context: In the Chinese capital market, April and beyond sets the tone for yearly economic performance as most data is not released during the Spring Festival. Significant tax cuts, not monetary easing or infrastructure expansion, seem to bolster consumer confidence and inject energy for growth.
China's A-share market surged after the Spring Festival this year—a nearly perfect start to the year. Moving forward, Jiang Chao 姜超 Haitong Securities lead analyst says five features are critical to understanding the 2019 macroeconomy, namely
- strong fiscal policy, weak monetary easing
- 2019 saw a C¥1.75 tn liquidity release through reserve requirement lowering; offset by suspension of open market operations recouping C¥1.9 tn, far less than the C¥4.00 tn net liquidity release in 2018
- currency oversupply is controlled with the shadow banking crackdown
- M2 growth is sitting at 8 percent, a near 20-year low
- reserve ratio in China is basically on par with major international economies, says Yi Gang 易纲 People’s Bank of China governor, foreshadowing a narrowed policy space
- by contrast, active fiscal policy featuring large-scale tax cuts is beyond expectation
- January 2019: six personal tax deductibles expected to cut C¥100 bn tax; small business inclusive tax cut program to reduce C¥200 bn tax
- April 2019: VAT cuts estimated to be C¥800 bn
- May 2019: employer pension submission reduction to alleviate their burdens by C¥300 bn
- C¥300 bn cuts in various administrative fee forthcoming
- C¥2 tn estimated tax cuts is much higher than C¥500 bn, C¥550 bn, and C¥1.1 tn goals in 2016-18
- consumption, not investment, to stabilise the economy
- investment unlikely to drive the economy because of insufficient monetary easing
- tightened regulation of local government implicit debt results in a lack of funding for infrastructure
- large-scale tax cuts could fuel consumption, which accounts for 55 percent of GDP already and almost five times the amount of real estate investment
- therefore, consumption growth is enough to hedge against declining investment and export
- stronger CPI performance than PPI
- VAT reduction will lower the price of industrial products and drive down PPI
- for CPI, tax cuts and fee reductions will increase disposable income
- profit growth will be ahead of GDP because strong tax cuts and reduction in social securities costs directly increase company profitability
- asset prices
- stock market valuation is low in history whereas housing market valuation is near its historical high
- currency oversupply benefits the real estate, but tax cuts will give hope to stock markets