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Central Bank Policy impact

Chinese government steps up the effort to support growth - Takeaways of China’s state council executive meeting

13 Aug 2018
Jack Jiang, Senior ETF Specialist, Index and Quantitative Investment, ICBC Credit Suisse Asset Management (International) Company Limited

On 23 July 2018, China’s state council executive meeting hosted by Premier Li Keqiang announced the fiscal and monetary policy will be further fine-tuned aiming to boost domestic demand. And the meeting reiterated that China will strike a balance between “easing and tightening” and keep liquidity “reasonable and sufficient”. It was also stressed that China will not resort to outright stimulus.


Here are some key points to come out of the state council executive meeting: 


More tax incentives to support technology upgrading:

  • On top of 1.1 trillion Yuan of reductions in levies and fees in the pipeline of 2018, the State Council announced that it will further expand the promised R&D tax credit (75% of cost) from small to medium-sized companies to all companies, which will bring additional tax cut worth of 65 billion Yuan. 
  • The government requested to finish the refund of 113 billion Yuan of the drawback of the withholding tax to the qualified enterprises in advanced manufacturing and modern service industry. 
  • The state council also requested to accelerate the issuance of 1.35 trillion Yuan of special local bonds and fund for the infrastructure projects.

Prudent monetary policy to keep sufficient liquidity:

  • It was stressed to keep the appropriate total social fund, “reasonable and sufficient” liquidity and smooth capital transition mechanism. 
  • The government requested the implementation of the various incentives to small and micro enterprises (SMEs). It was instructed that financial institutions support SMEs and the initiative of debt-to-equity swap by the specific funds with Required reserve ratio (RRR) reduction. China also encouraged the commercial bank to issue financial bonds for SME with the waiver of the requirement of consecutive profit of the issuer. 
  • The meeting also set up the target to increase 140 billion Yuan loan for around 150 thousand SME every year. 

Faster investment growth:

  • The government boosted the private investment in the projects in transport, oil and gas, and telecommunications. 
  • The statement also seeks to guide financial institutions to guarantee reasonable funding to Local Government Financing Vehicles so that essential projects aren’t held up, to facilitate construction and planning of a number of large scale projects that will meet development purposes and public demand. 

Furthermore, it was also mentioned to clear “zombie enterprises” - companies that require government support in the form of subsidies and bank loans to operate - and related invalid capital.  


In general, Chinese government stepped up the effort to support the growth, confirming from consolidation to a more neutral stance amid the economic headwinds. And it seemed like Chinese financial markets are recovering an appetite for risk not seen in months, taking cues from the government’s push to invigorate the economy.


Given the 726 billion Yuan deficit in first half of 2018 versus around 2.38 trillion Yuan as budgeted full-year deficit (2.6% of 2018 GDP), together with 5 trillion Yuan in fiscal deposits and robust land sales revenue, there is still ample room for further fiscal easing. 


As for the monetary policy, below-target inflation and a stabilizing debt mean that the government can afford to further lower the Required Rate Of Return (RRR). This can increase lending funds to facilitate the corporate development. Market players expects additional cuts of RRR rate in the second half of 2018.



The state Council of The People’s Republic of China, 24 July 2018:


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