Tax cuts, spending boost to counter tough struggle

Top News | AFP and AP 6 Mar 2019

China's premier warned that the country faces a "tough struggle" as he unveiled tax cuts to prop up a stuttering economy while increasing military spending.

And in a bid to defuse US and European complaints the Chinese system is rigged against foreign companies, Li Keqiang promised in a speech to the National People's Congress they will be "treated as equals" with mainland competitors.

Li, the country's top economic official, set this year's growth target at 6 to 6.5 percent, reflecting official determination to shore up a cooling, state-dominated economy and prevent politically dangerous job losses in the face of US tariff hikes and weaker global demand. It is off slightly from last year's 6.6 percent growth, a three-decade low, but would be among the world's strongest if achieved.

Li promised to "promote China-US trade negotiations," but gave no details of talks aimed at ending the fight with US President Donald Trump over Beijing's technology ambitions and complaints it steals or pressures companies to hand over technology.

President Xi Jinping's government was expected to use this year's session to announce measures to support economic growth including tax cuts and more support for entrepreneurs who generate China's new jobs and wealth.

China will cut company taxes and employer social insurance contributions paid on behalf of workers by nearly 2 trillion yuan (HK$2.34 trillion), Li said.

The value-added tax for manufacturers will be lowered to 13 percent from 16 percent and drop 1 percent for transportation and construction industries.

Beijing will also lift spending, with China's targeted fiscal deficit set to increase to 2.8 percent of GDP, from 2.6 percent last year.

Fiscal policy will be "proactive", while monetary policy will remain "prudent," Li said, outlining cuts to the reserve ratios at medium and small banks to unleash more funds into the economy.

Li pledged higher spending on technology development the Communist Party sees as a path to prosperity and global influence and more money for education, social programs and public works construction.

Li warned the second-largest economy faces a "graver and more complicated environment" and risks that "are greater in number and size."

Companies and investors are looking for details of how Beijing will carry out promises to curb the dominance of state industry.

Legislators also are due to endorse a law that aims to ease tensions with Washington and Europe by discouraging officials from pressuring foreign companies to hand over technology.

Spending plans reflect "emphatic pro-growth efforts" and a "commitment to offset external headwinds," said Vishnu Varathan of Mizuho Bank.

The proposed tax cuts would put "significant spending power" in the hands of consumers and companies and help to buoy sagging demand for autos, household appliances and other goods, said Varathan.

Beijing wants to "ensure a soft landing," he added.

Li, the No 2 leader behind Xi, said Beijing will spend more on technology development including artificial intelligence, electric cars, biotechnology and new materials.

China's emergence as a competitor in smartphones, telecom equipment, solar power and other technologies has increased the range of products available to consumers and helped to drive down prices.

But it rattles Washington and other governments that worry Chinese competition is a threat to their industries and employment.

Spending on the People's Liberation Army will rise to 1.2 trillion yuan, according to a separate report issued by the finance ministry. China's total military outlay, the second-largest behind the United States, is estimated by independent experts to exceed US$220 billion (HK$1.72 trillion) a year when off-budget expenses are added in.

Yue Gang, a military expert and retired Chinese army colonel, said the relatively modest rise in military spending - down from the double-digit percentage increases of past years - reflected the new economic conditions China is facing.

"It is more urgent for China to prepare for a trade war with the US, instead of a physical war," Yue said. "The basic reform of China's military structure and system are almost completed and China needs the money to be used for more urgent matters."

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