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China’s economy is under pressure from the US trade war and structural issues, with the expectation that Beijing will enact further stimulus this year. Photo: Reuters

China will not turn to global financial crisis stimulus playbook to offset US trade war, says Beijing adviser

  • Liu Shangxi, the head of the Chinese Academy of Fiscal Sciences, says Beijing will rely on tax reductions and budget management reform
  • US$580 billion stimulus package used in 2008 after the Lehman Brothers bankruptcy will not help China’s weakening economy, he says

China will not introduce another “giant stimulus programme” similar to the one seen during the 2008 global financial crisis to offset the ongoing trade war with the United States and its weakening economy, according to a leading Chinese government researcher.

Liu Shangxi, head of the Chinese Academy of Fiscal Sciences, an important think tank under the Ministry of Finance that advises Beijing on fiscal policy, said that instead, Beijing will rely on tax reductions and budget management reform, because the 2008 package helped lead to inefficiencies and overcapacity in the manufacturing sector.

“We will not introduce another giant economic stimulus programme for the problem we are faced with now – consumers are asking for greener, healthier and better goods but cannot find them in the market – it is different from the problems in 2008,” Liu said on the sidelines of a China-US trade and economic relations conference in Hong Kong.

“Though the stimulus programme was a necessity back in 2008, we need to admit that it caused overcapacity and low quality goods,” said Liu, in the first public comments from a leading Chinese government adviser on China’s trade war mitigation strategy since the US and China reached a tariff ceasefire in Osaka, Japan at the end of June.

China cut the rate of its value-added tax for manufacturers from 16 per cent to 13 per cent in April and the rate for transport and construction companies from 10 per cent to 9 per cent, to reduce businesses’ tax burden, improve income distribution and support employment.

These cuts were estimated to be worth 2 trillion yuan (US$290.55 billion) to the Chinese economy. This followed a personal tax cut unveiled in October last year, which Japanese bank Nomura estimated would increase domestic consumption by 81 billion yuan (US$11.77 billion).

Beijing also cut the rate of social security contributions employers need to make earlier this year. These moves could indicate what type of stimulus measures and scale the government may revisit, Liu suggested.

“We would mainly use tax and fee reduction, at an estimated volume of 2 trillion yuan, to offset both international and domestic risks and uncertainties,” said Liu, adding that China’s domestic economy is faced with severe downturn pressure. “And we have to reform the existing budget management system so as to push people to perform better with less spending.”
We would mainly use tax and fee reduction, at an estimated volume of 2 trillion yuan, to offset both international and domestic risks and uncertainties
Liu Shangxi

The Chinese government injected some 4 trillion yuan (US$580 billion) into the economy in the months following the Lehman Brothers bankruptcy in 2008, as the world faced the biggest economic crash since the Great Depression in the 1930s.

The stimulus helped China avoid a recession and helped it recover more quickly than other major economies. Now, with the trade war between China and the United States passing its first anniversary last week, the Chinese economy is under growing pressure.
Figures released by the National Bureau of Statistics on Wednesday showed that the June producer price index – that is, the price producers charge for their goods to wholesalers at the factory gate – fell to 0.0 per cent from the same month a year ago.

The statistic suggests that manufacturers, unable to sell their goods at the price they wish, are offering discounts to clear inventories.

Furthermore, trade data to be released on Friday are expected to show that both exports and imports are weak, emphasising the deep-rooted impact the tariff battle is having on the Chinese economy.

In July 2018, the Politburo – Beijing’s policymaking arm – made an effort to contain the trade war in six aspects: stability, supply-side reform, derisking the financial sector, expanding the opening up process, controlling inflation and keeping employment stable.

Its endeavours led to the aforementioned stimulus measures and may guide future policy, too.

Chinese officials have tried to shore up market confidence by stressing that the economy remains fundamentally solid and insisting that policymakers have sufficient capacity to deal with external problems.

This suggestion was questioned this week by analysts from Fitch, the ratings agency, which told an event in Hong Kong on Tuesday that Chinese banks do not have adequate capital to support the sort of stimulus that could bolster economic growth.

The tentative truce that President Xi Jinping and his US counterpart Donald Trump agreed to on the sidelines of the G20 summit in Japan last month will see Washington delay tariffs on the remaining US$300 million of Chinese goods not already under punitive US taxes and the two sides agreeing to resume trade negotiations.

This article appeared in the South China Morning Post print edition as: China policy adviser on fiscal rules out 2008-style stimulus to offset policy denies trade war will spur ‘giant stimulus’