China Makes Fiscal-Policy Nudge, Not a U-Turn

China’s pledge to lower corporate taxes and encourage infrastructure projects amounts to a fiscal nudge to counter slowing economic growth, not a policy U-turn or a relaxation of controls on local government spending, analysts said.

The State Council said Monday that China would take a more active fiscal policy posture and pledged to accelerate local governments’ special bond issuance for infrastructure projects. Chinese stocks rallied higher Monday on speculation of a large-scale policy easing.

“It is not a policy shift or broad-based easing, but an expected fine-tuning,” said Niu Li, deputy director of the Economic Forecasting Department at the National Information Center, a government-backed think tank.

The State Council set a tone of avoiding measures that might over-stimulate China’s still-expanding economy. Policies will also seek to guide financial institutions to ensure reasonable funding for local government financing vehicles, according to a statement released on the government’s website.

The policy comes at a time when slowing infrastructure spending has dragged down the growth of fixed-asset investment, a key driver of the nation’s economy. The fine-tuning is intended to bolster infrastructure investment at a time when Beijing’s tighter controls on local government borrowing has slowed the government-driven sector, according to Niu.

China’s infrastructure investment growth slowed to 7.3% in the first half of the year, 11.7 percentage points lower than in the similar period a year ago. Several planned investment projects in Xinjiang and Hunan province were suspended this year, while infrastructure investment plunged in many regions from last year.

Delayed projects that are short of funding will also increase social risks, a person close to the Finance Ministry told Caixin.

As China’s policymakers remain committed to a multi-year campaign to curb debt growth, the financing support targets only existing local investment projects, not new ones, Niu said.

While the cabinet’s Monday statement didn’t mention deleveraging, that policy direction remained unchanged, said Niu Bokun, chief economist of Huachuang Securities. The latest moves are intended to fine-tune previous tightening policies, he said.

“Deleverage should be timely and appropriate,” said the National Information Center’s Niu. “The task of deleveraging has not been completed, but we need to manage the pace and intensity of deleveraging amid the rising liquidity risks.”

The government will deliver a tax cut of 65 billion yuan ($9.6 billion) by expanding a preferential policy for small tech enterprises to all companies on top of a promised reduction in taxes and fees for businesses this year of 1.1 trillion yuan.

The Ministry of Finance aims to approve special bond issues totaling 1.35 trillion yuan this year, a 69% increase over last year’s 800 billion yuan, according to Monday’s meeting.