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16 Apr 2014

China builds for the future

Qu Hongbin

by Qu Hongbin

Co-Head of Asian Economic Research and Chief Economist for Greater China, HSBC

China builds for the future

Speeding up renovation lifts short-term investment and consumption

China’s State Council has responded to slowing growth with tax breaks for small firms, investment in railways and a programme to rebuild urban shanty towns. Though smaller than previous stimulus packages, these measures are more targeted and involve financing reforms to help secure funding.

Beijing’s policymakers are responding rapidly with concrete policy measures to support growth

This should smooth China’s growth without exacerbating financial-stability risks. The measures should filter through towards the end of the middle of 2014, allowing GDP growth to be maintained at around 7.5 per cent for the whole year.

Speeding up renovation of China’s shanty towns not only lifts short-term investment and consumption but is also key to boosting the government’s urbanisation plans. The China Development Bank will issue a special bond for these projects.

Accelerating railway construction, especially in the inland provinces, will mean another 6,600km of new construction is started in 2014 – some 1,000km more than last year. China will also reform the financing process by establishing a railway development fund that attracts between RMB200 billion and RMB300 billion a year and issuing RMB150 billion (about USD25 billion) of railway bonds this year.

Meanwhile, the annual income-tax threshold for small and micro-sized companies will be increased from the current RMB60,000.

Beijing’s policymakers are responding rapidly with concrete policy measures to support growth. They don’t want to take the risk of growth slipping below 7 per cent when early 2014 figures were disappointing.

The government is signalling that it intends to follow up with real policy actions to maintain growth. However, this is not quite a repeat of China’s previous stimulus packages. These measures differ in three ways:

  • The scale is modest, probably aimed at smoothing GDP growth at around the 7.5 per cent target. This should buy time to implement reforms that could involve short-term pain.
  • The targeted measures should balance growth and jobs in the short term, boost long-term growth prospects, and mitigate financial risks. For instance, small firms are the main employers but their tax cuts will be marginal, relative to total government fiscal revenues of more than RMB10,000 billion. Monetary policy seems to be playing a secondary role for now.
  • Reform is part of the measures. The financing reforms for railway and shanty town reconstruction should help establish a long-term sustainable funding channel for much-needed infrastructure projects and help keep infrastructure investment (now around 18.5 per cent of GDP) at a steady pace.

These measures should help China to stabilise growth in the short term with the impact filtering through towards the end of the second quarter. After a soft first quarter, the sequential growth should improve modestly and we remain comfortable with our 7.4 per cent full-year GDP forecast.

This research was first published on 3 April 2014.
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