MNI INTERVIEW: China Has No Big Scope For Tax Cut: Gov Advisor

--Fiscal Spending To Pick-Up in H2: Zhao

--Looser Regulation Can Help Ease Tight Credit Conditions

     BEIJING (MNI) - While fiscal stimulus will be increased in the second half

of the year, China's limited fiscal space precludes the implementation of large

tax reductions or big government expenditures to stimulate the economy. As such,

an easing of the government's regulatory drive would be a better option for

tackling tight credit conditions, according to Zhao Quanhou, director of the

financial research office at the Chinese Academy of Fiscal Sciences, a think

tank run by the Ministry of Finance.

     "There is no big space for the fiscal authorities to cut tax, given that

the government would have to raise more debt to do so in order to also keep the

fiscal deficit in check," Zhao said.

     At a State Council executive meeting on July 23, officials discussed

implementing a "more proactive" fiscal policy to boost the slowing economy.

Markets appear to have interpreted this as a sign of impending radical tax cuts

or other fiscal stimulus measures -- but Zhao, a veteran fiscal policy expert,

denied such possibilities.

     "Fiscal policy will be implemented according to the plan set earlier this

year, as part of which the pace of fiscal spending will accelerate in H2, as it

was slow in H1," Zhao said. He also stressed that liquidity conditions could be

helped if regulators ease restrictions which are currently weighing on

infrastructural investment, which is one of the main reasons behind the economic

slowdown. If this is done, then there is no need to significantly loosen fiscal

policy, Zhao added.

     --TAX REDUCTION

     As early as this March, Premier Li Keqiang said in his annual working

report that China would cut CNY1.1 trillion of taxes and fees this year to

"relieve the burden on the real economy." At the recent State Council meeting,

the Premier announced another CNY65 billion tax reduction targeting companies'

research and development spending.

     But Zhao considers the additional reduction to be just a small amount, and

told MNI that the CNY65 billion figure is "based on the rapid increase of fiscal

revenue in H1."

     --FISCAL SPENDING

     Fiscal spending increased at a far slower pace than fiscal revenue in H1.

     "The slowdown of fiscal spending in H1 was largely due to shrinkage of

local governments' investment as many of them have repaid the matured debt of

their funding vehicles via raising new debt, which means they were not able to

invest in projects," Zhao said, adding that the scrutiny of funding vehicles and

public-private partnership projects also discouraged investment in

infrastructure by local governments.

     --INFRASTRUCTUE INVESTMENT

     There has been a consensus that infrastructure investment will accelerate

as fiscal and credit policy loosen, particularly following the decision made at

the July 23 State Council meeting to allow local governments to issue CNY1.35

trillion of special bonds for infrastructure investment earlier than initially

planned.

     "The bond issuance will strongly support the infrastructural sector. In

addition, the policy of enhanced PPP scrutiny will be pushed forward once the

illegal ones have been dealt with," Zhao said, adding that "the government will

encourage the development of PPP projects, but not at an explosive rate."

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--MNI London Bureau; +44 207-862-7489; email: ukeditorial@marketnews.com

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