China’s stimulus has brought limited relief to lockdown-hit customers

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(Bloomberg) – China has created a comprehensive package of support systems aimed at businesses struggling to cope with the coveted lockdown, including limited relief for customers facing job losses and loss of income.

The State Council, China’s cabinet, has outlined a 33-point plan that would give companies an additional 140 billion yuan ($ 21 billion) in additional tax rebates and allow them to provide social insurance and repay loans. Additional emergency loans will go to the aviation industry, and railway construction will be encouraged by 300 billion yuan bonds.

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Support for consumers was limited to cutting taxes on vehicle purchases, suspending certain consumer and mortgage loans, and ensuring increased social benefits in line with price increases.

Premier Li Keqiang, who chaired the cabinet meeting, stressed the importance of job stability and the need to get the economy back on track. However, the authorities are reluctant to provide direct assistance to families, such as cash handouts and consumer vouchers, limiting the effectiveness of Chinese assistance.

While many economists expect the government not to meet its annual GDP growth target of around 5.5% this year, UBS Group AG will lower its projection to just 3%.

“We believe that these measures will help somewhat and slow down the growth slowdown or even the contraction, but we are wary of this year’s growth prospects,” economists at Nomura Holdings Ltd., led by Lu Ting, wrote in a note.

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Read more: China takes 33 steps in latest push for economic relief

Chinese auto and airline stocks rallied on news of tax relief and debt support for the industry. Great Wall Motor Co. Hong Kong rose 14% while Gili Automobile Holdings rose 11%. Air China Limited gained about 4%.

Nevertheless, in the larger equity market some investors say that much support has already been factored with the lower end.

Zhu Peng, an analyst at China International Capital Corporation, said: “The impact of various facilitation policies may be smaller than in previous economic cycles because companies under the epidemic face a lot of uncertainty and are reluctant to invest or spend,” said China International Capital Corporation

The additional tax relief announced on Monday represents about 0.1% of China’s gross domestic product last year and pushed the government’s planned tax cut to 2.64 trillion yuan this year – slightly more than the relief Beijing gave in 2020 when China first hit. Worldwide.

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“Without a certain level of GDP growth, stable employment cannot be realized,” Lee said. “The good thing is that we’ve been refraining from over-funding and massive stimulus over the last few years, and we still have reserves of policy tools.”

China’s zero-tolerance policy in the fight against Covid-19 has forced major centers like Shanghai to lockdown for more than a month, disrupted supply chains, reduced production and pushed unemployment rates to record highs.

The State Council said it would develop policies to help supply chain function, streamline domestic freight and increase the number of domestic and international flights.

Beijing will extend an existing delay on the company’s social-insurance contribution by the end of the year and expand the measure to further sectors, with the amount of that delayed payment expected to reach 320 billion yuan. Loan quota for small and medium enterprises will be doubled.

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Iris Pang, chief economist for Greater China at ING Groep NV, said that while the measures focused primarily on the “supply-side” of the economy, the State Council emphasized work stability, which is important for increasing utilization. Infrastructure spending, he said, “should also provide jobs.”

However, several prominent economists have called for more direct support from families, such as cash handouts and cost vouchers, to boost demand in the economy. Justin Lin Ifu, a former chief economist at the World Bank, has recommended that the government provide 1,000 yuan to areas under lockdown. Gao Zhanjun, a researcher at the National Institution for Finance and Development, echoed those sentiments for cash handouts and consumption coupons.

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This year’s outline was a major focus of the State Council’s arrangements on infrastructure. It called on local governments to spend the proceeds of special bonds, mainly used on infrastructure, by the end of August. Beijing will launch multiple projects in areas such as water, renovation of old housing, energy security and underground piping. It will also usher in a new round of rural road construction and renovation.

Separately, calls are mounting for the government to sell “special sovereign bonds”, as it did in 2020, to pay for additional stimulus. The state-run China Securities Journal, citing analysts in a front-page report on Tuesday, suggested that more monetary policy instruments could be used later, including the sale of special government debt.

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What Bloomberg Economics Says

“The Chinese government is using more and more financial space to shore up the economy. The recent move – a package of measures aimed at easing the burden on small businesses and families – could add to the growth, which we expect to be lower this quarter. Stimulation is probably not enough to encourage a rebound. But it shows that the government is willing to create more resources to prevent the deterioration of the fight against Kovid-19. “

– Chang Shu and Eric Zhu, economists

Read the full report here

Unlike regular bonds, special sovereign bonds are not counted as government budget deficits and revenues are used for specific policy purposes rather than for public spending.

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Beijing has expanded the scope of its tax relief policy in recent weeks but has not revised its fiscal target for the year, which was set in early March before the Omicron variant imposed severe lockdowns in Shanghai and other major urban centers. At the time of the budget’s release, the government said it would provide about 2.5 trillion yuan in tax breaks this year, including 1.5 trillion yuan.

The latest State Council arrangement does not say how the additional tax cuts will be financed, or whether they will need to revise Beijing’s official deficit target for the year.

© 2022 Bloomberg LP

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