The Great Stimulator

Can China stimulate their way to growth?

Oil prices are weighing signs of slowing growth in Germany versus the impact of more stimulus in China, against a backdrop of the U.S. finally not allowing waivers to buyers of Iranian oil and signs that U.S. oil supplies will fall.

Yesterday, the market questioned whether China was doing enough to stimulate its economy after bad trade data. Today they decided they were not doing enough. After lowering the reserve requirement for Chinese banks last week and move to tax cuts instead of infrastructure spending for the sake of infrastructure spending, China announced tax cuts that seem to put global markets and oil back into the risk-on mood.

The Guardian reported that China’s finance ministry has pledged to slash taxes, to reduce the burden on small firms, as part of a new stimulus drive. Under the plan, Beijing will cut value-added tax rates for some companies, including in manufacturing, and hand tax rebates to others. China also plans to step up fiscal expenditure this year, in what looks like a Keynesian push to help companies. Xu Thongchai, Assistant Minister of Finance, told reporters in Beijing that the government was determined to ease the burden on small enterprises and the manufacturing industry, adding: The focus is on enhancement and efficiency. Then in a coordinated move to reassure markets, China’s central bank has promised to make monetary policy more forward-looking, flexible and targeted.

The reason for China’s slowing, of course, is in large part due to the trade war. President Trump, on Monday, said that China is feeling the pain from U.S. tariffs, boding well for a trade deal, but talks so far between the two nations haven’t yielded concrete results, according to the Wall Street Journal.

Yet for oil, we know that there is trade progress as China has restarted imports of U.S. oil supply. Reuters reports that “Three cargoes of U.S. crude are heading to China from the U.S. Gulf Coast, trade sources said on Monday, the first departures since late September and a 90-day pause in the two countries’ trade war that began last month.”

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