Beijing says it has stepped up relief measures for coronavirus-hit businesses, as the highly contagious Omicron variant has spread to 28 of the country’s 31 provincial jurisdictions and authorities stick to their zero-Covid strategy that involves large-scale lockdowns and mass testing. In addition to a planned 2.5 trillion yuan (US$393 billion) tax cut, authorities have also rolled out a variety of supportive measures, including rent exemption and credit support. Relief packages announced so far Premier Li Keqiang announced the 2.5 trillion yuan tax-cut package at the “two sessions” in early March, and it is considerably larger than last year’s 1.1 trillion yuan. Key points: Value-added tax (VAT) will continue to be exempted for small taxpayers – those with monthly sales revenue of below 150,000 yuan Income tax will be halved if annual payment is between 1 million and 3 million yuan 1.5 trillion yuan worth of VAT refunds planned for this year Local governments will be encouraged to provide preferential power tariffs Internet platform companies will be encouraged to reduce charges on small businesses that rely on the platforms Various charges and other administrative fees will also be cut, and that could include money paid to government-backed trade associations, or port-management fees ‘No income, so what’s the point of a tax cut?’: China’s firms bemoan support The State-owned Asset Supervision and Administration Commission also said in March that small businesses and self-employed businesses who rent offices from central-government-owned enterprises will be exempt from rental payments for three months, while those in regions that are at greater risk to the coronavirus will be exempt for six months. Some pandemic-hit regions have also released their respective supportive measures. Shanghai, a financial hub with 25 million people, last month offered 140 billion yuan worth of tax incentives and low-interest bridging loans to help businesses survive the city’s phased lockdown to contain the Omicron variant of the coronavirus. Tianjin, a port city about 100km east of Beijing, announced that VAT will be exempt for public transport firms this year; property tax will be exempt for farm produce wholesalers; and its small and medium-sized manufacturers will be allowed to postpone their tax payments from the fourth quarter of 2021 and first quarter of this year. And Tianjin has pledged to fast-track loan approvals for small and self-employed businesses. Who is eligible for the tax cuts? A vast majority of the planned measures target small and micro-sized businesses, as well as self-employed people, showing how Beijing is putting emphasis on employment and social stability in the lead-up to a leadership reshuffle later this year. At an executive meeting of the State Council in March, China’s cabinet indicated that about 1 trillion yuan worth of tax cuts would apply to small and micro-sized firms. As they are most vulnerable to the impact of lockdown, the cabinet has ordered the VAT refund for small and micro enterprises to be completed before the end of June, and has pushed forward rent exemptions for state-owned properties. Sectors dealing with manufacturing; research and technology services; ecological protection; power and gas; and transport will also receive VAT refunds, regardless of their ownership. However, this will mainly take place in the July-December period. As China’s small-business owners turn more frugal, consumption woes worsen Will this help offset economic decline? Despite the good January-February growth figure, the fast spread of the Omicron variant, commodity price hikes caused by the Russia-Ukraine war, and the US Federal Reserve’s tightening measures have dealt a heavy blow to market sentiments. As the tax cut was mainly designed to maintain employment, economists have warned that there will be a significant fall in consumption activities, from the second half of March. The official non-manufacturing purchasing managers’ index (PMI), which measures business sentiment in the services and construction sectors, has provided the first glimpse into the shocks, as it fell to 48.4 in March from 51.6 in February. Natixis chief Asia-Pacific economist Alicia Garcia-Herrero warned that the government’s insistence on its zero-Covid policy is bound to create further headwinds to China’s already decelerating economic growth, as Omicron dampens revenue at the box office and reduces car and property sales. Natixis’ quantitative exercise, based on the high correlation between mobility and economic growth, found that the recent outbreaks should shave 1.8 percentage points off of the nation’s first-quarter gross domestic product (GDP), without providing an absolute estimate on the overall GDP growth. Meanwhile, ING Bank has revised down its forecast for China’s first-quarter economic growth to 2.28 per cent from 2.5 per cent. Will more support policies arrive? Beijing has called for the early implementation of announced measures, for the release of more pro-growth policies as soon as possible, and for new contingency plans to cope with uncertainties, the State Council said at the end of March. And at an executive meeting on April 6, the cabinet said hard-hit sectors such as catering, retail, tourism and aviation could postpone their second-quarter payments of employee pension contributions, and it extended subsidies for small and medium-sized enterprises to not cut jobs. The People’s Bank of China said it would respond to what has been referred to as “ threefold pressure ”, by providing greater support for the real economy and stabilising the macroeconomy. Why the backbone of China’s economic machine is falling apart “While tax cuts need to be implemented quickly to relieve the corporate burden, fiscal expenditures should accelerate to ensure the stability of demand,” the Bank of Communications said at the end of March. The Shanghai-based lender, the nation’s fifth-largest, warned that March consumption could plunge by 7 per cent, compared with a 6.7 per cent rise in social retail sales during the January-February period. “Monetary and credit loosening should start as soon as possible, with cuts to the reserve requirement ratio for commercial banks at appropriate times and rate cuts remaining necessary. The size of new loans should also be raised substantially,” it added. UBS chief China economist Tao Wang estimated that the national retail sales may drop by 3-4 percentage points due to Covid restrictions in March, compared with January and February. “We believe China’s government will likely ease policies further,” she said, adding that these could include more local stimulus, additional property-policy easing , and a policy rate cut of 10 basis points in the coming month or two.