China to further supply-side structural reform, tax cuts on the way
By Janet Lin
‘Supply-side structural reform’ appears eight times in this year’s China’s government work report, double from last year, which indicates Beijing’s resolution to shift the focus of economic development from speed to quality.
China’s Premier Li Keqiang delivered his annual work report on last Monday, said that the government would focus on deepening supply-side structural reform and seeking high-quality economic growth in 2018.
Put the supply-side structural reform as the first of nine tasks for 2018, Li also mentioned reducing the financial risks, poverty alleviation, tax cuts and environment in his speech at the opening ceremony of the first session of the 13th National People’s Congress.
In reaction to public opinion, Li pledged to lift the thresholds for personal income tax in the report, with extra deductions on children’s education and medical treatment for critical illness, while the details need to be discussed.
With the aim of enhancing productivity, Beijing said it will give a combined 800-billion-yuan tax cut for individuals and businesses.
Advance supply-side structural reform
Initiated in December 2015 at the Central Economic Work Conference, according to a white paper published by the Economic Intelligence Unit (EIU), supply-side structural reform is now the main economic policy framework in China.
The reform focus on the elimination of excess capacity, or in a broad sense, the “three cuts, one reduction, one strengthening”, which means cutting overcapacity, destocking, deleveraging, cost reduction and improving “weak links”, said the president of China Development Institute, Fan Gang, in his article explaining what the reform is.
Dr. Pak Hung Mo, the Associate Professor in the department of Economics at Hong Kong Baptist University, said the supply-side reform was raising production by improving productivity instead of increasing demands, hence the reallocation of the resources in high-productivity industries and improving technological level in all industries.
“The former extensive economic growth model has reached a dead end,” he said, “The surplus capacity should transfer to emerging industries, for instance, medical industry and education.”
The use of high technology and innovation are the essence of the supply-side structural reform. For instance, in the Internet plus action plan, as the energy consumption of traditional industries reduced rapidly through Internet, productivity is highly boosted.
Both state-owned enterprises and private companies would be affected by the reform, in a way that excess capacity enterprises, zombie companies and polluting factories would be closed, releasing resources for more productive companies and green enterprises.
Paul S. K. Luk, assistant professor of Department of Economics at Hong Kong Baptist University said, state-owned enterprises are quite heavily indebted; and the government may need to bail them out, preventing possible fiscal burden in the future.
Another example of the inform would be the guiding opinion issued by the State Council on 2016 that encouraged social investment to enter the key innovating areas, allotting resources into new industry.
The reform has already gradually taken effect in areas such as wind energy industry and electric vehicle industry, and it could benefit the public in terms of higher living standard, more convenient lifestyles and better environment.
Raise the thresholds of personal income tax
The adjustment of the thresholds of personal income tax is also beneficial to implement supply-side structural reform, as individual’s incentive for production would be mobilized, thus productivity is likely to be increased, Ning Li, columnist for Chinese Economic Net said in an article analyzing personal income tax reform.
Ordinary Chinese hailed the government’s improvement on livelihood. Apart from a 30 percent reduction on mobile data charges and promoting legislation on property tax written in the work report, raising threshold for personal income tax was a widely concerned issue over the past year.
Personal income taxes in China has not been changed since 2011. Currently, those who make more than 3,500 yuan or more a month pay taxes, which are unmatched with the rising consumption level and cause a heavy burden on wage earners.
Some lawmakers are suggesting a higher threshold for taxes that would start at 5,000 yuan. Dong Mingzhu, NPC deputy and chairman of air-conditioning giant Gree, in an interview by Securities Times, suggested a threshold that is even higher at 10,000 yuan, which means that to save a Chinese person making 9,000 yuan around 200 yuan a month.
Earning 7000 yuan monthly, Xinyi Chen, who works for China Life Insurance Company in Fuzhou, said she hopes the threshold could be lifted up to 10,000 yuan in a bid to have more spare money.
Shiyi Qin, whose monthly pay is around 5500 yuan, and the expected cutoff threshold also 10,000 yuan, in hope of having a low-stress life. Qin, works at Guangdong Guangye Group Co. Ltd, said the high daily expenditure and house rent in the first-tier city put great pressure on young tenants.
Talking about the impacts of reform on personal income tax, Luk said the poor might be exempted from tax which improves their livelihood, and also, there may be a heavier fiscal burden because total tax revenue is reduced. But China has enough fiscal space for tax reduction, he added.
“Given the high inequality in China it is reasonable that the government involves in more income redistribution,” Luk said.
“The policy makers are equipped with economic knowledge and are heading China towards the right direction in a logical way,” said Mo.