Caixin View: Stock Jitters Settle, But What Next
China's stock market had a brief respite early last week after regulators came out in a united show of force to support beleaguered investors. But, as we predicted, the rebound was short lived and the slew of measures announced to stabilize the market and support private companies have had little effect. The benchmark Shanghai Composite Index closed down 2.18% on Monday, taking its total decline over the past five trading days to 4.25%. While the index has crawled back above the psychological barrier of 2,500 it dipped below earlier this month, there's been no sign of a broader turn in sentiment. Another piece of bad news hasn't helped: industrial firms' profit growth slowed for the fifth month in a row in September, rising just 4.1% year on year, government data show.
By injecting funding where it's desperately needed, it's possible that the flurry of measures announced by the government (see below for a list of the key ones) might help defuse short-term financing difficulties for some companies, especially those whose shares have been pledged as collateral. This has become a vicious cycle as we explained last week, especially for private firms. About 87% of the market value of pledged shares is from privately owned companies, according to an analysis by Standard & Poor's.
But slowing growth, over-indebtedness, a poor financing environment, and deepening trade tensions with the U.S. are the fundamental issues behind this year's stock market rout, and they're all long-term problems for the economy that cannot be addressed by short-term fixes.
One key long-term support for the economy would be a cut in taxes – both corporate and personal.
China's corporate tax rate is 25%, but according to the 2018 World Bank "Doing Business" rankings, China's total corporate tax rate, through direct and indirect levies, is 67.3% of profits. This compares with 33.6% for the East Asia and Pacific Region and 40.1% in high-income OECD countries.
Lowering taxes is already a government priority and there's been some progress this year — value-added tax rates were reduced on May 1 by one percentage point. Earlier this month, the central government released a draft proposal for a long-awaited overhaul of personal income tax deductions that aims to stimulate consumer spending to bolster slowing economic growth. Rent, children’s education, further education, treatment of critical illnesses, mortgage interest and expenses for supporting the elderly will all be subject to tax relief up to a certain amount.
Total cuts to fees and taxes, including both corporate and personal taxes, will amount to more than 1.3 trillion yuan this year, above the target set in March of 1.1 trillion yuan, Finance Minister Liu Kun said in September.
But there's plenty of room for more, and bigger changes to the business environment like this one will be required to ease the burden on private companies. Ma Jun, special adviser to China’s central bank governor, Yi Gang, told Caixin last week that tax cuts next year could exceed 1% of China's gross domestic product (GDP). GDP was 82.7 trillion yuan in 2017, so that could mean a cut of at least 827 billion yuan.
So far there's been no official word from the government about what's in store on the tax front for next year, but we may get more details after the annual Central Economic Work Conference, which normally takes place in December. The closely watched closed-door meeting, attended by top government officials, policy makers and advisers, agrees on key economic policies for the year ahead which are then fleshed out by ministries and government departments to be put to the National People's Congress in March.
Last year, the conference agreed on the need to fight three critical battles over the next three years: preventing major financial risks, improving poverty alleviation and fighting pollution. December's meeting will give us the first signs of any shift in those priorities in 2019 to cope with the slowing economy, intensifying trade war and stock-market meltdown. A key question for investors will be whether and how the government will put support for private companies on a firmer footing over the longer term.
Key stock market support measures announced in the past week:
-People's Bank of China (PBOC) said it will provide 10 billion yuan ($1.4 billion) to China Bond Insurance Co. as credit support for debt sales by private enterprises
-PBOC said it will add 150 billion yuan of relending and rediscount quotas targeting the financing needs of small businesses. The new quotas come on top of another 150 billion yuan of similar quotas that were issued in June.
-China’s securities companies said they would invest a combined 21 billion yuan in a collective asset-management program to help listed companies ease liquidity crunches
-A government investment arm in Shenzhen is issuing a bond to raise funds to bail out listed companies.
Caixin View is coming to Singapore
Our research partner CEBM is an instrumental part of Caixin View. CEBM’s Chief Economist, Dr. Zhong Zhengsheng, formerly with the People’s Bank of China, will be visiting Singapore from Nov.19 to 23. Readers and their institutions are welcome to schedule a meeting with Dr. Zhong by contacting him at firstname.lastname@example.org, or with CEBM’s chief macroeconomic analyst Zhang Lu, at email@example.com, to discuss topics of interest or potential cooperation.
Oct. 31: NBS releases manufacturing Purchasing Managers Index (PMI), non-manufacturing PMI, and Composite PMI Output Index for October
Nov. 1: Caixin releases Caixin China General Manufacturing PMI for October
Nov. 5: Caixin releases Caixin China General Services PMI and Caixin China Composite PMI for October
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