China’s annual National People’s Congress ended in March with premier Li Keqiang outlining plans to stimulate private business to achieve stable economic growth this year.

State agencies will reduce taxes and fees for companies by 2 trillion renminbi – USD300 billion – financed by cuts in administrative expenditure and taking a greater share of profits at state-owned enterprises and banks. However, government spending on productive areas, including infrastructure projects, social-security, plus science and technology, will increase.

Premier Li said structural reforms and greater openness are critical for unleashing market forces. Adopting competitive neutrality will provide a level playing field for -foreign and domestic private companies. He emphasised that China remains the largest recipient of foreign direct investment among emerging markets.

He urged China's financial sector to better help the private sector, especially small firms, and vowed to reduce their funding costs by 1 percentage point this year.

The main policy messages from the National People’s Congress are:

*Beijing has become more decisive on stimulating the domestic economy. The tax cut – more than 2 per cent of GDP – exceeds expectations but interest rates and other monetary tools will also be used to increase funds for the real economy. Major state banks have been asked to raise their lending to private firms by 30 per cent.

The fiscal budget is being increased modestly from last year’s 2.6 per cent of GDP to 2.8 per cent but Beijing plans to deploy some of the 30 trillion renminbi of unused fiscal deposits to finance tax cuts while also allowing more local-government special bond issuance to finance new infrastructure projects.

* Corporate tax cuts are the core of the fiscal stimulus. Value-added tax is being cut from 16 per cent to 13 per cent for manufacturing (which accounts for two-thirds of VAT receipts) and from 10 per cent to 9 per cent for the transport and construction sectors. We estimate the tax savings at about 800bn renminbi, potentially adding half a percentage point to GDP growth.

* Credit easing will target private companies. The key aim remains avoiding an overly loose monetary policy, maintaining sufficient liquidity, and effectively mitigating difficulties in the real economy. The central bank will tell large banks to direct at least 30 per cent of total new lending in 2019 to private firms.

* Structural reforms will be speeded up. Reforming issues such as subsidies and market access following the principle of competitive neutrality will support growth, but also facilitate China-US trade talks and negotiations to join other trade pacts.

* Growth is bottoming before stimulus and reforms fuel a modest recovery. We expect 2019 growth of 6.6 per cent, overshooting Beijing’s target, led by the private sector this time, not the debt-dependent property and state-owned enterprises.

This means a broader-based, and hence more sustainable, recovery given that private firms account for over 60 per cent of China’s GDP, 70 per cent of patenting activity and 80 per cent of urban employment. And because private firms are much more efficient users of capital, re-allocating the new credit and fiscal resources away from the state sector will reduce the credit-intensity of future GDP growth.

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