China Promises Corporate Tax Cuts to Support Economic Shift to Services
Li Keqiang says reductions will amount to $76.8 billion this year
Premier Li Keqiang said Beijing will reduce the tax burden on Chinese companies to spur dynamism and help the economy’s shift toward consumption and services from manufacturing.
In a nearly hourlong speech Thursday at the annual Boao Forum for Asia—China’s answer to the Davos World Economic Forum—Mr. Li told about 2,000 foreign and Chinese officials and business leaders that the government will push ahead with tax cuts, with a particular focus on helping promising service industries, including those involved in research and development. He said such tax cuts will amount to 500 billion yuan ($76.8 billion) this year.
“This is a major step to promote structural reform,” he said. “We have great development potential as well as resilience.”
Mr. Li said China will remain open to the world, gradually liberalize its services market to outside investment and avoid a rapid depreciation of the yuan in keeping with its bid to encourage higher-value industries.
The premier acknowledged that China’s way forward won’t be easy, but said Beijing willstick to its pledge to deliver growth of at least 6.5% annually between now and 2020, even as it pushes ahead with structural reform.
Comparing China’s economy to a bullet train, he said running the train at high speed isn’t economical, so Beijing’s goal is to run it at “reasonably high speed.”
In themes likely to play prominently as China hosts the Group of 20 major economies this year, Mr. Li called for economic and financial coordination as an antidote to market volatility, new growth drivers and improved productivity to steer Asia and the world onto a more robust growth trajectory.
He reiterated that China’s employment outlook remains stable, domestic consumption continues to grow and the country has multiple tools to defend itself against systemic risk.
Mr. Li said China’s tax, fiscal and monetary policies will be marshaled to foster new sources of growth, including high-tech industries, cutting-edge technologies and more advanced manufacturing.
Offering an example, Mr. Li cited his recent visit to an innovation center on the southern island province of Hainan, where the Boao forum meets. The center developed a drill to punch holes in coconuts, affording a safer and more efficient way to insert straws so tourists can drink the juice.
Revenue in the Chinese tourism industry grew 19% last year, underscoring the dynamism and employment opportunities afforded in this sector, he added.
Economists say Beijing’s quest for 6.5% growth over the next five years could lead Beijing to resort to excessive stimulus and backtrack on pledges to restructure traditional industries. Last year, China grew by 6.9%, its slowest pace in a quarter century.
“They have to stick to the target,” said Mizuho Securities Asia economist Jianguang Shen before the speech. “Without huge stimulus, I don’t know how to achieve it.”
Economists say that some other policy tools, such as market interventions and efforts to micromanage capital flows or direct state-owned banks and companies may be hitting a point of diminishing returns.
“I fear that the current top leadership doesn’t realize how important national and international credibility on economic reforms and management is,” said Pieter Bottelier, formerly with the World Bank, in comments before Mr. Li’s presentation.
Mr. Li said China won’t try to defy the laws of economics and will gradually address excess industrial capacity, citing a plan to pare production in the overbuilt steel and coal industries. This includes a fund for retraining and relocating an estimated 1.8 million workers who are expected to lose their jobs.
Industry officials say the outlined cuts will only trim about 10% of overcapacity in sectors where the excess is already more than 30%.
Mr. Li underscored China’s bid to spur regional growth and expand its influence by building infrastructure under its “One Belt, One Road” initiative. In a sign of China’s growing regional influence, leaders from Cambodia, Laos, Myanmar, Nepal, Indonesia, Kazakhstan, Russia and Thailand—among others—attended the forum.
Upgrading China’s economy is good for China and provides opportunities for the rest of Asia, Mr. Li said. China will overcome temporary difficulties and “embrace a bright future,” he added.
Source: Wall Street Journal
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