China should lower taxes, not increase spending, to spur growth
The mainland's GDP growth of 7.4 per cent in the last quarter was the slowest since 2012. It beat market expectations of 7.3 per cent but came in just below the government's 7.5 per cent target for the year. Other data released yesterday showed a cooling real estate market amid tightened financing. The government can expect increased pressure for measures to stimulate the economy.
It has indicated it is relaxed with growth around 7.5 per cent. The question is whether the economy will continue to slow from post-financial-crisis highs driven by massive stimulus spending. There is no question this would prompt rising calls for more stimulus from vested-interest groups.
So far the government has resisted them and Premier Li Keqiang has vowed to pursue necessary structural reform. At the same time he has launched increased spending focused on achieving sustainable economic benefit, such as tax relief for small enterprises to stabilise the job market, renovation of more shanty towns to boost housing supply for the poor and migrant workers, and railway development to support urbanisation, seen as the future growth engine.
The government needs to keep a tight rein on these efforts to ensure that they do not add to structural problems aggravated by the post-crisis stimulus. Meanwhile, provincial and local areas are calling for relaxation of controls on property investment and other stimulus measures. So long as growth remains within the 7-7.5 per cent range, these calls should be strongly resisted. Rather, the government should take advantage of the slowdown with economic restructuring to soak up excess capacity that is distorting allocation of economic resources. Beijing has already advanced the cause of structural reform by widening the trading band of the yuan and putting a time frame on liberalisation of deposit rates.
The National Bureau of Statistics said the economy performed within a "proper range", with structural adjustment continuing to make progress. However, weakening industrial production, investment and property market data suggest further pressure on growth. Retail sales, a lead indicator of domestic consumption which must shoulder more of the burden of growth, rose only modestly year on year. That strengthens the argument for the government to consider income tax relief for individuals, both by reducing progressive rates and raising the income exemption level.