China - A Critical Global Growth Engine, Despite Deceleration

Despite U.S. trade wars, China will stick to its growth target and fiscal easing in the short-term, deleveraging in the medium-term and rebalancing in the long-term. That’s the message of Premier Li’s report.

Released on Monday at the annual session of the National People’s Congress (NPC), Premier Li Keqian’s annual work report sets the general tone for the 2019 economic policies.

In 2019, China has set a lower, flexible economic growth target at the range of 6.0% to 6.5%, while raising its tolerance of fiscal deficit at 2.8% of GDP.

The point about the GDP growth target is not how much it will exceed 6%, but that it should not fall below that level. That’s vital to sustain the quest to double living standard by 2020.

Tax cuts, 11 million new urban jobs

China is focused on raising per capita incomes, eradicating remaining poverty and battling climate change. Beijing is planning to cut $300 billion in taxes and corporate pension payments, especially to ease the burden on small-and-medium size (SME) enterprises.

The idea is also to cut the value-added tax rate that covers the manufacturing sector by 3 percentage points.

In this policy mix, the focus is on cutting banks’ reserve requirement ratios, instead of lowering interest rates and guiding liquidity into SMEs. That supports the aim to create over 11 million new urban jobs.

Still, skeptical observers note that the purchasing managers index (PMI) came in at 49.2 in February representing the worst performance in three years. But the PMI data should be seen in historical context. A decade ago, when Chinese growth still relied mainly on manufacturing exports, PMI data reflected economic realities directly. As China is rebalancing away from manufacturing exports, PMI offers a less accurate picture of the full economy.

Indeed, the new Caixin PMI - which focuses on light industry, as opposed to the official survey’s focus on heavy industry - posted a sharp rebound in February, rising to 49.9 from 48.3 in January.

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Disclaimer: Dr. Dan Steinbock is an internationally recognized strategist of the multipolar world and the founder of Difference Group. He has served at the India, China and America Institute ...

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