The View | For China, tax cuts may work where its 4 trillion yuan stimulus failed – by boosting the economy without creating more debt
- Hao Zhou says with Beijing still struggling to control the debt that swelled as a result of its 2008 rescue package, it has no appetite for more debt-fuelled stimulus. One way to increase domestic demand is to reduce the tax burden
However, China intends to shore up growth without falling back on debt-fuelled stimulus in this easing cycle, as a massive package to boost growth would trigger a déjà vu of the debt/disinflation cycle that has repeatedly happened in the past decade.
Indeed, since the Lehman collapse, while China has succeeded several times in preventing a dramatic economic slowdown with aggressive easing policies, the rapid credit/debt expansion – with deteriorating profitability of the corporate sector – suggests that the growth model is unsustainable.
Let’s begin with a brief review. Against the backdrop of a global financial crisis following Lehman’s collapse, the 4 trillion yuan (US$582 billion at exchange rates today) stimulus package was announced in November 2008.
The economic plan was seen as a success, and while China's economic growth dipped sharply to almost 6 per cent during the fourth quarter of 2008 and the first quarter of 2009, it recovered to about 8 per cent in the second quarter of 2009 and over 9 per cent in the third.
However, the side effect of the large stimulus package was a steep rise in local government debt and non-financial corporate debt.