MNI POLICY: Fiscal, Credit Support To Drive China Growth Plans

China’s ambition to boost domestic investment and consumption to underwrite a “high quality” and “reasonable” expansion of the economy will require supportive fiscal and credit policies for priority areas like technology and growth of the middle class that are vital to delivering on President Xi Jinping’s vision, policy advisors told MNI.

Xi’s call for the nation to “move faster to build a modernized economy” highlighted the urgency to recalibrate China’s growth drivers as he reaffirmed his commitment to the “dual circulation” strategy as integral to a “new development pattern” at the 20^th National Congress on Sunday. China will also engage in the global economy at a “higher level”, Xi said. (See MNI: China’s Xi Pledges Reform, eyes Domestic Demand Growth)

The new vision places more emphasis on expanding demand, while retaining a focus on supply-side reforms said Zhang Yiqun, director of a fiscal studies institute affiliated with Jilin province's finance department.

He said short-term measures will focus on maintaining strong levels of government-led investment, boosting car sales, subsidising or issuing consumer coupons to those on lower-incomes, and keeping luxury spending within China by building more duty-free shops and importing more high-quality overseas products for shoppers to buy.

TECH TAKES CENTRE STAGE

Longer term investment will be needed to fast-track the modernisation of China industrial base and provide the services required to meet the demands of China changing demographics and ageing population. President Xi spoke of the need for “new industrialisation” and continued “green development”.

“Investment in high-tech innovation, digital manufacturing, modern services, as well as health and aging care will be strengthened as these sectors are expected to enjoy policy support from both fiscal and credit sides,” said Xu Hongcai, deputy director of the China Association of Policy Science’s Economic Policy Commission.

An advisor who asked to remain anonymous, told MNI that both fiscal and monetary authorities will further support manufacturing upgrades and green growth via direct government investment and cheap funds. The People’s Bank of China could expand its targeted tools for tech innovation and green growth, and require lenders to increase loans to these sectors, the source said.

GROWING THE MIDDLE CLASS

Reforms to China’s income distribution system are viewed as crucial to promote the Party’s vision of “common prosperity” and increasing purchasing power. This will be delivered by increasing the earnings of low-income workers and expanding the middle class.

The hunt for additional revenue could lead to tougher investigations on possible tax evasion by China’s largest companies, said Zhang. He added that there was limited room to raise tax rates as it may spark capital flight at a time when other countries are cutting tax rates.

Doubling the size of middle-income earners will be crucial to driving domestic demand, said Xu. “The 300 million of new citizens, mainly migrant workers, has the potential to stimulate spending such as on house buying, education and medication treatment, which needs further policy support,” he said, estimating the middle-income group would grow to about 700 million by the end of 2035 from 400 million currently.

Property tax will be used to address income disparities but would not be embraced over the next two to three years given government policies to support the weak market, Zhang added.

LONG TERM GOALS

President Xi calls to “effectively upgrade and appropriately expand economic output” was interpreted by advisors as highlighting a demand for solid growth to meet the government’s long-term development goals.

Annual GDP needs to increase by 4.7% on average from 2021 to 2035 to meet the target of becoming a medium-developed country by 2035, calculated Tianfeng Securities analyst Sun Binbin. This translates to annual GDP expanding by around 5.5% on average during 2020 to 2025.

Given GDP grew by 8.1% in 2021, the economy would need to expand by about 3% this year to realise an average growth of 5.5% in two years, he noted.