country currently faces a “grave and more complicated environment”, amid a slowing economy and tensions over tariffs with the U.S.
 


Source: MioTech Report

 

Prepared not to underestimate the difficulties China might face, the plan to navigate through the times ahead were laid out in the government’s annual policy report, with the premier announcing its readiness to roll out fiscal, monetary stimulus to prop up economic growth. The most significant counter-cyclical measure being reforms in VAT or value-added tax.

 

On top of the slashing of company taxes and employer social insurance contributions, China is looking to cut value-added tax for manufacturers from 16% to 13%. According to market estimates, a 3 percentage-point cut to VAT could bolster up to 0.6% of GDP, or US$90 billion. Additionally, tax for transportation and construction companies will be lowered by a one percentage-point.

 


Source: China Government World Reports
 

In an effort to further boost economic growth, small-to-micro sized enterprises became the core of the 2019 fiscal policies. The Premier has given large state-owned commercial banks an explicit target to increase their lending to micro and small enterprises by 30% this year. On these directives, China’s top banking regulator the China Banking Insurance Regulatory Commission (CBIRC) has ordered for commercial banks to relax their tolerance over non-performing loans (NPLs) owned by small companies, by 3 percentage-points. This loosening of of the NPL ratio tolerance could see as much US$230 billion worth of capital being injected into small companies. But ti could also post post additional credit risk for banks who have suffered from the economic slowdown.

 

Collectively, this new three-tier tax regime is expected to have a total tax relief of US$298 billion, based on the official estimation, compared to the 1.3 trillion yuan last year. So which sectors will seek to benefit and which will pay the price?

 


Source: MioTech Report


Most of the sectors are subject to 16% VAT currently and these sectors should be the most beneficial sectors under the 3 ppts VAT tax cut at a glance. But after further analysis, we found that 25 out of the total 42 sectors are expected to have lower tax expenditure in net while 17 sectors would suffer from higher tax expense. (Negative reading means VAT tax saving and vice versa)

 


Source: MioTech Report


Consumption-related and upstream industrial sector are the two largest sources of GDP contribution and are the most beneficial sectors under the tax change. Interestingly, oil and gas extraction and information transfer, software and IT services will potentially suffer with higher tax expense. It is worthy to note that the above analysis only takes VAT change into account while assuming other factors remain constant. The VAT is an indirect tax and the corporate tax burden depends on market competitiveness, consumer preference and so on.

 

With Consumption related and Industrial (especially up-stream) sectors likely to gain from the VAT reforms, what of market competitiveness by sector? Which sector of consumers would have to suffer from negative tax cut benefits? What are the current VAT rates and what are the overall impacts of VAT in terms of revenue and cost? Download the report below to find out!

Download the China VAT Reform Report

Get a free deepdive into China’s upcoming VAT reforms and its impacts on sectors.

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