Tax cuts, tax cuts, tax cuts - China Tip Sheet, March 21

Driving the Day

1. State Council focusesontax cuts

The State Council did its thing on Wednesday, holding itsweekly executive meeting.

This was the first meeting since the conclusion of the Two Sessions, so it was no surprise that Wednesday’s get-together focused on carrying out the priorities that were recently laidout.

Topping the list of priorities – tax cuts.

Here’s a recap of the key measures (Gov.cn):

“Lowering the VAT rate in manufacturing and other industries from 16 to 13 percent.”
“[Lowering] the VAT rate in transportation, construction and other industries from 10 to 9 percent.”
“The input VAT eligible for deduction will be expanded and will cover passenger transportation services.”
“Taxpayers whose main businesses are postal services, telecommunications, modern services and consumer services will receive a 10 percent additional input VAT deduction before the end of 2021.”

The meeting also decided to extend tax breaks for companies working in poor areas.

There’s not time to waste: The tax cuts go into effect on April 1.

What to watch: These tax breaks will help the economy – but how much?

Finance Economics

2.Local governments issuing lots ofbonds

Local government bondshave come out of the gate hot in 2019:

Local governments havealready issued RMB 1.05 trillion worth of bonds this year.
That compares to just RMB 220 billion of issuance in Q1 2018.

Some context: The y/y comparison isn’t really fair, given that authorities approved the 2019 bond quota last December, instead of waiting until March like usual (see December 18 Tip Sheet).

More context: The reason for the early approval was precisely so that local governments could issue a lot of bonds at the beginning of the year.

All that being said, on a sequential basis, issuance is slowing.Local governments issued:

RMB 418 billion in January
RMB 364 billion in February
RMB 274 billion so far in March

Of course, issuance could ramp up into month’s end, but from where we sit things seem to be stalling out.

What’s more,the average Jan-Feb issuance of RMB 391 billion is still well below the Mar-Oct 2018 average of RMB 503 billion (typically the prime months for issuance).

The key point: Even with decent local government bond issuance throughout Q1, the economy has continued to struggle. If issuance fallsfurther, it would be yet another economic headwind.

Finance Economics

3.Local governments incentivize rural residents to buy houses

Are you looking to buy a vacation home in lovely Chengwu County, Shandong?

If so, it’s a great time to buy (Caixin):

“Chengwu, a small county under the administration of Heze city in the eastern province of Shandong, is encouraging its rural residents to purchase a first, newly built home in local urban areas.”
“This month, the county began offering subsidies of 300 yuan ($44.80) per square meter (10.76 square feet) to rural residents who have received approval and have completed moving their household registration, or ‘hukou,’ to an urban area.”

Apparently, this type of incentive program is starting to catch on, at least to a small extent:

“Some local governments have been increasing purchase subsidies for rural residents as a way to reduce the amount of unsold homes in their areas.”

But don’t get too excited. This doesn’t represent a widespread juicing of China’s real estate market.

Instead, it speaks to the entrenched challenges in China’s smaller property markets.

Get smart: Chengwu county is home to about 600,000 people, or about 0.05% of China’s population.So when it comes to supporting China’s national property market efforts like these don’t even touch the needle, let along move it.

Politics Policy

4.Energy sector in for a shake up

State-owned enterprises beware – the discipline inspectors are coming for you!

That’s according to Zhao Leji, head of the Party’s discipline commission (CCDI).

On Wednesday, Zhao identified the organizations that will be in focus for the next round of inspections.

SOEs are squarely in the crosshairs:

A total of 42 centrally-administered SOEs will be up for scrutiny – almost half of all national SOEs.
What’s more, the central SOE administrator (SASAC) is in for inspection as well.

Of clear focus is the energy sector. Inspectors are going to find out what’s going on at:

The Big Three oil companies
Four of the Big Five power producers, as well as China Three Gorges Group
The two main grid operators

For good measure,inspectors are also heading over to the National Energy Administration to find out what the regulators are up to.

Here’s what the inspectors are looking to assess:

Implementation of Central Committee decisions
Strict self-governance over Party cells
Proactive Party-building
Rectification of problems discovered in previous inspections

What it all means: We are hearing that SOEs are once again being resistant to various market openings and other reforms.

Will the discipline inspectors be able to bring them in line?

Politics Policy

5.Central government devolves authority for administrative law enforcement

A crucial development for business is quietly developing behind the scenes.

Central authorities have recently circulated internal instructions for instituting reforms to the enforcement of administrative laws at the local level.

Agencies responsible for enforcement include the local branches of the new market regulator (SAMR) and the environmental protection ministry (MEE).

Based on official interpretations (links below) and some of the actual directives we’ve seen, there are five key goals that authorities want to accomplish:

Consolidate respective enforcement bodies, following on from the consolidation of local SAMR and MEE bodies
Beef up enforcementat the city level and shorten the chains of command
Cutredundant law enforcement personnel at the provincial level, since enforcement is primarily conducted at the city level
Improve the quality of law enforcement recruits by raising the bar for hiring
Reduceredundant and overlapping enforcement items

The broader objective:

Increase overall manpower to make sure rules are followed
But preventunchecked intrusions into business operations

Get smart: Businesses may not believe us yet, but this is all part ofrenewed efforts to optimize and improve the business environment – a key goal established at the Two Sessions for 2019.

Politics Policy

6.Marshalling a German fund

When it comes to global attitudes toward Chinese trade and investment practices, the world is fed up with what itsees as an unlevel playing field.

Increasingly, countries are looking for ways to level the field.

A pending move by Germany is a sign of the times (Reuters):

“Germany plans to pass legislation by the end of 2019 to create a state-owned fund that can protect key companies from takeovers by Chinese and other foreign firms.”
“Two senior government officials…said the idea was for the state-owned investment fund to work with the private sector when buying company stakes to foil unwelcome takeovers.”
“One official said the state could buy a stake initially and then sell it on as soon as possible to private investors.”

It’s all about the creeping definition of “national security” as it relates to the economy:

“’In the past, Germany was too reluctant to define its national interests.”
“‘This is changing now,’ the first government official said.”

What to watch: We expect Germany won’t be the last country to make such a move.

The irony: In trying to change Chinese industrial policy, Western democracies are becoming more like China – not the other way around.

Tax cuts, tax cuts, tax cuts – China Tip Sheet, March 21

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