Impact of China’s tax-cut stimulus is estimated at US$300 billion, or 1.2 per cent of output, according to JPMorgan’s economists

China’s government will cut taxes on a “larger scale” to prop up the slowing economy, according to a Tuesday statement by deputy central bank governor Zhu Hexin, assistant finance minister Xu Hongcai and Lian Weiliang, vice chairman of the National Development and Reform Commission

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People buy vegetables and fruits at a supermarket in Beijing on November 30, 2018. Photo: AFP

Published: 1:55pm, 15 Jan 2019Updated: 11:09pm, 15 Jan 2019

China’s government is turning increasingly to tax cuts as the first line of defence against a slowing economy, in a departure from the wasteful infrastructure binges of the past.

Further evidence of the shift emerged Tuesday, as senior policy officials pledged that tax reductions on a “larger scale” are in the pipeline, amid worsening economic data. JPMorgan Chase economists estimate the total impact will be around 2 trillion yuan (US$300 billion), or 1.2 per cent of gross domestic product.

Last May the government cut value added taxes for manufacturing, transportation, construction, telecommunications and farm produce industries, followed by a cut in personal income taxes and the introduction of more deductions. Earlier this month, the State Council announced a US$29-billion annual tax cut plan for small companies.

The change of approach is being driven largely by China’s large debt load, which makes funding a splurge on bridges and railways - like that following the 2008 financial crisis - dangerous for financial stability. Against the backdrop of slowing global growth and the trade war with the US though, it’s not clear whether the new approach will be enough to stabilise the economy.

The government “has grasped the problem” after years of overinvestment led to low efficiency and surging debts,” JPMorgan economists led by Zhu Haibin wrote in a report. The impact on growth could be modest though, they wrote as more vigorous tax collection can dampen the benefit and the transmission of tax cuts to the economy is uncertain.