China’s H2 Fiscal Policy Will Focus on Spurring Domestic Demand and Infrastructure Investment


The Chinese central government has shed further light on its plans for more active fiscal policy in the second half of 2018, with analysts expecting tax reductions to spur domestic demand.

The Chinese Communist Party Politburo convened a meeting on 31 July to discuss China’s economy as well as make arrangements for economic work in the second half of 2018.

According to the meeting China’s economy enjoyed overall stability in the first half and maintained a trend of “improvement amidst stability,” but new problems and challenges have emerged as a result of shifts in external conditions.

Domestic analysts said that the Politburo meeting signalled a reduction in the tax burden for market actors in a bid to stimulate consumer demand in the second half, as well as an acceleration in the issuance of government bonds in order to support infrastructure development.

The State Council announced in July that China would implement more active fiscal policy in the second half, as escalating Sino-US trade tensions cast as shadow over the economy.

Hu Yijian (胡怡建), head of the Public Policy and Administration Institute at the Shanghai University of Finance and Economics, said to Yicai that as a result of Sino-US trade frictions and export difficulties, it will be necessary to stimulate domestic demand and expand “effective” investment in order to stabilise the economy.

“Active fiscal policy must play a greater role in these two areas.”

Yang Zhiyong (杨志勇), a researcher with the National Academy of Economic Strategy at the Chinese Academy of Social Sciences, said that fiscal policy could involve the use of tax reductions to stimulate consumption, including recent reductions to tariffs on daily use goods, as well as the launch of further tax reforms on 1 October that could lighten the tax burden for low and middle-income earners.

According to Yang amendments to the personal income tax will raise the minimum threshold, expand the scope of lower tax rates and introduce specialist added deductions, which will result in further tax reductions for those on low and middle-incomes and help to spur demand.

Tax reforms outlined by China’s State Council are expected to result in full year reductions of over 1 trillion yuan.

Expanded infrastructure investment is also slated to be a key plank of China’s more active fiscal policy in the second half, with the Politburo making reference to “expanding the vigour of supplementation of shortcomings in the area of infrastructure.”

An executive meeting of the State Council convened last week pointed to he need to “drive stable growth in effective investment,” as well as confirmed the accelerated issuance of 1.35 trillion yuan in special bonds by local governments for the full year.

China Orient Asset Management analyst Zhang Zifan (张子范) said to Yicai that the issuance of special bonds by local government had picked up since the start of july.

As of 27 July 19 provinces including Hebei, Heilongjiang and Shanghai had issued nearly 200 billion yuan in special bonds that month, for a sharp rise compared to the monthly average of 61.22 billion yuan in the first half of 2018.

Jin Yongxiang (金永祥), PPP expert and director of Dayue Consulting, said that public-private partnership (PPP) investment would pick up in the second half amidst government encouragement of effective investment, particularly following efforts to clean up the PPP sector over the past year.