Limited leverage with monetary policy will force the Chinese government to use a more active fiscal policy to reverse the current economic slowdown, analysts told Bloomberg.
China’s policy makers have already voiced support for cuts to VAT and income taxes due in this quarter and the start of 2019. There is also potential to lower corporate income taxes and social security premiums to free up investment spending by companies.
“We estimate that a two percentage point cut to the VAT rate in the top bracket corresponds to a 0.4 percentage point reduction in weighted-average effective VAT tax and a total of Rmb 400 billion ($57 billion) in tax cuts,” wrote analysts at CICC.
This would likely lead to China’s deficit ratio widening to as high as 3.8% in 2019 from the 2.6% target for 2018, a Bloomberg survey forecasts.
Many analysts agreed that more cuts to the reserve requirement ratio (RRR) will be made next year, unleashing liquidity in financial markets for loans and refinancing. “What the central bank can do is, for example, every quarter there will be an RRR cut of one percentage point,” said Iris Pang from ING.