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Two Sessions special: big tax cuts, higher local government bond quotas, more loans to small companies

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By Rebecca Feng
08 Mar 2019

In this special round-up on China’s annual ‘Two Sessions’ parliamentary meeting, premier Li Keqiang promised a bigger tax cut than expected, increased the local government special purpose bond quota and demanded large commercial banks to boost their lending to small enterprises

As usual, major economic development targets were set out in the government work report delivered by the Chinese premier on the morning of the first day of Liang Hui, which translates as the ‘Two Sessions’.

Premier Li Keqiang set the GDP growth target at 6-6.5%, the lowest since 1991. Other growth targets and major policy measures were also set, such as the creation of 11 million urban jobs, a 4.5% unemployment rate and 10 million people being pulled out of poverty.

Infrastructure spending was set at Rmb2.6tr ($386.5bn), with Rmb800bn allocated to railways and Rmb1.8bn to highway and water transport.

Li again confirmed that policies regarding the property market should be made at a city level rather than at a provincial level. Li also made more general promises such as further relaxing controls on foreign investors in China’s bond and equity markets, shorten the negative list for foreign investment, and open up more sectors for wholly foreign funded enterprises.

The three surprises from tax cuts, the local government bond quota, and a further push for big commercial banks to lend to small and micro enterprises.


The total tax and social contribution cut for corporations will reach Rmb2tr this year. Last year’s tax cut was Rmb1.3tr. Value added tax (VAT) will be cut from 16% to 13% for the manufacturing sector and from 10% to 9% for the transportation sector.

The fiscal deficit target was set at 2.8% of GDP, an increase from last year’s 2.6%. The fiscal deficit is likely to go higher than this level, said Yu Song, China economist at Beijing Gao Hua Securities. Otherwise, the government may be forced to make up for tax cuts with other measures.

“The impact of this adjustment is clearly positive, especially for manufacturing companies, but the size of the impact is not as clear as it may seem because of the uncertainties related to the actual fiscal deficit level versus official budget level,” Song wrote in a Wednesday note. “If the actual deficit level is only increased by 0.2%, the cuts in VAT may lead to increases in taxes in other areas, often via more stringent tax collection which requires no change in tax rates or additional cuts in government spending.”


The quota for special purpose local government bond issuance — effectively project finance — was set at Rmb2.15trn, an Rmb800bn increase from 2018.

“This is expected to improve funding for key infrastructure projects which will be mainly focused on high-end manufacturing, 5G, and IT infrastructure development,” Ma Xiaoping, an economist at HSBC, wrote in a Thursday note.

Yubin Fu, a sub-sovereign analyst at Moody’s, said in a Wednesday note expects the direct debt of regional and local governments to increase to 83% of fiscal revenue in 2019 from around 77% in 2018. The increase will likely be due to the lower fiscal revenue growth, which Fu thinks will slow to 5.4% from 11.5% in 2018.


Premier Li also demanded big commercial banks to extend 30% more loans to small and micro enterprises this year.  But bankers said the proposal remains vague — and could be hard to achieve.


In a series of smaller-scale meetings following Tuesday’s government work report, more concrete policies were announced.

In terms of further opening up the market to foreign investment, the National Development and Reform Commission (NDRC) promised to loosen foreign investment restrictions during a press conference on Wednesday.

Ning Jizhe, vice chairman of the NDRC, said the opening-up efforts will be focused on four specific sectors – agriculture, mining, manufacturing, and services.

The government promised a faster approval process and preferential land-use policies for foreign investment in sectors of new energy, advanced manufacturing, petrochemicals and electronic information.

In another press conference, China Banking and Insurance Regulatory Commission chairman Guo Shuqing told reporters that China and the US will be able to reach an agreement in terms of opening up the financial market.

By Rebecca Feng
08 Mar 2019