China cuts taxes, sees ‘tough struggle’ as growth slows

China’s premier warned Tuesday that the country faces a “tough struggle” as he unveiled tax cuts to prop up a stuttering economy while increasing military spending to nearly $180 billion.

The slowdown and US trade war have become major challenges for President Xi Jinping, a year after becoming the country’s most powerful leader since Mao Zedong with the abolition of term limits and etching of his name into the constitution.

Premier Li Keqiang told the opening session of China’s annual National People’s Congress that the government is targeting growth of 6.0-6.5 percent this year for the world’s second-largest economy, lowering its range from 2018.

Nearly 3,000 delegates from across the country gathered under tight security, with legislation aimed at improving conditions for foreign investors topping the agenda of the two-week session.

“In pursuing development this year, we will face a graver and more complicated environment as well as risks and challenges … that are greater in number and size,” Li said in his speech.

“We must be fully prepared for a tough struggle,” he said.

The government had set a target of around 6.5 percent in 2018 and eventually recorded official growth of 6.6 percent — the slowest pace in nearly three decades. Three-quarters of provinces have already lowered their annual growth targets this year.


Taxes cut, spending boosted

“We have made a moderate adjustment to our projection on the basis of a thorough assessment of destabilizing factors and uncertainties affecting the economic performance,” Li said.

To combat slowing growth, policymakers have said they will lower taxes, reduce fees and streamline red tape.

China will cut company taxes and employer social insurance contributions paid on behalf of workers by nearly 2 trillion yuan ($298 billion), Li said.

The value-added tax for manufacturers will be lowered to 13 percent from 16 percent and drop one percent for transportation and construction industries.

Beijing will also lift spending, with China’s targeted fiscal deficit set to increase to 2.8 percent of GDP, from 2.6 percent last year.

“They need to strike a balance between boosting economic activity and not restarting another debt-fuelled boom,” said Tai Hui of JP Morgan Asset Management.

Fiscal policy will be “proactive”, while monetary policy will remain “prudent”, Li said, outlining cuts to the reserve ratios at medium and small banks to unleash more funds into the economy.

Beijing is determined to achieve above six percent growth for the next two years to “meet its promise” of doubling GDP for the decade ending 2020, said Lu Ting, an analyst at Nomura bank.


Economic difficulties

Despite the slowdown, the government unveiled a military budget increase of 7.5 percent to 1.2 trillion yuan, though that is lower than last year’s 8.1 percent hike.

China has spent billions on stealth warplanes, aircraft carriers and other advanced weaponry as it faces territorial disputes in the South China Sea and issues warnings against independence in Taiwan.

Recent economic data point to the difficulties China faces, with growth in the last three months of 2018 clocking in at 6.4 percent.

In January, an important barometer of prices in the country’s industrial sector neared contraction territory while China’s imports fell at the start of the year.

Manufacturing activity saw its worst performance in three years in February.

But the country’s stock market soared to its highest point in more than eight months Monday on renewed optimism about a US trade deal.

Relations with the United States deteriorated sharply last year after President Donald Trump hit roughly half of Chinese imports with new tariffs in an attempt to force trade concessions.

Trump, however, has voiced confidence that he could soon sign a deal with Xi.

Li said China will settle “trade disputes through discussions as equals”.

Enforcement of any agreement with the US has emerged as a potential sticking point.

“We faithfully honor our commitments,” Li said.

“Right now both teams are still negotiating because there is still lots left to do,” Commerce Minister Zhong Shan told reporters, adding there have been “breakthroughs in some areas”.

The legislature will next week pass a new law regulating foreign investment and barring the forced transfer of technology by foreign firms to Chinese joint venture partners, in a move that could help ease US trade tensions.

Beijing will “create a fair and impartial market environment where Chinese and foreign companies are treated as equals and engage in fair competition”, Li said.

The European Union Chamber of Commerce in China, which has voiced concerns that the foreign investment law was being fast-tracked, cautiously welcomed the government report.

“We hope that the work report provides real impetus to create a fair and well-regulated Chinese market with global characteristics,” said Mats Harborn, president of the European Union Chamber of Commerce in China.

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