Chinaʼs Macroeconomic Outlook: Quarterly Forecast and Analysis Report, October 2019 (Current Chinese Economic Report Series) 9811532222, 9789811532221

Table of contents :
Preface
Acknowledgements
Principal Investigator
Members of the Research Team
Executive Summary
Contents
1 China’s Economic Performance in the First Half of 2019
1.1 China’s Economy Performed Stable, but the Downward Pressure on the Economy Increased
1.2 The Unemployment Rate Remained Relatively High, and Inflation was Moderate
1.3 The Growth of Total FAI Maintained Stable, and the Growth of Private Investment Declined
1.4 The Growth of the Total Retail Sales of Social Consumer Goods Slowed Down, and the Household Consumption Accelerated to Services-Oriented
1.5 The Recession-Style Trade Surplus Highlighted, and the Positive Growth Rate of Exports Showed Resilience
1.6 The Growth Rate of Social Financing Continued to Rise, and Corporate Financing Demand Remained Weak
1.7 The Growth of Taxation Declined Markedly and Financial Pressure Became Relatively High
1.8 Outlook for the Second Half of 2019
2 Quarterly Forecast for 2019–2020
2.1 Assumptions on Exogenous Variables
2.1.1 Growth Rates of the US and the Euro Area
2.1.2 The Exchange Rates
2.1.3 Growth Rate of the Broad Money Supply (M2)
2.2 Scenario Design on Different Trends in Trade Conflicts
2.3 Quarterly Forecast of China Major Macroeconomic Indicators in 2019–20
2.3.1 GDP Growth Rates
2.3.2 Growth Rates of Exports and Imports
2.3.3 Growth Rates of FAI
2.4 Growth Rates of Other Major Macroeconomic Indicators
2.4.1 Projected Growth Rates of Major Price Indicators
2.4.2 Growth Rates of Consumption
3 Policy Simulation: Effects of China’s Tax Cuts Policy to Boost the Growth of Household Consumption
3.1 Background
3.2 Policy Simulation
3.2.1 Transmission Mechanism
3.2.2 Simulation Scenarios Planning
3.2.3 Simulation Results
3.3 Conclusion
References
4 Conclusions and Policy Suggestions
4.1 Introduction
Appendix A Report on Questionnaire Survey on the Outlook for China’s Economy and Policy
Outlook for the World Economy in 2019
Outlook for China’s Economy in 2019
Outlook for China’s Macroeconomic Policy in 2019
Appendix B Forecast of Major Indicators of China’s Economy in 2019 by the CQMM Team and Experts

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Current Chinese Economic Report Series

Center for Macroeconomic Research at Xiamen University

China’s Macroeconomic Outlook Quarterly Forecast and Analysis Report, October 2019

Current Chinese Economic Report Series

The Current Chinese Economic Reports series provides insights into the economic development of one of the largest and fastest growing economies in the world; though widely discussed internationally, many facets of its current development remain unknown to the English speaking world. All reports contain new data, which was previously unknown or unavailable outside of China. The series covers regional development, industry reports, as well as special topics like environmental or demographical issues.

More information about this series at http://www.springer.com/series/11028

Center for Macroeconomic Research at Xiamen University

China’s Macroeconomic Outlook Quarterly Forecast and Analysis Report, October 2019

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Center for Macroeconomic Research at Xiamen University Xiamen, Fujian, China

Grants: the major projects of China National Social Science Foundation (15ZDC011), the major research projects of philosophy and social sciences of China’s Ministry of Education of China (16JZD016), the key research projects of the Key Research Institutions of Humanities and Social Sciences at Universities (17JJD790014, 18JJD790007, 18JJD790008), the project of China National Social Science Foundation (17BJY086), the project of China Natural Science Foundation (71503222, 71740022). ISSN 2194-7937 ISSN 2194-7945 (electronic) Current Chinese Economic Report Series ISBN 978-981-15-3222-1 ISBN 978-981-15-3223-8 (eBook) https://doi.org/10.1007/978-981-15-3223-8 © Springer Nature Singapore Pte Ltd. 2020 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Preface

This report is a partial result of the China’s Quarterly Macroeconometric Model (CQMM), a project developed and maintained by the Center for Macroeconomic Research (CMR) at Xiamen University. The CMR is one of the Key Research Institutes of Humanities and Social Sciences sponsored by the Ministry of Education of China, focusing on China’s economic growth and macroeconomic policy. The CMR started to develop the CQMM for the purpose of short-term forecasting, policy analysis, and simulation in 2005. Based on the CQMM, the CMR and its partners hold press conferences to release forecasts for China’s major macroeconomic variables. Since July 2006, twenty-six quarterly reports on China’s macroeconomic outlook have been presented and thirteen annual reports have been published. This 27th quarterly report was presented at the Forum on China’s Macroeconomic Prospects and Press Conference of the CQMM at Xiamen University Malaysia on October 25, 2019. This conference was jointly held by Xiamen University and Economic Information Daily of Xinhua News Agency. Xiamen, China

Center for Macroeconomic Research at Xiamen University

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Acknowledgements

Sorted by Chinese phonetic alphabet by name, 121 experts who participated in this questionnaire survey are: Bo Peiwen, Bi Jiyao, Chang Xin, Chen Changbing, Chen Gong, Chen Jianbao, Chen Yumei, Chen Kunting, Chen Langnan, Chen Lei, Chen Menggen, Chen Shoudong, Chen Xikang, Chen Xuebin, Chen Yanbin, Chen Zhiyong, Charles Leung, Dai Kuiqian, Deng Xiang, Dong Xiwei, Dong Zhiyong, Fan Yong, Gao Bo, Guo Qiyou, Guo Xibao, Guo Xiaohe, Guo Zhiyi, Han Zhaozhou, He Jingtong, Hu Ridong, Hua Hecheng, Huang Xianfeng, Jin Jinhan, Jian Xinhua, Jiang Yongmu, Yu Tao, Li Wei, Li Chunqi, Li Haizhen, Li Jianwei, Li Jun, Li Xiao, Li Yingdong, Lin Xuegui, Liu Ge, Liu Jianping, Liu Changzhi, Liu Shiguo, Liu Shujie, Liu Xiaoxin, Ma Ying, Peng Suling, Wan Wanwen, Shao Yihang, Shen Guobing, Shen Lisheng, Shi Junyi, Shi Jinchuan, Su Jian, Sun Shaoyan, Sun Wei, Tang Jijun, Tian Ruzhu, Wang Hongyu, Wang Tongsan, Wang Yida, Wang Cheng, Wang Dashu, Wang Guocheng, Wang Jiping, Wang Junbo, Wang Liyong, Wang Meijin, Wang Susheng, Wang Wei’an, Wang Wei, Wang Yanxing, Wang Yuesheng, Wen Chuanhao, Wu Huabin, Wu Xinru, Qi Guoming, Xiao Xingzhi, Xie Danyang, Xie Di, Xie Pan, Xin Benjian, Xu Yifan, Xu Wenbin, Xu Xianchun, Yan Ping, Yang Chengyu, Yang Cuihong, Yang Zhiyong, Yi Xianrong, Yin Xingmin, Yu Li, Yu Zuo, Yuan Fuhua, Yan Xuheng, Zhang Donghui, Zhang Liqun, Zhang Liancheng, Zhang Long, Zhang Mingzhi, Zhang Monan, Zhang Ping, Zhang Wei, Zhang Yuan, Zeng Wuyi, Zhao Changhui, Zhao Mingxi, Zhao Yidong, Zhao Zhenquan, Zhao Zhijun, Zheng Chaoyu, Zhou Liqun, Zhou Zezhen, Zhu Baohua, Zhu Jianping, Zhu Qigui. The experts participating in this survey are from institutions like the Macroeconomic Research Department of the Development Research Center for the State Council, the Regional Economic Research Department of the Development Research Center for the State Council, the Macroeconomic Research Institute of the National Development and Reform Commission, the Center for Forecasting Science of the Chinese Academy of Sciences, the Institute of Finance of the Chinese Academy of Social Sciences, the Institute of Economics of the Academy of

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Sciences, Institute of Quantitative and Technical Economics of the Chinese Academy of Social Sciences, Institute of Finance and Economics of the Chinese Academy of Social Sciences, Institute of World Economics and Politics of the Chinese Academy of Social Sciences, Ministry of Commerce, Ministry of Finance, National Bureau of Statistics, Department of External Relations of the Central Committee of the Communist Party of China, CCTV, China International Economic Exchange Center, People’s Daily Internal Affairs Department, Economic Information Daily, Evergrowing Bank, Minsheng Bank, Baoshang Bank, China Exim Bank, China Banking Association, Taiwan “Academia Sinica”, and China Economic Research Institute, as well as Xiamen University, Shanghai University of International Business and Economics, Hong Kong University, Fujian Normal University, Liaoning University, Zhejiang University of Technology, Zhejiang University, Zhongshan University, Central South University, Northeast University of Finance and Economics, Northeast University of Finance and Economics, Beijing Normal University, Jilin University, Renmin University of China, Zhongnan University of Economics and Law, Zhejiang University of Finance and Economics, Sichuan University, Peking University, Nanjing University, Shanghai University of Finance and Economics, Wuhan University, East China Normal University, Jinan University, Nankai University, Huaqiao University, Hunan University, Central University of Finance and Economics, Xi’an Jiaotong University, Taiwan University, Northwest University, Beijing University of Aeronautics and Astronautics, City University of Hong Kong, Chongqing Technology and Business University, Shaanxi Normal University, China Europe International Business School, Fudan University, Tianjin University of Commerce, Tianjin University of Finance and Economics, Shandong University, Hong Kong Baptist University, City University of Hong Kong, Capital University of Economics and Business, Huazhong University of Science and Technology, Anhui University of Finance and Economics, Shanghai Jiaotong University, Shanghai University of International Business and Economics, Hong Kong University of Science and Technology, and so on. We would like to express our sincere gratitude to all of the above experts for their active participation and insights.

Principal Investigator Min Gong

Members of the Research Team Zhiyuan Lin, Yanwu Wang, Huakun Wu, Changlin Yu, Guifu Chen, Yu Liu, Shengrong Lu, Jing Li, Wenpu Li The Chinese edition of this report is due to Yanwu Wang, Huakun Wu, Zhiyuan Lin, Min Gong, and Changlin Yu. The English edition of this report is translated by Zhiyuan Lin. The raw data are processed by Huakun Wu.

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Executive Summary

In the first half of 2019, China’s real GDP grew by 6.3% year-on-year, 0.5 percentage points lower than the same period of the previous year. China’s economic growth maintained stable with a slight decline, and the downward pressure on the economy increased. The rise of trade protectionism and the continued escalation of Sino-US trade frictions have begun to curb the growth of China’s export-oriented manufacturing and private investment. Under the policy of maintaining control over real estate, the growth rate of real estate investment is unlikely to increase significantly, and strict management of debt ratios has also largely inhibited the rapid growth of infrastructure investment. Although state-owned investment can boost investment growth to a certain extent, it is difficult to reverse the trend of continuous decline in the growth of total investment. In the first half of 2019, the total fixed asset investment (excluding farmers) rose by 5.8%, down 0.2 percentage points over the same period of the previous year. The contribution of total capital formation to GDP growth was 19.2%, a decrease of 17.5 percentage points from the same period of the previous year, and the lowest in the same period in the past decade. Under the current situation that China’s economic growth has not reversed the investment-driven growth model, the downward pressure on investment growth is expected to continue to increase. In terms of industrial production, in the first half of 2019, after deducting the price factor, the value added of industrial enterprises above designated size increased by 6.0% year-on-year, down 0.7 percentage points compared with the same period of the previous year, of which the value added of manufacturing expanded by 6.4%, 0.5 percentage points lower than that in the same period last year. The cumulative total profit of industrial enterprises fell by 2.4%, a sharp drop of 19.6 percentage points over the same period of the previous year; the cumulative total manufacturing profits shrank by 4.1%, down 18.4 percentage points from the same period of the previous year. In the first half of the year, the proportion of the secondary industry to GDP was 39.9%, down 0.5% over the same period of the previous year. The contribution rate of secondary production to GDP growth was 37.1%, a slight increase of 0.3 percentage points over the same period of the xi

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previous year. The slowdown in industrial production growth and the sharp decline in the growth of total profit of industrial enterprises is set to further curb both the growth of manufacturing investment and that of fiscal revenues, thereby putting more pressure on China’s economic growth. This year and the next, economic growth prospects for both the US and the EU, which are China’s major commodity export markets, are not optimistic. The manufacturing PMI of most countries, including emerging market economies, are declining and below the boom-bust line. Although China’s monetary policy is expected to continue the tone of steady expansion, and fiscal policy is anticipated to increase tax cuts and fee reductions, the slowdown in the growth of international merchandise trade, especially manufacturing products, is set to greatly inhibit China’s external trade and investment growth. Assumed that there would be three scenarios in the direction of the Sino-US trade friction in 2020: a. Baseline scenario, the trade friction would continue the current tariff scale and punitive tariff rates; b. Optimistic scenario, the two sides would reconcile and cancel all new punitive tariffs. c. Pessimistic scenario, the trade frictions continue to escalate, and the two sides would further expand the scale of tariff and increase the level of punitive tariffs. Our team applied China’s Quarterly Macroeconomic Model (CQMM) to forecast the major indicators of China’s economy this year and the next. 1. China’s GDP growth is expected to stay steady with a slight decline. The extent of the decline depends to a large extent on the development direction of Sino-US trade frictions. In 2019, China’s real GDP is forecasted to increase by 6.21% year-on-year, down 0.39 percentage points compared with 2018; and is expected to fluctuate within the range of 6.02–6.33% in 2020. 2. The inflationary pressures facing the Chinese economy is anticipated to ease, but the PPI is expected to face greater downward pressure. In 2019, the CPI is forecasted to rise by 2.54%, which is 0.41 percentage points higher than that of 2018; in 2020, the CPI is set to shrink to 2.09%. In 2019, the PPI is anticipated to expand by 0.08%, a decrease of 3.46 percentage points over 2018; and is expected to further decline by 1.47% in 2020. 3. If Sino-US trade frictions are further escalated, the slow investment growth is anticipated to continue. The total FAI (excluding farmers) is forecasted to increase by 5.12% in 2019, down 0.87 percentage points over 2018; and is expected to fluctuate within the range of 5.42–7.38% in 2020. Of which non-state-owned investment is set to grow by 4.07% in 2019, a decrease of 4.25 percentage points from 2018; and is expected to fluctuate within the range of 5.17–8.81% in 2020. 4. Residents’ income growth is expected to stay stable with a slight decline, and consumption growth is set to slow down. At current prices, the total retail sales of consumer goods in 2019 is forecasted to grow by 8.37%, down 0.68 percentage points from 2018; and is anticipated to fluctuate around 7.54% in 2020.

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5. With slowing global trade expansion, China’s import and export growth is expected to shrink markedly. Total value of exports measured by current US dollars is forecasted to drop by 0.24% in 2019, down 10.07 percentage points from 2018; and total value of imports is set to fall by 0.89%, 16.70 percentage points lower than that of 2018. In 2020, the growth of foreign trade is anticipated to rebound. Total value of exports is expected to fluctuate within the range of 1.9–4.8%, and total value of imports is forecast to fluctuate within the range of 7.0–10.0%. 6. The growth of Sino-US trade is expected to contract sharply. In 2019, total value of China’s export to the US is forecasted to fall by 11.41%, down 22.34 percentage points from 2018. In 2020, in the baseline forecast it is expected to grow by 10.48%, in the optimistic forecast it is set to expand by 7.06%, and in the pessimistic forecast it is anticipated to drop by 15.59%. In addition, total value of China’s import from the US is expected to fall dramatically. It is forecasted to decrease by 25.75% in 2019, down 26.15 percentage points from 2018. In 2020, in the baseline forecast it is set to grow by 8.47%, in the optimistic forecast it is anticipated to increase by 12.83%, and in the pessimistic forecast it is expected to decline by 15.61%. To ease the downward economic pressure, China’s central government has implemented expansionary fiscal policy to adjust economic structure and stabilize growth since 2016. Various measures have been adopted such as the reform of changing business tax to VAT, lowering the VAT rate, and a series of tax incentives for small and micro enterprises, combined with simplifying administrative procedures and reducing administrative fees. From 2016 to 2018, the total of fiscal tax cuts and fee reduction reached 619.6 billion yuan, 1.0 trillion yuan, and 1.3 trillion yuan, respectively. In the first half of 2019, tax reliefs reached 1.17 trillion yuan. In the past three and a half years, the total amount of tax reductions and reductions was about 4.09 trillion yuan. The rebound in foreign trade growth in 2017 and the optimistic expectation of Sino-US trade frictions at home and abroad in 2018, combined with the timely introduction of the tax cuts and fee reduction policy, effectively stimulated the recovery of China’s manufacturing and private investment. The growth rate of private investment accelerated from 3.2% in 2016 to 8.7% in 2018. Since 2019, the escalating Sino-US trade friction has dramatically increased the uncertainty of investment, and the growth of world equipment investment and durable consumer goods trade has declined rapidly. To address this problem, the Chinese government has further introduced the larger tax reduction and fee reduction measures to stabilize the growth of manufacturing and private investment. However, the growth of manufacturing production and investment is still falling, indicating that the recovery of China’s manufacturing industry and private investment growth since 2017 would be likely reversed in 2019 and the trend of sustained decline in the growth of total FAI would continue.

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Compared with 2017 and 2018, the incentive effect of the larger tax reduction and fee reduction policy on China’s manufacturing investment in the first half of 2019 has been significantly weakened. The main reasons are as follows: First, the tax cuts and fee reduction policies implemented in the past three and a half years have promoted their investment by cost reduction for enterprises, thereby stabilizing employment and stabilizing economic growth. In 2017, the strong recovery of world trade strengthened the investment expectations of enterprises from the demand side, and the tax cuts and fee reduction policy on the supply side reduced costs for enterprises further strengthened the enterprises’ profit growth expectations and investment willingness. In contrast, in 2019 the rise of trade protectionism and the escalation of Sino-US trade frictions not only weakened the enterprises’ investment expectations, but also directly worsened the enterprises’ profit growth expectations. At this backdrop, even if the larger tax cuts and reductions policy further reduced the cost of enterprises, the great uncertainty faced by China’s major export partners would also inhibit the willingness of export-oriented manufacturing enterprises to accelerate investment. Second, in the first half of 2019, the larger tax cuts and fee reduction policy for the first time implemented measures such as increasing the exemption and deduction for personal income tax, and lowering the social insurance rate, hoping to accelerate the domestic demand for consumption. However, in recent years, as the real disposable income growth of residents has slowed down, the income gap between urban and rural residents has not narrowed significantly, and the household debt ratio is still high, the demand-side consumption growth maintains stable and a downward trend. With the slowdown of the growth of current consumer market, the enterprises are unable to quickly increase their investment after destocking, thereby inhibiting the incentive effect of the tax cuts and fee reduction policy on the investment. In summary, in the first half of 2019, the uncertainty of external market demand and the slowdown in domestic consumption growth greatly weakened the investment incentive effect of the tax cuts and fee reduction policy on enterprises. Therefore, in the case of uncontrollable external demand risks, it is necessary to maximize the incentive effect of the tax cut and fee reduction policy on investment. While reducing costs from the supply side, it is also necessary to implement the policy to stimulate the rapid growth of domestic household consumption from the demand side, thereby enhancing the willingness of enterprises to actively add inventory after destocking. To this end, our CQMM team proposes that the focus of the tax cuts and fee reduction policy should be shifted from taking enterprise as the main body to pay equal attention to both enterprises and residents, and should be more diverted to the policy combination of raising the disposable income of residents and optimizing the consumer environment. The counterfactual analysis conducted based on the CQMM shows that compared with a certain scale of corporate income tax reduction, the macroeconomic positive effect produced by the same scale of personal income tax reduction is more significant.

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How to analyze the macroeconomic effects of the tax cuts and fee reduction policy? Theoretically, tax reduction for enterprises can reduce corporate costs and increase corporate profits from the supply side; encourage enterprises to increase investment, expand employment, lower product prices, then stimulate demand-side consumption growth, further drive investment growth, and promote fiscal revenue and stimulate economic growth. In contrast, tax reduction for individual residents can directly increase the disposable income of residents, promote consumption growth from the demand side, drive investment growth, and thus promote fiscal revenue and economic growth. Nonetheless, the tax cuts and fee reduction policy will lead to a reduction in fiscal revenue. As a result, both reducing the fiscal expenditures and increasing the government’s debt burden will have a negative impact on economic growth. Therefore, the ultimate effect of tax cuts for enterprises or residents depends on the degree of positive and negative effects. Scenario 1: Personal income tax cuts for residents only. Assume that the personal income tax be reduced by 320 billion yuan per year in 2016 and 2017, a total reduction of 640 billion yuan. In order to avoid the decline in fiscal revenue due to the reduction of persona income tax, it is further assumed that the annual reduction of the turnover tax of 320 billion yuan be eliminated, maintaining the overall scale of tax cuts and fee reduction is consistent with the actual scale of tax cuts and fee reductions in 2016 and 2017. This scenario is designed to measure the macroeconomic effects when the tax cuts and reduction policy is fully transferred from businesses to residents. Scenario 2: Corporate income tax cuts for businesses only. Assumed that the annual corporate income tax be reduced by 320 billion yuan per year in 2016 and 2017, and the same amount of VAT exemption be cancelled. Since the core of the current tax cuts and fee reduction policy is to reduce the turnover tax, this scenario is designed to measure the different policy effects between the same scale of corporate income tax exemption and the actual turnover tax reduction. The simulation results show that whether it is to improve economic growth, promote household consumption, or stimulate investment in fixed assets, the net macro effect of personal income tax reduction and exemption is better than that of corporate income tax reduction. Specifically, in 2016 and 2017, the reduction and exemption of personal income tax would boost GDP growth by 0.38 and 0.28 percentage points compared with the benchmark value, respectively; driving the growth rate of household consumption to increase by 1.17 and 0.94 percentage points compared with the benchmark value, respectively; and driving the growth rate of urban FAI to rise by 0.54 and 0.40 percentage points compared with the benchmark value, respectively. In contrast, the reduction of corporate income tax has a slightly less effect on these three aspects. Therefore, our CQMM team proposes that at the backdrop of current uncertain external demand and slowing growth of domestic demand, the tax cuts and fee reduction policy should shift its focus on businesses to residents, and the macroeconomic positive effects generated by the same-scale personal income tax reduction would be more significant.

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However, it should be noted that there are different tax cuts and fee reduction policies for manufacturing enterprises and the private economy, such as tax reductions for innovative enterprises and high-tech enterprises, and increase the deduction of research and development expenses, especially for the private economy. The tax cuts and fee reduction policy play an important role in stimulating businesses to increase investment in R&D, enhance their innovation capabilities, boost market confidence, and stimulate the vitality of micro-subjects. In this view, the tax cuts and fee reduction policy for manufacturing enterprises and the private economy should be of hematopoietic function. These differential policies should fundamentally accelerate the transformation and upgrading of China’s manufacturing and enhance its ability to respond to external markets. In addition, to increase residents’ income by deduction and exemption of personal income tax is by no means a long-term measure. In the long run, there are various important factors inhabiting the long-term sustained and rapid growth of residents’ income such as the slowdown of the growth of labor productivity, the high propensity to compulsory saving induced by institutional factors, the decreasing marginal consumption propensity, the contradiction between industrial restructuring and employment improvement caused by the decline in the proportion of labor-intensive manufacturing, the phenomenon of high employment and low income formed by the high proportion of service industry, and so on. Therefore, policy incentives are only expedient measures. To truly reverse and improve the slowdown of the growth of residents’ income, it is also necessary to start from the fundamental factors that hinder the growth of residents’ incomes, such as institutional barriers, market structure, and labor productivity, and achieve the long-term sustained growth of residents’ income through market-oriented reforms and breakthroughs in institutional mechanisms, which, in turn, stimulates sustained and steady growth in household consumption. To this end, our CQMM team proposes that the current macroeconomic policy should focus on: First, continue to increase tax cuts and fee reduction efforts for innovative enterprises and high-tech enterprises, increase the deduction of research and development expenses, and encourage enterprises to invest in research and development, thereby enhancing the innovation capability of enterprises and promoting industrial upgrading and product upgrading of manufacturing industries. Second, continue to increase tax cuts and fee reduction efforts for the private economy, and effectively solve the problem of difficult and expensive financing for export-oriented manufacturing private enterprises. In addition, accelerate the establishment of a fair competition business environment and improve the property rights protection system. Enlarge the development space of the private economy, boost corporate confidence, and stabilize the growth of private manufacturing investment. Third, increase direct tax incentives and reductions for individual residents, continue to promote the transfer of part of state-owned capital to enrich social security funds and ensure that the social security rate steadily decrease.

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Fourth, as the expansion of housing loans is the main reason for the sharp increase in the debt ratio of residents, as to real estate regulation policies, while limiting the amount of domestic loans flowing into real estate investment, we should develop the housing leasing market, promote the balance of supply and demand in the regional real estate market, and accelerate the establishment of a long-term mechanism to promote the stable and healthy development of the real estate market. Fifth, the monetary policy should focus on adjusting the credit structure to ensure that the proportion of loans to non-financial enterprises and institutional groups is stable at more than 60%, so as to truly implement the goal of financial services to the real economy. Meanwhile, promote the marketization of interest rates and reduce the financing costs of enterprises. Sixth, we should guide the coordinated development of industrial transformation and employment promotion to achieve steady growth in employment. We should further support business innovation, promote the development of small and medium-sized enterprises, and strengthen vocational training skills.

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1 China’s Economic Performance in the First Half of 2019 . . . . . . . 1.1 China’s Economy Performed Stable, but the Downward Pressure on the Economy Increased . . . . . . . . . . . . . . . . . . . . . 1.2 The Unemployment Rate Remained Relatively High, and Inflation was Moderate . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 The Growth of Total FAI Maintained Stable, and the Growth of Private Investment Declined . . . . . . . . . . . . . . . . . . . . . . . . 1.4 The Growth of the Total Retail Sales of Social Consumer Goods Slowed Down, and the Household Consumption Accelerated to Services-Oriented . . . . . . . . . . . . . . . . . . . . . . . 1.5 The Recession-Style Trade Surplus Highlighted, and the Positive Growth Rate of Exports Showed Resilience . . . . . . . . . . . . . . . 1.6 The Growth Rate of Social Financing Continued to Rise, and Corporate Financing Demand Remained Weak . . . . . . . . . 1.7 The Growth of Taxation Declined Markedly and Financial Pressure Became Relatively High . . . . . . . . . . . . . . . . . . . . . . 1.8 Outlook for the Second Half of 2019 . . . . . . . . . . . . . . . . . . . . 2 Quarterly Forecast for 2019–2020 . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Assumptions on Exogenous Variables . . . . . . . . . . . . . . . . . . 2.1.1 Growth Rates of the US and the Euro Area . . . . . . . . 2.1.2 The Exchange Rates . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.3 Growth Rate of the Broad Money Supply (M2) . . . . . . 2.2 Scenario Design on Different Trends in Trade Conflicts . . . . . 2.3 Quarterly Forecast of China Major Macroeconomic Indicators in 2019–20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.1 GDP Growth Rates . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.2 Growth Rates of Exports and Imports . . . . . . . . . . . . . 2.3.3 Growth Rates of FAI . . . . . . . . . . . . . . . . . . . . . . . . .

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2.4 Growth Rates of Other Major Macroeconomic Indicators . . . . . . . 2.4.1 Projected Growth Rates of Major Price Indicators . . . . . . . 2.4.2 Growth Rates of Consumption . . . . . . . . . . . . . . . . . . . . . 3 Policy Simulation: Effects of China’s Tax Cuts Policy to Boost the Growth of Household Consumption . . . . 3.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Policy Simulation . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 Transmission Mechanism . . . . . . . . . . . . . . 3.2.2 Simulation Scenarios Planning . . . . . . . . . . 3.2.3 Simulation Results . . . . . . . . . . . . . . . . . . . 3.3 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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4 Conclusions and Policy Suggestions . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Appendix A: Report on Questionnaire Survey on the Outlook for China’s Economy and Policy . . . . . . . . . . . . . . . . . . . . .

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Appendix B: Forecast of Major Indicators of China’s Economy in 2019 by the CQMM Team and Experts . . . . . . . . . . . . .

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Chapter 1

China’s Economic Performance in the First Half of 2019

In the first half of 2019, with the weakening of domestic and international economic growth momentum, the Chinese economy performed relatively stable, and the economic structure continued to optimize. The unemployment rate remained relatively high, and inflation was mild. Under the support of infrastructure investment and real estate investment, the growth rate of total fixed asset investment (FAI) was relatively stable, but the growth of manufacturing investment and private investment slowed down. The growth rate of total retail sales of social consumer goods bottomed out. And household consumption accelerates to shift to service-oriented consumption. The recession-style trade surplus is prominent, and the positive growth in exports shows resilience in China’s exports. In terms of monetary and fiscal aspects, the growth rate of social financing continued to rise, while corporate financing demand remained weak. Tax revenue slowed down markedly, while fiscal pressures increased gradually.

1.1 China’s Economy Performed Stable, but the Downward Pressure on the Economy Increased In the first half of 2019, China’s real gross domestic product (GDP) was 45.09 trillion yuan, a year-on-year growth rate of 6.3% (see Fig. 1.1), down 0.5 percentage points from the same period of the previous year, but still stayed within the target range of 6.0–6.5%, which was set at the beginning of the year. China’s economy performed stable. Quarterly, the real GDP grew by 6.4% in the first quarter and 6.2% in the second quarter, down 0.4 and 0.5 percentage points respectively over the same period of the previous year. Overall, the real GDP growth still shows a steady decline. By industry, in the first half of 2019, the value-added of the primary industry was 2.23 trillion yuan, a real year-on-year growth rate of 3.0%, down 0.3 percentage points compared with the same period of the previous year. The value-added of the secondary industry was 1.80 trillion yuan, a real year-on-year growth rate of 5.8%, © Springer Nature Singapore Pte Ltd. 2020 Center for Macroeconomic Research at Xiamen University, China’s Macroeconomic Outlook, Current Chinese Economic Report Series, https://doi.org/10.1007/978-981-15-3223-8_1

1

2

1 China’s Economic Performance in the First Half of 2019 12.0 10.0

%

8.0 6.0 4.0 2.0

03/2011 06/2011 09/2011 12/2011 03/2012 06/2012 09/2012 12/2012 03/2013 06/2013 09/2013 12/2013 03/2014 06/2014 09/2014 12/2014 03/2015 06/2015 09/2015 12/2015 03/2016 06/2016 09/2016 12/2016 03/2017 06/2017 09/2017 12/2017 03/2018 06/2018 09/2018 12/2018 03/2019 06/2019

0.0

GDP

Primary industry

Secondary industry

Tertiary industry

Fig. 1.1 Growth rates of real GDP and the three strata: cumulative, YoY. Source CQMM team calculations on CEIC data

fell by 0.3 compared with the same period of the previous year. The value-added of the tertiary was 2.48 trillion yuan, a real year-on-year growth rate of 7.0%, a decrease of 0.6 percentage points from the same period of the previous year (see Fig. 1.1). From a structural point of view, the value-added of the tertiary industry accounted for 54.9% of GDP, up 0.5 percentage points over the same period of the previous year. The value-added of the secondary industry accounted for 39.9% of GDP, down 0.5 percentage points from the same period of the previous year. The proportion of the value-added of the primary in GDP remained stable. It can be seen that the continued decline in the growth rate of the value-added of the secondary industry has led to an increase in the proportion of value-added of the tertiary industry in GDP, which has promoted the continued optimization of the economic structure to a certain extent. In term of contribution share of the three components of GDP to the growth of GDP, in the first half of 2019, the contribution share of final consumption expenditure was 60.1%, down 19.3 percentage points from the same period of the previous year; the contribution share of gross capital formation was 19.2%, the lowest level in the same period in the past decade, a decrease of 17.5 percentage points from the same period of the previous year; and the contribution share of net exports of goods and services was 20.7%, an increase of 36.8 percentage points over the same period of the previous year (see Fig. 1.2). In term of contribution of the three components of GDP to the growth of GDP, the contribution of final consumption expenditure was 3.8 percentage points, down 1.6 percentage points from the same period of the previous year; the contribution of gross capital formation was 1.2 percentage points, down 1.3 percentage points from the same period of last year; the contribution of net exports of goods and services was 1.3 percentage points, up 2.4 percentage points over the same period of the previous year (see Fig. 1.3). Therefore, although the Sino-US trade friction has led to the decline of foreign demand, due to the reduced contribution of consumption

1.1 China’s Economy Performed Stable …

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Final consumption expenditure

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Fig. 1.2 Contribution share of the three components of GDP to the growth of GDP: cumulative, YoY, %. Source CQMM team calculations on CEIC data 10.0

percent points

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Gross capital formation

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Fig. 1.3 Contribution of the three components of GDP to the growth of GDP: cumulative, YoY. Source CQMM team calculations on CEIC data

and investment to China’s GDP growth, the share and contribution of net exports to the growth of GDP has increased significantly. In the first half of 2019, after deducting price factors, the cumulative value-added of industrial enterprises above designated size increased by 6.0% year-on-year, down 0.9% and 0.2% over the same period of the previous year and the end of the previous

4

1 China’s Economic Performance in the First Half of 2019

16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 -2.00 -4.00

Mining

Manufacturing

06/2019

02/2019

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Industrial value added

02/2017

10/2016

08/2016

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-6.00

Public utilities

Fig. 1.4 Growth rates of added value of industry and its three main categories: cumulative, YoY. Source CQMM team calculations on CEIC data

year, respectively, and remained at a relatively low level. As to the three major categories, the cumulative growth rate of the value-added of mining industry was 3.5%, up 1.9 and 1.2 percentage points respectively over the same period of the previous year and the end of the previous year, respectively; the cumulative growth rate of value-added of manufacturing industry was 6.4%, which was 0.5 and 0.1 percentage points lower than the same period of the previous year and the end of the previous year, respectively; and the cumulative growth rate of public utilities such as electricity, heat, gas and water production and supply was 7.3%, down 3.2 and 2.6 percentage points compared with the same period of the previous year and the end of the previous year, respectively (see Fig. 1.4). The value-added of manufacturing industry continues to grow at a low rate.

1.2 The Unemployment Rate Remained Relatively High, and Inflation was Moderate In the first half of 2019, the urban survey unemployment rate fluctuated within the range of 5.0–5.3%, and the urban unemployment rate of 31 large cities fluctuated within the range of 4.8–5.1%, both of which were relatively high in the past three years. Compared with the end first quarter, both the urban survey unemployment rate and the urban and rural unemployment rate in 31 major cities at the end of the second quarter both fell by 0.1 percentage points, reflecting a slight improvement in the labor market (see Fig. 1.5). However, the unemployment rate is still at a relatively high level, indicating that the task of stabilizing employment is still grim.

1.2 The Unemployment Rate Remained Relatively High …

5

5.60 5.40 5.20

%

5.00 4.80 4.60 4.40

07/2019

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4.20

Survey unemployemnt rate in 31 major cities and towns National survey unemployement rate in cities and towns

Fig. 1.5 Survey unemployment rates in cities and towns: monthly. Source CQMM team calculations on CEIC data

Inflation was overall moderate. In the first half of 2019, the consumer price index (CPI) showed a slow upward trend. The monthly growth rate was generally stable within the range of 1.6–2.8%, and the non-food CPI was slightly slowing with, with a year-on-year growth falling from 1.7% in January to 1.1% in June, and the monthly growth rates were lower than those in 2017 and 2018 (see Fig. 1.6). The main reason 3.5 3.0 2.5

%

2.0 1.5 1.0 0.5

CPI

07/2019

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Non-food CPI

Fig. 1.6 Changes in CPI and non-food CPI: monthly, YoY. Source CQMM team calculations on CEIC data

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1 China’s Economic Performance in the First Half of 2019 60.0 50.0 40.0 30.0

%

20.0 10.0 0.0 -10.0 -20.0 -30.0

Pork price index

07/2019

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07/2018

05/2018

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09/2017

07/2017

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-40.0

Fresh vegetable index

Fig. 1.7 Changes in pork price index and fresh vegetable price index: monthly, YoY. Source CQMM team calculations on CEIC data

for the rise in CPI in the first half of 2019 came from the food sector: first, affected by the price cycle of pigs and African swine fever, pork prices rose rapidly; second, there was a super-seasonal rise in fresh fruit prices (see Fig. 1.7). In the first half of 2019, the industrial product price index (PPI) was low, and its trend was roughly divided into two stages: from January to April, due to the unexpected dropping supply of iron ore and crude oil, the PPI gradually rebounded from 0.1% in January to 0.9% in April. After May, with the slowdown in bulk commodity prices, the PPI fell back to 0.6% in May and June (see Fig. 1.8).

1.3 The Growth of Total FAI Maintained Stable, and the Growth of Private Investment Declined In the first half of 2019, the total FAI (excluding farmers) was 29.9 trillion yuan, a year-on-year growth rate of 5.8%, which was 0.2 and 0.1 percentage points lower than the same period of the previous year and the end of the previous year, respectively, and maintained a steady growth at a low speed. The growth rate of private FAI was 5.7%, down 2.7 and 3.0 percentage points over the same period of the previous year and the end of the previous year, respectively, showing a sustained slowdown (see Fig. 1.9). By category, in the first half of 2019, the investment in manufacturing increased by 3.0% year-on-year, down 3.8 and 6.5 percentage points from the same period of the previous year and the end of the previous year, respectively. The investment in infrastructure expanded by 4.1% year-on-year, dropped by 3.2 percentage points and

1.3 The Growth of Total FAI Maintained Stable …

7

10.0

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1.5

6.0 1.0

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%

%

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PPI: YoY (LHS)

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-8.0

PPI: MoM (RHS)

Fig. 1.8 Changes in PPI: monthly, YoY. Source CQMM team calculations on CEIC data 16.00 14.00 12.00

%

10.00 8.00 6.00 4.00 2.00 01/2015 03/2015 05/2015 07/2015 09/2015 11/2015 01/2016 03/2016 05/2016 07/2016 09/2016 11/2016 01/2017 03/2017 05/2017 07/2017 09/2017 11/2017 01/2018 03/2018 05/2018 07/2018 09/2018 11/2018 01/2019 03/2019 05/2019 07/2019

0.00

Total FAI

Private FAI

Fig. 1.9 Growth rates of total and private FAI: cumulative, YoY. Source CQMM team calculations on CEIC data

0.3 percentage points compared with the same period of the previous year and the end of last year, respectively. The investment in real estate grew by 11.0%, up 3.6 and 2.7 percentage points from the same period of the previous year and the end of the previous year, respectively (see Fig. 1.10). It can be seen that the weakening of domestic and international demand has led to a slowdown in manufacturing

8

1 China’s Economic Performance in the First Half of 2019 30.0 25.0

%

20.0 15.0 10.0 5.0

01/2015 03/2015 05/2015 07/2015 09/2015 11/2015 01/2016 03/2016 05/2016 07/2016 09/2016 11/2016 01/2017 03/2017 05/2017 07/2017 09/2017 11/2017 01/2018 03/2018 05/2018 07/2018 09/2018 11/2018 01/2019 03/2019 05/2019 07/2019

0.0

Manufacturing

Real estate

Infrastructure

Fig. 1.10 Growth rates of investment in manufacturing, real estate, and infrastructure: cumulative, YoY. Source CQMM team calculations on CEIC data

investment. However, coupled with the stabilization of the growth of infrastructure investment, under the macro-policy orientation that houses are used to live in while not to be used for speculation, the growth of real estate investment still shows sufficient resilience which has played an important supporting role in the stability of investment growth.

1.4 The Growth of the Total Retail Sales of Social Consumer Goods Slowed Down, and the Household Consumption Accelerated to Services-Oriented In the first half of 2019, the total retail sales of social consumer goods expanded by 8.4% year-on-year, down 1.1 and 2.3 percentage points from the same period of the previous year and the end of the previous year, respectively. The total retail sales of consumer goods in rural areas went up by 9.1% year-on-year, which is higher than the growth rate of 8.3% in urban areas (see Fig. 1.11). By category, the cumulative year-on-year growth rates of retail sales of daily necessities, cosmetics, Chinese and Western medicines, grain, oil, food and beverages were 13.2%, 10.9%, 10.4%, and 9.9%, respectively, higher than the growth rate of the total retail sales of socials consumer goods. The sharp decline in the growth of the retail sales of automobiles and their closely related goods, petroleum and consumer products, has dragged down the growth of the total retail sales of social consumer goods (see Fig. 1.12).

1.4 The Growth of the Total Retail Sales …

9

13.0 12.0

%

11.0 10.0 9.0 8.0

02/2015 04/2015 06/2015 08/2015 10/2015 12/2015 02/2016 04/2016 06/2016 08/2016 10/2016 12/2016 02/2017 04/2017 06/2017 08/2017 10/2017 12/2017 02/2018 04/2018 06/2018 08/2018 10/2018 12/2018 02/2019 04/2019 06/2019

7.0

Total

Urban area

Rural area

Fig. 1.11 Growth rates of the total retail sales of social consumer goods: cumulative, YoY. Source CQMM team calculations on CEIC data Automobiles Clothings, shoes, hats, and textiles Petroleum and related products Gold and silver jewelry Architectural and decoration materials Cultural office supplies Furniture Tobacco and alcohol Household appliances and audio-video equipment Communications equipments Total retail sales of social consumer goods Beverages Cereals, oils and foodstuffs Traditional Chinese and Western medicines Cosmetics Daily necessities 0.00

2.00

4.00

6.00

8.00 10.00 12.00 14.00 16.00

%

Fig. 1.12 Growth rates of retail sales of various consumer goods: cumulative, YoY. Source CQMM team calculations on CEIC data

In the first half of 2019, the per capita consumption expenditure of residents was 10,330 yuan. After deducting the price factor, the cumulative growth rate was 5.2% year-on-year, which was 1.5 and 1.0 percentage points lower than the same period of the previous year and the previous period, respectively. As to the cumulative year-on-year growth rates of expenditures on various household consumption, those

10

1 China’s Economic Performance in the First Half of 2019 Clothings Daily necessities and services Food, tobacco and alcohol

Per capita consumption expenditure Transportation and communication Medical care Housing Education, culture and entertainment 0.0

2.0

4.0

6.0

8.0

10.0

12.0

%

Fig. 1.13 Growth rates of total sales of enterprises above designated size by category of main commodities: cumulative, YoY. Source CQMM team calculations on CEIC data

of education, culture and entertainment (10.8%), residence (10.8%) and health care (9.4%) were in the top, those of transportation and communication (7.8%) were in the middle, and those of food and tobacco (4.8%), household goods and services (3.8%) and clothing (3.0%) were low in the ranking, indicating that residents’ consumption is accelerating the transition to service-oriented (see Fig. 1.13). Benefiting from the tax cuts and fee reduction policy, in the first half of 2019, the residents’ per capita real disposable income grew by 6.5% year-on-year, down 0.1 percentage points from the same period of the previous year. The per capita real disposable income of rural and urban residents went up by 6.6% and 5.7, respectively, which was 0.2 and 0.1 percentage points lower than the same period of the previous year (see Fig. 1.14). In terms of the residents’ source of income, the cumulative growth rate of wage income was 8.7% year-on-year, and those of net operating income, net property income, and net transfer income, were 8.9%, 13.3%, and 6.8%, respectively, indicating that the characteristics of high growth of net income and low growth of net transfer income still exists. In addition, the growth rate of net operating income has also risen significantly.

1.5 The Recession-Style Trade Surplus Highlighted …

11

9.50 9.00 8.50 8.00

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National

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Rual residents

Fig. 1.14 Growth rates of residents’ per capita real disposable income: cumulative, YoY, %. Source CQMM team calculations on CEIC data

1.5 The Recession-Style Trade Surplus Highlighted, and the Positive Growth Rate of Exports Showed Resilience In the first half of 2019, China’s total value of merchandise imports and exports reached 2.16 trillion US dollars, down 2.0% year-on-year. Among them, the total value of merchandise exports was 1.17 trillion US dollars, increased by 0.1% yearon-year, down 12.7 percentage points from the same period of last year; the total value of merchandise imports was 0.99 trillion US dollars, dropped by 4.3% yearon-year down 24.2 percentage points over the same period of the previous year (see Fig. 1.15). In the context of sluggish global demand and the continued escalation of Sino-US trade friction, although exports slowed down, they still maintain positive growth, indicating the resilience of exports. The downward pressure on the domestic economy is the main cause of weak imports. In the first half of 2019, the value of general trade imports and exports totaled 1.29 trillion US dollars accounting for 59.8% of the total value of merchandise imports and exports, an increase of 0.8 percentage points over the same period of last year, indicating the structure of trade methods continued to optimize. Among them, the value of general trade exports was 0.69 trillion US dollars, up 2.5% year-on-year (see Fig. 1.16); the value of general trade imports was 0.60 trillion US dollars, down 4.1% year-on-year. By country, the EU, the US and ASEAN rank among the top three major exporters in China. In the first half of 2019, exports to these three economies accounted for 48.4% of total exports. Exports to the United States fell by 7.8% year-on-year, exports

1 China’s Economic Performance in the First Half of 2019 7000

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Imports (LHS)

Fig. 1.15 Growth rates of total value of merchandise exports and imports: cumulative, YoY, and trade balance: cumulative. Source CQMM team calculations on CEIC data 35.0 25.0

%

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01/2015 03/2015 05/2015 07/2015 09/2015 11/2015 01/2016 03/2016 05/2016 07/2016 09/2016 11/2016 01/2017 03/2017 05/2017 07/2017 09/2017 11/2017 01/2018 03/2018 05/2018 07/2018 09/2018 11/2018 01/2019 03/2019 05/2019 07/2019

-25.0

General trade

Processing export with supplied materials

Processing export with imported materials

Fig. 1.16 Growth rates of exports of major trade methods (in US dollars): cumulative, YoY. Source CQMM team calculations on CEIC data

to the EU dropped by 3.0%, and exports to ASEAN rose by 12.9% (see Fig. 1.17). These changes indicate that the uncertainty of trade friction is driving a shift in China’s export structure.

1.6 The Growth Rate of Social Financing Continued to Rise …

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ASEAN

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Fig. 1.17 Growth rates of exports to three major exporting economies (in US dollars): cumulative, YoY. Source CQMM team calculations on CEIC data

1.6 The Growth Rate of Social Financing Continued to Rise, and Corporate Financing Demand Remained Weak In the first half of 2019, the year-on-year growth of the narrow money, M1, basically maintained its upward trend, though slowed down compared with the same period of last year, indicating that the overall economic activity was sluggish but was turning better. The year-on-year growth of broad money, M2, was stable at a relatively high level around 8.5%, up from the same period last year. The main reasons are as follows: First, bank loans grew rapidly. Second, bank bond investment rose rapidly. Third, the decline in off-balance sheet funds of commercial banks slowed down, and the bank’s ability to derive funds increased. The scissors gap between the growth rate of M2 and M1 continued to narrow, indicating that capital activation continued and business operations improved (see Fig. 1.18). In the first half of 2019, new social financing reached 13.23 trillion yuan, an increase of 3.18 trillion yuan year-on-year, of which new RMB loans were 10.2 trillion yuan, an increase of 1.26 trillion yuan year-on-year. The sharp rise in new social financing was mainly due to the marked expand in RMB loans, the narrowing of the year-on-year decline in financing below the low base, and the mushroom growth of local government special debt (see Table 1.1). In terms of credit, in the first half of 2019, new RMB loans rose by 9.67 trillion yuan, an increase of 0.64 trillion yuan year-on-year, of which corporate and institutional group loans accounted for 64.8%, an increase of 7.5 and 13.4 percentage points over the same period of the previous year, respectively. As to term structure,

M2-M1(RHS)

M1(LHS)

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1 China’s Economic Performance in the First Half of 2019

04/2015

%

14

M2(LHS)

Fig. 1.18 Growth rates of M1 and M2: monthly, YoY. Source CQMM team calculations on CEIC data Table 1.1 Structural changes in new social financing Items New social financing Loans Off-balance sheet financing

Direct financing

Others

2019H1

YoY change

13227.06

3157.94

RMB loans

10021.86

1257.34

Foreign currency loans

9.72

22.26

Entrusted loans

−493.27

307.52

Trust loans

92.82

279.14

Undiscounted bank acceptance bill

−38.88

232.70

Corporate bond net financing

1458.54

416.87

Local government specific bond financing

1186.55

825.77

Corporate equity financing

120.49

−130.66

Deposit-type financial institution ABS

101.40

−55.93

Loan write-off

418.30

−10.72

Unit billion yuan Source CQMM team calculations on CEIC data

1.6 The Growth Rate of Social Financing Continued to Rise … Table 1.2 Structural changes in new RMB loan

Items

15 2019H1

YoY change

New RMB loan

9671.20

644.00

Short-term and bill financing

3650.00

1290.00

Medium and long term

6230.00

10.00

Household loan

3756.10

154.60

Short-term

1000.00

−100.00

Medium and long term

2750.00

250.00

Corporate and institutional groups loan

6264.70

1098.30

Short-term

1470.00

596.90

bill financing

1180.00

793.10

Medium and long term

3480.00

−240.00

Non-banking financial institutions loan

−356.50

−589.90

Unit billion yuan Source CQMM team calculations on CEIC data

the growth of short-term loans was still the main support, and the growth of medium and long-term loans was still weak. The increment in residential loans comes from medium and long-term loans, mainly due to the resilience of real estate sales, indicating that the demand for home purchases was not reduced, which to some extent backed medium and long-term loans (see Table 1.2). The term structure of corporate loans is still not satisfactory. While short-term loans and bill financing was growing significantly, the growth of medium and longterm loans was still weak. The main reasons include: First, owing to the policy to support private enterprises and small and micro enterprises, commercial banks tend to issue short-term loans to enterprises for the sake of financial security. Second, the temporary ease of Sino-US trade friction in the first half of 2019 had led to an increase in short-term loans. Third, as the aggregate demand continued to be sluggish and corporate confidence in expanding production was to be recovered, the growth of medium and long-term loan demand was limited (see Table 1.2). In the first half of 2019, non-bank financial institutions’ loans dropped by 356.5 billion yuan, a year-on-year decrease of 589.9 billion yuan. It may be due to the stratification of credit and liquidity induced by the Baoshang Bank incident, which negatively affected the liquidity of non-bank financial institutions (see Table 1.2).

16

1 China’s Economic Performance in the First Half of 2019

1.7 The Growth of Taxation Declined Markedly and Financial Pressure Became Relatively High In the first half of 2019, the general public budget revenue totaled 10.78 trillion yuan, a year-on-year growth rate of 3.4%, down 7.2 percentage points from the same period of the previous year. The general public budget expenditure was 12.35 trillion yuan, a year-on-year growth rate of 10.7%, an increase of 2.9 percentage points over the same period of the previous year (see Fig. 1.19). In response to the economic downturn, expansionary fiscal policy was implemented in the first half of 2019. The large-scale tax reduction and fee reduction measures led to a slowdown in fiscal revenue growth, while the expansion of government investment in infrastructure made fiscal expenditure maintain a relatively high growth rate. As a result, fiscal pressure remained large during the year. In the first half of 2019, China’s tax revenue was 9.24 trillion yuan, a year-onyear growth rate of 0.9%, down 13.6 percentage points from the same period of the previous year. Among them, domestic value-added tax increased by 5.9% year-onyear, down 10.7 percentage points from the same period of last year, mainly due to the hikes of the policy of lowering the VAT rate last year and the further reduction of the VAT rate this year. Corporate income tax increased by 5.3% year-on-year, down 7.5 percentage points from the same period of the previous year, which was mainly caused by policies such as increasing pre-tax deduction for research and development expenses and inclusive tax relief for small and micro enterprises. Personal income tax decreased by 30.6% year-on-year, down by 51.0 percentage points compared with the previous year, mainly owing to the overlapping effect of increasing the exemption 40.0 30.0

%

20.0 10.0 0.0 -10.0

01/2015 03/2015 05/2015 07/2015 09/2015 11/2015 01/2016 03/2016 05/2016 07/2016 09/2016 11/2016 01/2017 03/2017 05/2017 07/2017 09/2017 11/2017 01/2018 03/2018 05/2018 07/2018 09/2018 11/2018 01/2019 03/2019 05/2019 07/2019

-20.0

General public budget revenue

General public budget expenditure

Fig. 1.19 Growth rates of the general public budget revenue and expenditure: cumulative, YoY. Source CQMM team calculations on CEIC data

1.7 The Growth of Taxation Declined Markedly …

17

25.0

120.0 100.0

20.0

80.0

%

40.0 10.0

%

60.0

15.0

20.0 0.0

5.0

-20.0 -40.0

Tax (LHS)

Corporate income tax (LHS)

Value added tax (RHS)

Individual income tax (RHS)

07/2019

04/2019

01/2019

07/2018

10/2018

01/2018

04/2018

10/2017

07/2017

04/2017

01/2017

07/2016

10/2016

04/2016

01/2016

07/2015

10/2015

04/2015

01/2015

0.0

Fig. 1.20 Growth rates of total tax revenue and revenues from three major taxes: cumulative, YoY. Source CQMM team calculations on CEIC data

amount and reducing the marginal rates of personal income tax last October, and adding six additional tax deductions this year (see Fig. 1.20). The effect of the tax reduction and fee reduction policy in the first half of the year was remarkable. The total amount of tax reductions was 1.04 trillion yuan and the fee reduction was 132.20 billion yuan. Among them, tax on private enterprises was reduced by 6.71 billion yuan, accounting for 65% of the total tax reduction. The year-on-year growth rates of value-added tax, corporate income tax and personal income tax all dropped significantly, and the tax burden of the entity was further reduced. In the first half of 2019, China’s non-tax revenue was 1.54 billion yuan, an increase of 272 billion yuan year-on-year, a growth rate of 21.4%. Of which state-owned capital operating income was 220.3 billion yuan, an increase of 170.5 billion yuan, expanding by 3.4 times. And state-owned resources or assets paid users’ income was 441.6 billion yuan, an increase of 68.3 billion yuan, rising by 18.3%. The above two income totals increased by 238.8 billion yuan, accounting for 88% of increment in China’s non-tax revenue. The reason that non-tax revenues grew rapidly is mainly because the central and local government tried to raise income by activating stateowned capital and asset via various channels. In the first half of 2019, China’s general public budget expenditure grew by 10.7% year-on-year, 2.9 percentage points higher than the same period of last year. The fiscal expenditure has reached 52.5% of the progress, 2.5 percentage points faster than the scheduled progress. As of the end of June, the local transfer payment funds reached 57.3% of the budget, 7.3 percentage points faster than the scheduled progress. The advancement and accelerated progress of fiscal expenditures is to counter the risks brought about by the downward pressure on the economy on the one hand, and to

18

1 China’s Economic Performance in the First Half of 2019

stabilize the people’s livelihood and the confidence of job market for purpose of preventing financial risks from passing to the real economy against the backdrop of intertwining internal and external factors on the other. In the first half of 2019, a total of 2.18 trillion yuan new bonds were issued, accounting for 70.7% of the new local government debt limit of 308 billion yuan in 2019. Over 50% was used for the projects under construction, effectively solving the problems of unsuccessful work and arrears of construction projects. As to the fields of financial support, new bond funds were used for the construction of affordable housing such as renovation of shanty towns, railways, highways and other transportation infrastructure construction, urban infrastructure construction, rural revitalization, which accounted for 64.8% of total investment. The accelerated issuance of local government bonds has played an important supporting role in the infrastructure construction of local governments, and has effectively slowed down the pressures currently faced by local finances. However, the risks inherent in the increase scale of local debt cannot be ignored.

1.8 Outlook for the Second Half of 2019 At the backdrop of slowing domestic and foreign demand and yet-to-be repaired entrepreneurial confidence, the growth of corporate capital expenditure has yet to start. De-capacity and strengthening environmental protection requirements have led to a decline in the growth of profits of upstream enterprises. These factors are reflected in the future manufacturing investment data, indicating a large probability of decline in manufacturing investment growth, which can be seen from leading indicators such as the entrepreneur’s macroeconomic heat index and profitability index. However, From the leading indicators such as the growth rate of output value of construction and installation projects, and that of export delivery value, the growth of manufacturing investment may rebound slightly in the third quarter of 2019. The growth of infrastructure investment is expected to rebound, but the range is limited. First, different from the past, this round of policy is more restrained. The implementation of proactive fiscal policy faces the rigid constraint of strictly controlling the explicit and implicit debt increment of local governments. The prevention of risks is the bottom line, and the basic tone of regulatory policies is strict. Secondly, although the old city transformation is expected to release a large amount of infrastructure investment demand, there still exist problems such as financing mode and low project conversion rate, and the promotion may be limited during the year. The growth of investment in construction and installation projects lacks rapid upward momentum, but still has resilience. On the one hand, due to weaker real estate sales, and tightening of regulatory policies, construction growth may slow down; on the other hand, low absenteeism and monetary easing are expected to become the support of the growth of investment in construction and installation projects. Owing to increasing uncertainty of trade friction and slowing international demand, the growth of exports is set to continue to declining, although trade transfers

1.8 Outlook for the Second Half of 2019

19

to emerging and developing economies can play a buffering role. Leading indicators such as JP Morgan Chase Global Integrated PMII, BDI year-on-year and OECD composite all fell back to the levels of the global economic recovery in 2016, indicating that the growth rate of exports is likely to continue to move down. In summary, in the second half of 2019, the growth of manufacturing investment and exports is set to decline. However, as investment in infrastructure is expected to rise steadily, investment in real estate remains resilient, monetary policy continues to be stable and proactive, and the drag on the economy in the automobile industry is anticipated to weaken, the improvement in domestic demand is expected to offset the fall in external demand, and the economy is anticipated to continue to stay stable.

Chapter 2

Quarterly Forecast for 2019–2020

2.1 Assumptions on Exogenous Variables 2.1.1 Growth Rates of the US and the Euro Area In the first three quarters of 2019, Sino-US trade frictions continued to escalate, and global economic growth became increasingly sluggish. Against the overall weak growth of large developed economies, the US economic situation is still so bright. The US economy continues to grow moderately, and the negative effects of trade disputes are still not fully apparent. Although recent data of consumer spending and non-agricultural employment have sent inconsistent signals,1 the treasury bond yield curve reversed to reveal a mid-term to long-term expected deterioration, and the manufacturing PMI in September was significantly lower than expected,2 it is expected that at least in the short term, economic momentum will remain until the fiscal stimulus is withdrawn. In contrast, the European economic situation is more vulnerable. The economic growth rate of the Eurozone continued to decline, and the driving forces in the real economy was insufficient.3 The German economy showed signs of recession.4 No deal Brexit is on the edge of the cliff. Both the weak external

1 The

former see the Federal Reserve’s September Beige Book (https://www.federalreserve.gov/ monetarypolicy/beigebook201909.htm), the latter refers to the US August new The increase in employment was lower than expected, but the salary increase exceeded expectations. 2 The Institute for Supply Management (ISM) data showed that the US manufacturing PMI for September was 47.8, the lowest since June 2009. It has been below the dry line for two consecutive months. 3 IHS Markit data showed that the initial PMI of the Eurozone in September was 45.6, and the recession was the lowest since October 2012, which was lower than the dry line in the eighth consecutive month. 4 In the second quarter, German GDP fell by 0.1% from the previous quarter. If the third quarter shrinks again, it will enter a technical recession. © Springer Nature Singapore Pte Ltd. 2020 Center for Macroeconomic Research at Xiamen University, China’s Macroeconomic Outlook, Current Chinese Economic Report Series, https://doi.org/10.1007/978-981-15-3223-8_2

21

22

2 Quarterly Forecast for 2019–2020 % 2.80 2.60 2.40 2.20 2.00 1.80 1.60 1.40 1.20 1.00 USGDP_C EAGDP_C

2019Q1 2.65 1.33

2019Q2 2.28 1.15

2019Q3 2.34 1.20

2019Q4 2.61 1.30

2020Q1 2.07 1.57

2020Q2 2.09 1.75

2020Q3 1.78 1.60

2020Q4 1.69 1.50

Fig. 2.1 Assumptions on GDP growth rate of the US and the euro area: seasonally adjusted, YoY. Note EAGDP_C denotes real GDP growth rate in the euro area, USGDP_C denotes real GDP growth rate in the US. Source CQMM team assumptions

demand and political uncertainty still dominate the downside risks of the European economy. The International Monetary Fund has updated World Economic Outlook in July 2019. It predicts that the US economy is expected grow by 2.6% and 1.9% respectively this year and next, up 0.3 percentage points from its April forecast and remain unchanged. The Eurozone is expected to grow by 1.3% and 1.6% this year and next, which is unchanged and 0.1 percentage points higher than its April forecast. However, since the third quarter, the situation has become more serious. Based on the above data, our CQMM team assumes that the economic growth rate in the US this year and next year is 2.47% and 1.90%, respectively. The economic growth rate of the Eurozone is 1.24% and 1.60% this year and next, respectively. With the growth rate this year slightly lower than the IMF forecast, the corresponding quarterly growth rate is set (see Fig. 2.1).

2.1.2 The Exchange Rates In the first half of 2019, the US dollar continued to strengthen against the euro due to the strong US economy and the continued weakening of the Eurozone economy. It is expected that by the end of 2019, the trend of economic differentiation in Europe and the United States is anticipated to dominate the euro against the US dollar. The exchange rate of the euro is set to continue to depreciate until 2020 when the US fiscal stimulus is expected to exit and the economic growth slow down, and eventually stabilize at around 1.12 (see Fig. 2.2). On the other hand, after the exchange rate of dollar against renminbi quickly broke through the psychological barrier of 7 in

2.1 Assumptions on Exogenous Variables

23 EUR/USD

USD/CNY 7.20

1.15

7.10

1.14

7.00

1.13

6.90

1.12

6.80

1.11

6.70

1.10

6.60

1.09

6.50

2019Q1 USD/CNY 6.75 EUR/USD 1.14

2019Q2 6.82 1.12

2019Q3 6.99 1.11

2019Q4 7.08 1.11

2020Q1 7.06 1.10

2020Q2 7.04 1.11

2020Q3 7.02 1.12

2020Q4 7.00 1.12

1.08

Fig. 2.2 Assumptions on changes in exchange rates. YoY. Note USD/CNY denotes the exchange rate of the US dollar against the RMB, and EUR/USD denotes that of the euro against the US dollar. Source CQMM team assumptions

August this year, it remained relatively stable. Take into account both the economic fundamentals of China and the US and their development trends, our CQMM team assumes that except for the devaluation in the fourth quarter of 2019 when the lowest point of the phase would be reached, the exchange rate of the US dollar against the RMB would decline steadily next year, but it is not expected to return to below 7 level (see Fig. 2.2).

2.1.3 Growth Rate of the Broad Money Supply (M2) In the first half of 2019, the structural de-leverage and the prevention of financial risks was still the focus of the monetary policy authorities, and the monetary policy tone remained stable. In the first and second quarter, the growth rate of M2 was 8.6% and 8.5%, respectively. And liquidity kept reasonably abundant. Gang Yi, China’s central bank governor, said recently that the normal monetary policy space should be cherished and the normal monetary policy should be continued for as long as possible.5 Indicating that China’s monetary policy is set to continue this stable tone in the coming period. Therefore, our CQMM expects the overall growth rate of M2 maintain 8.50% in 2019, and slightly increase to 8.85% in 2020, with the quarterly changes are shown in Fig. 2.3. Besides, as China’s central bank further reforms and improves the loan market quotation rate (LPR) formation mechanism, which is 5 Yu

Gang. Not eager to implement a large interest rate cut and quantitative easing policy, (http:// www.xinhuanet.com/finance/2019-09/25/c_1210291737.htm).

24

2 Quarterly Forecast for 2019–2020 9.1

%

9.0 8.9 8.8 8.7 8.6 8.5 8.4 8.3 8.2 M2

2019Q1 8.60

2019Q2 8.50

2019Q3 8.30

2019Q4 8.60

2020Q1 9.00

2020Q2 8.70

2020Q3 8.90

2020Q4 8.80

Fig. 2.3 Assumptions on M2 growth rates. YoY. Source CQMM team assumptions

anticipated to break through the obstacles in the transmission of market interest rates to the real economy, it is expected that the overall credit interest rate gradually fall in the coming period.

2.2 Scenario Design on Different Trends in Trade Conflicts Since 2019, the Sino-US trade negotiation process has been repeated. In August, in response to the US decision to impose a 10% tariff on imported goods worth about US$300 billion from China, China imposed a tariff of 5–10% on goods valued at approximately US$75 billion originating in the US. China’ counter-measure made the US retaliate against almost all of the imported goods from China, and the relevant tariffs will come into effect during the year. In view of the possible different trends in the follow-up of trade negotiations, in addition to taking into account the current trade conflict as the baseline forecasting scenario, our CQMM team considers both the optimistic and pessimistic scenarios as well. The optimistic scenario refers to the 2020 trade conflict reconciliation when both sides revoke the punitive tariffs additionally levied so far. And the pessimistic scenario refers to escalating trade conflicts in 2020 that the US imposes an additional 30% tariff on all imports from China, and China imposes an additional 25% tariff on all imports from the US as a counter-measure. Unless otherwise stated, the following text mainly reports the forecast results of the baseline scenario in which trade conflicts continue the current development trend, while the optimistic and pessimistic scenarios are presented in the chart when necessary for reference.

2.3 Quarterly Forecast of China Major Macroeconomic Indicators …

25

2.3 Quarterly Forecast of China Major Macroeconomic Indicators in 2019–20 2.3.1 GDP Growth Rates Based on the above assumptions on exogenous variables in the China’s Quarterly Macroeconometric Model (CQMM), it is forecast that China’s GDP growth rate is expected to reach 6.21% in 2019, 0.39 percentage points lower than that in 2018, and 0.03 percentage points lower than the spring forecast of our research team. In 2020, GDP growth is anticipated to fall further to 6.09%. In contrast, if the SinoUS trade conflict subsides in 2020, China’s GDP growth rate is still set to reach 6.33%, 0.24 percentage points higher than the baseline scenario. And if the trade conflict escalates in 2020, China’s GDP growth rate is anticipated to further drop to 6.02%. This is almost consistent with our autumn forecast in 20186 with some slightly increase, which was mainly due to the overdraft effect of previous rush export on this year’s demand, the long-term expectation changes induced by the persistence of trade conflicts and the weakening of external demand. Quarterly, China’s GDP growth rate in the third quarter is expected to reach 6.10%, the lowest of the year and rebound to 6.16% in the fourth quarter. The change in the whole year of 2020 is relatively flat. The growth rate in the first quarter is set to remain relatively high with the support of expansionary fiscal policy. Then it is anticipated to fall back to around 6.00% and slightly improve with the domestic economic adjustment to 6.11% in the fourth quarter (see Fig. 2.4).

2.3.2 Growth Rates of Exports and Imports Continued trade conflicts have had a major impact on imports and exports. Our model predicts that total value of exports measured in current US dollar is expected to contract by 0.24% in 2019, down 10.07 percentage points from 2018. Total value of imports is set to fall by 0.89%, down 16.70 percentage points over 2018. In 2020, the growth rates of total value of exports and imports are anticipated to be 2.55% and 7.73%, respectively, rebounding from the low base of 2019 (see Table 2.1). By country, the trade with the United States bears the brunt. On the one hand, as punitive tariff suppresses demand, the previous rush export action has an overdraft effect on foreign trade this year, with the base effect superimposed, making the yearon-year growth rate of exports to the US under pressure. Total value of exports to the US is expected to fall by 11.41% in 2019. If trade conflicts continue or intensify, it is set to shrink further in 2020. On the other hand, total value of imports from the 6 In

our Autumn forecast of 2018, we predicted that the escalation of the conflict would have an impact of 0.18 percentage points on the growth rate in 2019. In our Spring forecast of 2019, we predicted that the escalation of the conflict would have an impact of 0.16 percentage points on the growth rate in 2019.

26

2 Quarterly Forecast for 2019–2020 6.6

%

6.5 6.4 6.3 6.2 6.1 6.0 5.9 5.8 GDP_C_SA Optimistic Pessimistic

2019Q1 6.39 6.39 6.39

2019Q2 6.20 6.20 6.20

2019Q3 6.10 6.10 6.10

2019Q4 6.16 6.16 6.16

2020Q1 6.18 6.48 6.09

2020Q2 6.02 6.30 5.93

2020Q3 6.04 6.17 6.01

2020Q4 6.11 6.38 6.04

Fig. 2.4 Projected GDP growth rates in different scenarios. YoY. Note Optimistic denotes optimistic scenario and Pessimistic denotes pessimistic scenario. Source CQMM team calculations

US is anticipated to contract more sharply than exports to the US, and is expected to decline by 25.75% in 2019. If trade conflicts continue or intensify, it is forecast to continue to contract in 2020. Exports to Europe, which are alternatives to exports to the US in some extent, are also anticipated to be negatively impacted in 2019, but are expected to recover shortly with the euro zone economy stabilizing in 2020. The growth of imports from ASEAN and other trading partners is set to be slow or contract in 2019 as the overall decline in exports is anticipated to lead to a decrease in induced imports of raw materials or intermediates. The related growth in 2020 is forecast to rebound due to the growth of alternative exports and the previous low base, but it is still difficult to return to the growth rate of about 20% in the short term. In summary, if the trade conflict continues or intensifies, China’s foreign trade structure is expected to undergo continuous adjustment, and the growth of trade with different partners is set to be a general slowdown (see Table 2.2). Due to the higher-than-expected decline in induced imports, with export contraction, the proportion of China’s net exports to GDP in 2019 is not expected to fall but rise to 0.88%, up 0.18 percentage points over 2018, while decline by 0.91% in 2020.

2.3.3 Growth Rates of FAI In 2019, China’s state-owned investment is anticipated to accelerate owing to expansionary policy to stabilize economic growth and low bases, leading to the overall investment growth. However, as the ensuing squeeze effect and credit transmission

4.16

−0.38

Others

12.75

7.36

2.00

EU

ASEAN

Others

Unit % Source CQMM team calculations

−10.48

US

2.55

9.89

ASEAN

Total

14.89

5.62

EU

2020

−7.48

−11.41

US

2.11 1.96

7.52 7.29

8.26 14.30

7.06 −15.59

4.83 1.92

3.81

9.20

14.71

−8.84

4.37

10.37

4.27

3.92 3.77

9.36 9.13

10.15 16.29

9.02 −14.04

6.69 3.73

Reference

8.62

8.66

7.77

−8.47

7.73

−0.09

3.89

5.27

−25.75

−0.89

Baseline

9.82 8.26

10.78 8.02

8.09 7.66

12.83 −15.61

10.04 7.00

Reference

Baseline

Reference

−0.24

Baseline

Total

In current US dollars

2019

Import In current US dollars

In current RMB

Export

Trade partner

Year

Table 2.1 Projected growth rates of imports and exports of China’s trade partners from 2019 to 2020

10.48

10.51

9.62

−6.79

9.58

4.50

8.73

10.05

−22.13

3.68

Baseline

11.70 10.11

12.67 9.85

9.95 9.50

14.89 −14.06

11.92 8.83

Reference

In current RMB

2.3 Quarterly Forecast of China Major Macroeconomic Indicators … 27

3.89

EU

6.90 2.59 0.83

ASEAN

Others

10.88

20.49

12.85

−8.95

−26.03

US

EU

4.90 10.71

1.27

−0.05

Others

Total

16.77

10.49

6.76 14.00

ASEAN

EU

8.30

−1.88

Others −11.75

17.69

−0.18

ASEAN

−12.27

10.23

4.02

EU

US

−11.07

−28.02

US

4.07

8.13

−2.74

Total

0.99

2.46

Others

Total

14.06

10.93

−1.46

ASEAN

7.92

1.65 −13.80

−1.73

−14.63

US

2019Q4

2019Q3

Total

Source CQMM team calculations

Imports (RMB)

Exports (RMB)

Imports (US dollars)

Exports (US dollars)

Country

18.63

21.15

16.37

−2.01

18.30

5.52

12.59

13.60

−3.06

6.54

13.34

15.74

11.18

−6.38

13.02

0.82

7.56

8.53

−7.39

1.79

2020Q1

15.99

11.91

14.23

−9.00

13.63

6.26

12.93

17.82

−9.72

6.38

12.30

8.36

10.60

−11.89

10.02

2.89

9.35

14.08

−12.59

3.00

2020Q2

Table 2.2 Projected growth rates of imports and exports of China’s trade partners from 2019 to 2020

6.85

7.53

6.72

−9.17

6.06

2.99

6.43

14.79

−9.77

3.41

6.32

6.99

6.18

−9.62

5.53

2.48

5.90

14.22

−10.22

2.90

2020Q3

2.02

3.15

2.41

−6.82

1.79

0.68

5.55

12.83

−12.72

1.36

3.19

4.33

3.58

−5.76

2.95

1.83

6.76

14.12

−11.72

2.52

2020Q4

4.50

8.73

10.05

−22.13

3.68

4.16

14.89

10.37

−7.48

4.27

−0.09

3.89

5.27

−25.75

−0.89

−0.38

9.89

5.62

−11.41

−0.24

2019

10.48

10.51

9.62

−6.79

9.58

3.81

9.20

14.71

−8.84

4.37

8.62

8.66

7.77

−8.47

7.73

2.00

7.36

12.75

−10.48

2.55

2020

28 2 Quarterly Forecast for 2019–2020

2.3 Quarterly Forecast of China Major Macroeconomic Indicators … 10

29

%

9 8 7 6 5 4 3 2 FAI_SA Optimistic Pessimistic

2019Q1 6.07 6.07 6.07

2019Q2 5.66 5.66 5.66

2019Q3 5.64 5.64 5.64

2019Q4 3.18 3.18 3.18

2020Q1 3.70 5.28 3.12

2020Q2 5.20 6.64 4.68

2020Q3 7.94 9.31 7.44

2020Q4 6.96 8.30 6.47

Fig. 2.5 Projected growth rates of FAI: quarterly, YoY. Note Optimistic denotes optimistic scenario and Pessimistic denotes pessimistic scenario. Source CQMM team calculations

to non-state-owned enterprises are expected to weaken transmission efficiency, combined with lasting trade conflicts affecting long-term expectations, the growth of non-state-owned FAI is anticipated to be suppressed. The CQMM predicts that FAI (excluding farmers) at current prices is expected to rise by 5.12% in 2019, 0.87 percentage points lower than that in 2018, and a slight increase to 5.94% in 2020. Quarterly, in 2019, the investment growth rate in the third quarter is forecast to be similar to the second quarter, but is set to fall further in the fourth quarter. In 2020, due to the base effect and expected changes, the investment growth is anticipated to show a trend of low before and then high. The continuation or aggravation of trade conflicts is expected to further put pressure on investment growth in 2020 through the decline in export demand and deteriorating expectation, making it as low as 5.42% (see Fig. 2.5). By ownership, the state-owned investment is forecast to grow by 6.42% in 2019 on a low base and 6.23% in 2020. That the growth of state-owned investment is expected to maintain relatively stable under different scenarios makes it an important force to back overall investment growth. In contrast, the growth of non-state-owned investment is set to more affected by trade disputes. It is anticipated to increase by 4.07% in 2019, down 4.25 percentage points over 2018. In 2020, if the trade conflict would continue, the non-state-owned investment is forecast to grow by 6.13%. If the conflict would escalate, it is anticipated to only rise by 5.17%, and if the conflict would cease, it is expected to expand by 8.81%, similar to the growth rate in 2018 (see Table 2.3).

30

2 Quarterly Forecast for 2019–2020

Table 2.3 Projected growth rates of investment measured in current prices 2019Q3

2019Q4

2020Q1

2020Q2

2020Q4

2019

2020

TI_C_SA

3.26

3.89

3.23

4.36

2020Q3 4.23

4.76

3.06

4.15

Optimistic

3.26

3.89

3.32

4.95

4.36

5.03

3.06

4.42

Pessimistic

3.26

3.89

3.20

4.14

4.19

4.65

3.06

4.05

FAI_SA

5.64

3.18

3.70

5.20

7.94

6.96

5.12

5.94

Optimistic

5.64

3.18

5.28

6.64

9.31

8.30

5.12

7.38

Pessimistic

5.64

3.18

3.12

4.68

7.44

6.47

5.12

5.42

FAI_SOE_SA

7.64

5.06

2.94

5.44

8.41

8.15

6.42

6.23

Optimistic

7.64

5.06

3.00

4.92

7.50

7.18

6.42

5.65

Pessimistic

7.64

5.06

2.92

5.61

8.70

8.43

6.42

6.41

FAI_PRI_SA

3.32

2.45

5.40

5.24

7.64

6.23

4.07

6.13

Optimistic

3.32

2.45

7.95

7.89

10.43

8.99

4.07

8.81

Pessimistic

3.32

2.45

4.47

4.29

6.66

5.27

4.07

5.17

Unit % Note TI_C denotes FAI completion, FAI_SA denotes FAI, FAI_SOE_SA denotes state-owned and state-owned holding FAI, FAI_PRI_SA denotes the portion of FAI that is not owned by state-owned and state-owned holding, Optimistic denotes optimistic scenario and Pessimistic denotes pessimistic scenario. Source CQMM team calculations

2.4 Growth Rates of Other Major Macroeconomic Indicators 2.4.1 Projected Growth Rates of Major Price Indicators The CQMM predicts that China’s inflation pressure would ease this year and next, while producer prices face greater downward pressure. Specifically, the CQMM predicts: The CPI is expected to rise by 2.54% in 2019, an increase of 0.41 percentage points over 2018; but the overall downward trend of the inflation is set to drag the CPI growth in 2020 down to 2.09%. Quarterly, it is anticipated that the CPI growth would first rise and then fall and return to a stable level this year and next (see Fig. 2.6). In 2019, the PPI is expected to climb by 0.08%, a decrease of 3.46 percentage points from 2018, and further fall to −1.47% in 2020, facing greater downward pressure. Quarterly, the year-on-year growth rate of the PPP is anticipated to pass the phased high point, and is set to enter a negative range in the remaining two quarters of this year in the next two years. It is anticipated to face further downside risks in 2020 (see Fig. 2.6). In 2019, the GDP deflator is expected to rise by 2.20%, down by 0.73 percentage points over 2018, and its growth in 2020 is forecast to fall back to 1.73%. Quarterly, the overall trend of its growth is similar to the CPI. It is set to risen slightly in the remaining two quarters of this year and generally decline next year (see Fig. 2.6).

2.4 Growth Rates of Other Major Macroeconomic Indicators 4.0

31

%

3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 CPI_SA P_P_SA PGDP_SA

2019Q1 1.85 0.17 1.35

2019Q2 2.63 0.55 1.97

2019Q3 2.76 -0.30 2.64

2019Q4 2.91 -0.09 2.82

2020Q1 2.96 0.10 3.14

2020Q2 2.39 -1.13 2.21

2020Q3 1.64 -2.14 1.13

2020Q4 1.41 -2.69 0.49

Fig. 2.6 Projected price index: quarterly, YoY. Note CPI_SA, PGDP_SA and PPI_SA denote the seasonally adjusted CPI, GDP deflator and PPI, respectively. Source CQMM team calculations

2.4.2 Growth Rates of Consumption The growth of real income of residents is expected to show a downward trend as a whole this year and next. The CQMM predicts that the per capita disposable income of urban residents would increase by 5.55% in 2019, down 0.15 percentage points over 2018. In 2020, it is set to drop further to 4.97%. In contrast, the per capita cash income of rural residents is anticipated to expand by 9.02% in 2019, 0.89 percentage points lower than that in 2018. It is set to fall further to 7.54% in 2020 (see Fig. 2.7). Although consumption growth still has inherent stability, in the case of high leverage of residents, the growth is slowing down, and consumption upgrading still faces challenges. The CQMM predicts that the total retail sales of social consumer goods at current prices would increase by 8.37% in 2019, which is 0.68 percentage points lower than that in 2018. And its growth rate is forecast to be 7.54% in 2020. Household consumption at constant prices is expected to rise by 5.65% in 2019, down 3.84 percentage points over 2018, and is set to expand by 6.81% in 2020 (see Fig. 2.8). In summary, the forecast based on the CQMM shows that the persistent Sino-US trade conflict is set to continue to hurt the growth prospects and internal structure of the Chinese economy: 1. China’s GDP growth is expected to stay steady with a slight decline. The extent of the decline depends to a large extent on the development direction of Sino-US trade frictions. In 2019, China’s real GDP is forecast to increase by 6.21%, down 0.39 percentage points compared with 2018; and is expected to fluctuate within the range of 6.02% to 6.33% in 2020.

32

2 Quarterly Forecast for 2019–2020 11.00

%

10.00 9.00 8.00 7.00 6.00 5.00 4.00

2019Q1 5.91 10.15

YD_U_C_PC YC_R_C_PC

2019Q2 5.69 9.66

2019Q3 5.39 7.53

2019Q4 5.25 8.82

2020Q1 5.13 7.54

2020Q2 4.97 6.65

2020Q3 4.90 8.20

2020Q4 4.88 7.77

Fig. 2.7 Projected growth rates of urban and rural residents’ income: quarterly, YoY. Note YD_U_C_PC denotes the real disposable income of urban residents, and YC_R_C_PC denotes the per capita cash income of rural residents. Source CQMM team assumptions

10.00

%

9.00 8.00 7.00 6.00 5.00 4.00 3.00 RETAIL_SA CON_D_C_SA

2019Q1 8.33 5.21

2019Q2 8.47 6.74

2019Q3 7.97 3.80

2019Q4 8.70 6.87

2020Q1 8.65 9.23

2020Q2 7.68 4.84

2020Q3 7.21 6.72

2020Q4 6.70 6.57

Fig. 2.8 Projected growth rates of consumption: quarterly, YoY. Note CON_D_C_SA denotes the growth rate of total household consumption at constant prices; RETAIL_SA denotes the growth rate of total retail sales of consumer goods at current prices. Source CQMM team calculations

2. The inflationary pressures facing the Chinese economy is anticipated to ease, but the PPI is expected to face greater downward pressure. In 2019, the CPI is forecast to rise by 2.54%, which is 0.41 percentage points higher than that of 2018; in 2020, the CPI is set to shrink to 2.09%. In 2019, the PPI is anticipated to

2.4 Growth Rates of Other Major Macroeconomic Indicators

3.

4.

5.

6.

33

expand by 0.08%, a decrease of 3.46 percentage points over 2018; and is expected to further decline by 1.47% in 2020. If Sino-US trade frictions are further escalated, the slow investment growth is anticipated to continue. The total FAI (excluding farmers) is forecast to increase by 5.12% in 2019, down 0.87 percentage points over 2018; and is expected to fluctuate within the range of 5.42% to 7.38% in 2020. Of which non-state-owned investment is set to grow by 4.07% in 2019, a decrease of 4.25 percentage points from 2018; and is expected to fluctuate within the range of 5.17% to 8.81% in 2020. Residents’ income growth is expected to stay stable with a slight decline, and consumption growth is set to slow down. At current prices, the total retail sales of consumer goods in 2019 is forecast to grow by 8.37%, down 0.68 percentage points from 2018; and is anticipated to fluctuate around 7.54% in 2020. With slowing global trade expansion, China’s import and export growth is expected to shrink markedly. Total value of exports measured by current US dollars is forecast to drop by 0.24% in 2019, down 10.07 percentage points from 2018; and total value of imports is set to fall by 0.89%, 16.70 percentage points lower than that of 2018. In 2020, the growth of foreign trade is anticipated to rebound. Total value of exports is expected to fluctuate within the range of 1.9% to 4.8%, and that of imports is forecast to fluctuate within the range of 7.0% to 10.0%. The growth of Sino-US trade is expected to contract sharply. In 2019, total value of China’s export to the US is forecast to fall by 11.41%, down 22.34 percentage points from 2018. In 2020, in the baseline forecast it is expected to grow by 10.48%, in the optimistic forecast it is set to expand by 7.06%, and in the pessimistic forecast it is anticipated to drop by 15.59%. In addition, total value of China’s import from the US is expected to fall dramatically. It is forecast to decrease by 25.75% in 2019, down 26.15 percentage points from 2018. In 2020, in the baseline forecast it is set to grow by 8.47%, in the optimistic forecast it is anticipated to increase by 12.83%, and in the pessimistic forecast it is expected to decline by 15.61%.

Chapter 3

Policy Simulation: Effects of China’s Tax Cuts Policy to Boost the Growth of Household Consumption

3.1 Background Our forecast results shows that the Chinese economy is expected to continue to slow down in 2020 due to the following reasons: First, the growth of investment is difficult to rebound shortly as, one the one hand, the increasing global trade uncertainty due to Sino-US trade friction has inhibited the investment growth of China’s exportoriented enterprises; on the other hand, the investment of real estate is difficult to grow rapidly due to strict regulation policy impact, infrastructure investment is unlikely to increase significantly owing to high government debt ratio, and negative growth in profits has weakened the growth of manufacturing investment. Second, the growth of household consumption is weak as, on the one hand, the economic slowdown has slowed the growth of residents’ real income; on the other hand, the rapid accumulation of household debts limits residents’ capability to increase leverage. In order to prevent the potential risks of excessive economic slowdown, the central government has implemented an unprecedented tax cuts and fee reduction policy since 2016,1 in hope that enterprises and residents would reduce their burdens and increase their income to promote investment and consumption. However, although the tax cuts and reduction in the three and a half years is as high as 4.09 trillion yuan, the main economic indicators show that the macroeconomic effects of the tax cuts and fee reduction policy are limited, and the downward pressure on the economy is still increasing. First, GDP growth continues to decline. In the first half of 2019, China’s GDP increased by 6.2% year-on-year, the lowest in the past decade. Second, 1 Various measures have been adopted such as the reform of changing business tax to VAT, lowering

the VAT rate, and a series of tax incentives for small and micro enterprises, combined with simplifying administrative procedures and reducing administrative fees. From 2016 to 2018, the total of fiscal tax cuts and fee reduction reached 619.6 billion yuan, 1.0 trillion yuan and 1.3 trillion yuan, respectively. In the first half of 2019, the scale of new tax reductions and reductions reached 1.17 trillion yuan. In the past three and a half years, the total amount of tax reductions and reductions was about 4.09 trillion yuan. © Springer Nature Singapore Pte Ltd. 2020 Center for Macroeconomic Research at Xiamen University, China’s Macroeconomic Outlook, Current Chinese Economic Report Series, https://doi.org/10.1007/978-981-15-3223-8_3

35

36

3 Policy Simulation: Effects of China’s Tax Cuts …

the growth rate of FAI continued to fall. As of August 2019, the cumulative FAI (excluding farmers) increased by 5.5% year-on-year,2 down 4.5 percentage points from the year of 2015. Of which the growth rate of private investment rose by 4.9% year-on-year, 5.2 percentage points lower than that of 2015; the cumulative growth rate of state-owned and state-owned investment was 7.1%, which was 3.8 percentage points lower than that in 2015. Third, the growth of the total retail sales of social consumer goods continues to slow. As of July 2019, the total retail sales of consumer goods increased by 8.3% year-on-year, down 2.4 percentage points from 2015. So why have such large-scale tax cuts and fee reduction policies not effectively stimulated the expansion of private investment and consumption in China? First, from the perspective of investment, the policy of tax cuts and fee reduction during the economic downturn, which is biased towards reducing cost, may be difficult to stimulate corporate investment. In the past three and a half years, the policy of tax cuts and fee reduction has two main characteristics: First, it focuses on the reduction of corporate taxes and fees, rather than individual residents. The major tax cuts in 2016 and 2017 are the reform changing business tax to value added tax (VAT), which are directly targeted at enterprises. In 2018, of the total tax cuts of 1.3 trillion yuan, the personal income tax cuts were about 80 billion yuan, which only accounts for 6.2%. The personal income tax did not decline significantly until the two-step personal income tax reform implemented completely in the first half of 2019, when the personal income tax has been reduced by 307.7 billion yuan, and the per capita cumulative tax cuts is 1340.5 yuan. However, even so, the total amount of personal income tax exemption accounted for only 26.3% of the total tax cuts of 1.17 trillion yuan, and the tax cuts for enterprises still has an absolute dominant position. Second, tax cuts are concentrated in corporate turnover tax rather than corporate income tax. Taking 2018 as an example, of the total of 1.3 trillion yuan of tax cuts and reduction, the sum of the value-added tax cuts, import tax deduction, tax rebate and export tax rebate, which are related to turnover tax, decreased by about 803 billion yuan, accounting for 61.8%. The income tax rate reduction and loss offset extension for high-tech enterprises, start-up enterprises and small-scale and lowprofit enterprises, which are directly related to corporate income tax, is only 65 billion yuan. Obviously, the aim of such design of tax cuts and fee reduction policy is to stimulate the enterprises to increase investment by reducing cost, thereby stabilizing employment and economic growth. However, during the economic downturn, the investment demand of enterprises may be driven more by the demand side, that is, the expansion of consumer demand, rather than the supply side, that is, the decline in cost. Once the investment and production of the enterprise does not depend on the cost, but depends on the level of consumer demand, then the tax burden cost will no 2 Notes from the National Bureau of Statistics in the Statistical Communiqué on National Economic

and Social Development in 2018: According to statistical law enforcement inspections and the fourth national economic census, some revisions were made to the base of FAI in 2017. The growth rate in 2018 is calculated on a comparable basis. If calculated according to the published total FAI data, the nominal growth rate in 2018 has plummeted to 0.6%. And as of August, 2019, the growth rate of FAI showed a negative growth of −3.5%.

3.1 Background

37

longer be a key factor in corporate investment decisions. In this case, the significance of tax cuts for enterprises is very limited. Tax cuts will not stimulate enterprises to increase investment and production, but will only bring about the pure effect of the decline in tax revenue. In particular, when tax reduction is concentrated on a turnover tax with a tax-neutral effect,3 its promotion effect on investment or employment may be less.4 Secondly, from the perspective of policy environment, the high macro debt ratio has inhibited the rapid growth of investment and consumption. Particularly, the rapid increase in the debt ratio of the household sector has seriously weakened the potential of household consumption, which in turn has constrained the incentive effect of the tax cuts and fee reduction policy on private investment expansion. According to the data of the Bank for International Settlements (BIS), as of the fourth quarter of 2018, China’s household sector debt accounted for 52.6% of GDP, a significant increase of 34.7 percentage points from the fourth quarter of 2008. Affected by this, although the total debt-to-GDP ratio of China’s non-financial enterprises continued to fall from the highest of 162.6% in the first quarter of 2016 to 151.6% in the fourth quarter of 2018, down by 11.0 percentage points, the macro total debt ratio has not decreased significantly. In the fourth quarter of 2018, China’s total gross debt ratio increased to 254.0% of GDP, up 8.5 percentage points from the first quarter of 2016. Of which the debt ratio of the household sector rose by 12.4 percentage points, an increase of 30.8%; the debt ratio of the government sector went up by 7.6 percentage points, an increase of 16.6% (Fig. 3.1). However, studies have shown that on the one hand, tax cuts with deficit expansion and debt financing are often difficult to stimulate private investment and consumption. One of the mechanisms is the Ricardo equivalence principle. That is, when the micro-entities such as enterprises and residents realize that the deficit expansion caused by tax cuts and the rise of government debt will inevitably be repaid in the future by tax increase or inflation, their investment and consumption behavior will not change significantly. On the other hand, changes in household sector debt ratios will influence household consumption by breaking

3 Theoretically,

if the tax burden can be completely passed on to the downstream link, the impact of the turnover tax on the cost of the enterprise should be neutral, that is, all tax burden costs are borne by the final consumer segment. Therefore, during the period of strong consumer demand, enterprises can pass part of, all of or even excess of the tax burden to the final consumer; while during the period of sluggish consumer demand, most of or even all of the tax burden is borne by the enterprise. Therefore, during the economic downturn, large-scale turnover tax relief does help companies reduce the cost of tax, but it does not encourage enterprises to increase inventory investment. 4 A recent study by Benzarti and Carloni (2019) confirms that during the economic downturn, the government hopes to encourage companies to lower product prices through large tax breaks to stimulate consumer demand, increase employee wages and increase investment, but in fact, the effect of this fiscal policy is quite limited and costly. Taking the French government’s VAT exemption policy for restaurant companies in 2009, the government’s price for the above-mentioned VAT exemption policy is 3 billion euros, of which about 55% of tax credits are taken away by business owners and converted into the increase in corporate profits, but almost no incentive or companies to increase employment demand and investment expansion.

38

3 Policy Simulation: Effects of China’s Tax Cuts … %

300 151.6 250 200 150

109.5

100 52.6 50 0

11.5 26.3

49.8 2018Q3 2018Q1

2017Q3 2017Q1 2016Q3 2016Q1 2015Q3

2015Q1 2014Q3 2014Q1 2013Q3

2013Q1 2012Q3 2012Q1 2011Q3 2011Q1

2010Q3 2010Q1 2009Q3 2009Q1

2008Q3 2008Q1 2007Q3 2007Q1

2006Q3 2006Q1

Debt Ratio of Government Sector

Debt Ratio of Household Sector

Debt Ratio of Non-financial Enterprises Sector

Fig. 3.1 Debt ratios of China’s three sectors and their growth rates. Source CQMM team calculations on BIS

disposable income limits and changing household asset status.5 Changes in household consumption will also affect corporate investment. Meanwhile, the debt ratio of the household sector will also affect the capital demand and capital price, i.e., interest rate, in the capital market through changes in the loan demand and default risk of the residential sector,6 and then directly trigger changes in corporate investment demand. As far as the increase in the debt ratio of the household sector is concerned, on the one hand, the rise in the household debt ratio implies that the household loans would increase, loan demand would expand, and the probability of debt defaults would go up, thereby pushing up the market interest rate and curbing investment growth. On the other hand, the rise in the household debt ratio will also strengthen residents’ precautionary savings motives, reduce household consumption, increase household savings, lower market interest rates, and stimulate investment growth. In addition, when the household debt ratio rise rapidly, in order to repay debts, the 5 André

(2016) indicate that household debt increases will help at first to promote household consumption. However, with the expansion of debt scale, the credit crunch caused by the increase in default risk will inhibit household consumption. 6 Currently, the loans of China’s household sector account for one-third of the total loan. Besides, taking the 2017 data as an example, the household sector’s deposits accounted for 33.3% of the financial institutions’ RMB deposits, and also accounted for one-third of the total. Therefore, it can be considered that the change of resident deposits and loans is one of the important factors determining the price of funds in the capital market.

3.1 Background

39

Consumption

Resident Income

Demand

Debt

Saving

Ratio of House hold

Loan Demand

GDP Growth

Default Risk

Interest

Investment

Sector

Capital Labor time

Labor Effort

Supply

Labor Efficiency

Fig. 3.2 Transmission channels of the household’s debt ratio on economic growth. Note The variable pointed by the arrow indicates the explanatory variable; the dotted line indicates the intermediary variable. The general income of residents is defined as the disposable income of residents’ plus the debt

labor hours of family members may increase, and the level of labor effort will also increase. The former will directly improve labor supply, while the latter will improve labor efficiency, which will jointly promote output growth (see Fig. 3.2). However, as China’s current employment market has remained basically stable, there has been no significant increase in employment. Meanwhile, as the Chinese economy is in the critical period of supply-side structural reform and the problem of overcapacity is serious, the rise in household debt ratio should be more reflected in the effect of pulling aggregate demand rather than the effect of increasing aggregate supply, which will only have limited effect on output growth. In summary, the effect of this round of tax cuts and fee reduction policy is not significant is due to the following reason: the implementation of the tax cuts and fee reduction policy focuses on reducing costs to decrease the enterprises’ burden of from the supply side. Nonetheless, as the demand side, especially the consumer market, is in continued downturn, the enterprises has not increased inventory instantly after destocking, and thus weakening the investment incentive effect of tax cuts and fee reduction. In other words, it is the decline in consumer demand, especially consumer demand, which makes it difficult for corporate investment to expand rapidly.

40

3 Policy Simulation: Effects of China’s Tax Cuts …

3.2 Policy Simulation Based on the above analysis, our CQMM team proposes that at the backdrop of the increasing downward pressure on China’s current economy, the key to improving the incentive effect of tax cuts and fee reduction policy on investment is to stimulate the steady and rapid growth of resident’s consumption from the demand side, thereby enhancing the enterprises’ willingness to enhancing investment by increasing inventory instantly after destocking. And the key to stimulating residents’ consumption is to shift the tax cuts and fee reduction policy to individual residents, and turn to the policy combination with the ultimate goal of increasing residents’ disposable income and optimizing the consumer environment. In order to confirm the above judgment, our team will apply the CQMM model to conduct counter-factual simulations to reveal the differences in macroeconomic policy effects between reducing corporate tax burden costs to increase corporate profits and lowering individual income tax to raise disposable income of residents, thereby showing how different policy combinations will influence the policy effects given the same scale of tax cuts. And based on this, relevant policy recommendations are given. Before the policy simulation, it is necessary to further refine the difference in the mechanism of the two policy combinations and apply them to the CQMM model framework.

3.2.1 Transmission Mechanism On the one hand, tax cuts for enterprises will increase corporate profits, encourage enterprises to boost investment, expand employment, lower product prices, and thus stimulate consumption and economic growth. On the other hand, the tax cuts and fee reduction policy will reduce fiscal revenue, which either decrease fiscal expenditures or increase fiscal deficits and government debt levels, both of which will affect economic growth adversely. The total effect depends on whether the positive effect of enterprises will be greater than the negative effect of the policy implementation. In contrast, on the one hand, the tax cuts for the individual residents will increase the residents’ disposable income, promote the household consumption, boost investment growth, thereby stimulate the economy. On the other hand, the tax cuts for the individual residents will also decrease fiscal revenue, which will result in a decline in fiscal expenditure or an increase in fiscal deficits and government debt, and thus constrain economic growth. Therefore, how to choose between these two policies depends mainly on which of the following two effect chains is more significant: the first is ‘tax cuts–corporate profits increase—investment rises, employment expands, product prices decline— household consumption improves—investment growth stimulated again…’, and

3.2 Policy Simulation

41

the second is ‘tax cuts—residents’ disposable income rises—household consumption improves—investment growth stimulated and employment expands—household consumption growth stimulated again…’. If the former effect is greater than the latter, then the current tax cuts and fee reduction policy biased towards the enterprise should be adhered to. Otherwise, we should shift to such policy that is based towards individual residents. In addition, there is an important effect transmission channel for the tax cuts and fee reduction policy of individual residents, that is, the increase of residents’ income is an effective means to dampen the household consumption effect induced by the increasing household debt ratio. It is very important because, if the consumption erosion effect caused by the increasing household debt ratio cannot be alleviated, then in the above-mentioned first policy effect chain, even if the increase in corporate profits will lead to increased investment, employment expansion and product price decline, it is difficult to raise household consumption. This will break the effect chain and eventually make the enterprises retain profits rather than increase investment. As a result, the final effect of the tax cuts and fee reduction policy is only an ineffective transfer from the government to the enterprises, rather than effectively stimulate the growth of investment and consumption.

3.2.2 Simulation Scenarios Planning Based on the above transmission mechanism analysis, our CQMM team started the policy simulation from the changes in the growth of various taxes. First, since 2012, China’s personal income tax revenue has grown rapidly, and its proportion to total tax revenue has also increased marked. By 2018, China’s total personal income tax reached 1.39 trillion yuan, and its proportion to total tax revenue increased from 5.78% in 2012 to 8.87%, with an average annual growth of about 0.5 percentage points. In the first half of 2019, after the full implementation of the personal income tax reform, the proportion of personal income tax to total tax revenue fell to 6.10%, almost returning to the level of 2014 (see Fig. 3.3). Second, the corporate income tax revenue climbed steadily from 1.97 trillion yuan in 2012 to 3.53 trillion yuan in 2018, an increase of nearly 80.0%, and its proportion to total tax revenue also went up from 19.53 to 22.59%, an average annual increase of about 0.5 percentage points. In the first half of 2019, due to the substantial reduction of VAT and the rebound of the growth of corporate profits, the proportion of corporate income tax revenue to total tax revenue picked up rapidly to 27.26%, a sharp jump of 4.67 percentage points over 2018, exceeding the total amount of the past six-year increase (see Fig. 3.4). Third, during the period of 2012 through 2015, the VAT revenue has grown relatively slow and its proportion to total tax revenue has also dropped from 26.25% to 24.90%. However, after the reform of changing business tax to VAT in 2016, the proportion of VAT began to increase. In 2017, the VAT accounted for 39.05% of the total tax revenue, and further increased to 39.34% in 2018. It seems that there is no

42

3 Policy Simulation: Effects of China’s Tax Cuts …

100 million 20000

10% 7.74%

16000 12000 8000

8.29%

6.90% 5.78%

5.91%

8.87% 13871.97

6.19%

11966.37

8% 6.10% 6%

10088.98 5820.28

6531.53

7376.61

8617.27 5639

4%

4000

2%

0

0% 2019H1

2018

2017

2016

2015

2014

2013

2012

Personal Income Tax Revenue

Proportion of Personal Tax Revenue to Total Tax Revenue

Fig. 3.3 Changes in personal income tax since 2012. Source CQMM team calculations on CEIC Billion 5000

27.26%

4000 19.53%

20.29%

20.68%

3000

2000

1965.5

2242.7

2464.2

21.72%

22.13%

2713.4

2885.1

30%

22.25% 22.59%

25%

3211.7

20%

3532.4 2519.9

15% 10%

1000

5%

0

0% 2012

2013 2014 2015 2016 2017 2018 2019H1 Corporate Income Tax Revenue Proportion of Corporate Income Tax Revenue to Total Tax Revenue

Fig. 3.4 Changes in corporate income tax since 2012. Source CQMM team calculations on CEIC

tax cuts effect. However, taking account of VAT in a broad sense including VAT, business tax, import-related VAT and consumption tax, the proportion of VAT in a broad sense to the total tax revenue declined steadily from 56.62% in 2012 to 50.13% in 2018. In the first half of 2019, it was further reduced to 47.46% (see Fig. 3.5). Based on the above changes in tax revenue, our CQMM team designed the following two counter-factual simulation scenarios.

3.2 Policy Simulation

43

Billion 10000

56.62% 54.33%

52.92%

60% 50.40%

49.86%

8000

50.11%

50.13%

47.46%

39.05% 39.34% 38.49%

6000

31.23% 26.25%

26.07%

25.89%

4000 2641.6

2881.0

3085.5

24.90%

4071.2

5637.8

6153.1

50% 40% 30%

3557.0

3110.9

2000

20% 10% 0%

0 2012

2013 2014 2015 2016 2017 2018 2019H1 VAT Revenue Proportion of VAT to Total Tax Revenue Proportion of VAT to Total Tax Revenue(Broad Defination)

Fig. 3.5 Changes in VAT Tax since 2012. Note VAT in the broad sense includes VAT, business tax and import-related VAT. Source CQMM team calculations on CEIC

Scenario 1: Assume that the two reforms of personal income tax would be implemented ahead of schedule in 2016. According to China’s Ministry of Finance, personal income tax would be reduced by 360 billion yuan each year,7 and thus it would be reduced by 640 billion yuan from 2016 to 2017. Meanwhile, in order to avoid the decline in fiscal revenue caused by the reduction of personal income tax, it is assumed that the actual annual turnover tax cuts would be reduced by 320 billion to maintain the overall scale of tax cuts and fee reduction in line with the actual scale of tax cuts and fee reduction. The significance of this assumption is as follows: First, the direct target of tax cuts would be transferred from enterprises to individual residents; secondly, as to the debt environment before policy implementation, the household debt ratio in 2018 was as high as 52.6%, while it is only 39.0% in 2015, which was 13.6 percentage points lower and at a relatively low level. Therefore, the increase in personal disposable income from tax deductions may be more helpful to stimulate household consumption growth. Scenario 2: In order to capture the feature that the current tax cuts and fee reduction policy focused on turnover tax rather than income tax, and make comparison with simulation on Scenario 1 as well, assume that during the period of 2016 to 2017, the corporate income tax would be reduced by 320 billion yuan per year, while the turnover tax based on value-added tax would be reduced by 320 billion yuan, based on the same tax cuts and fee reduction scale. There are two purposes for this scenario simulation: the first is to compare the difference of policy effects between reducing 7 China’s

Ministry of Finance: After the tax threshold is raised, the annual tax revenue will be reduced by 320 billion yuan, https://finance.sina.com.cn/roll/2018-08-31/doc-ihinpmnq8156686. shtml.

44

3 Policy Simulation: Effects of China’s Tax Cuts …

10% 8%

7.74%

8.87% 8.29%

23.0%

22.13% 22.25% 21.72%

22.0%

6.90% 6.97%

6%

21.0%

20.54%

6.21%

4%

5.42%

20.03%

20.0% 19.68%

19.0%

2%

22.59%

18.0%

0% 2012 2013 2014 2015 2016 2017 2018 Proportion of Personal Income Tax to Total Tax Revenue Proportion of Personal Income Tax to Total Tax Revenue After Adjusted

2012

2013

2014

2015

2016

2017

2018

Proportion of Corprate Income Tax to Total Tax Revenue Proportion of Corprate Income Tax to Total Tax Revenue After Adjusted

Fig. 3.6 Changes in personal income tax and corporate income tax before and after scenario simulation. Source CQMM team calculations

more corporate income tax and the actual scenario, which mainly reducing turnover tax, and the second is to compare with the personal income tax cuts in Scenario 1, and compare the different macroeconomic effects between tax cuts on enterprises and on individual residents from different perspectives. Figure 3.6 shows the changes in the proportion of personal income tax and corporate income tax before and after these two scenario simulations.

3.2.3 Simulation Results Combined with the setting of the CQMM model, the simulation results of the two scenarios are as follows: First, the GDP growth rates in Scenario 1 rise significantly. Compared with the baseline values, the GDP growth rates increased by 0.38 and 0.28 percentage points in 2016 and 2017, respectively. In contrast, the GDP growth rates in Scenario 2 are slightly lower than the baseline values, down 0.01 and 0.04 percentage points in 2016 and 2017, respectively (see Fig. 3.7). It shows that given the scale of tax cuts and fee reduction unchanged, it would be more favorable to boost economic growth if switching the main target of tax cuts to residents by changing the structure of tax cuts. The effect of tax cuts for residents on economic growth obviously better than that for enterprises. Moreover, even if it is a tax reduction for enterprises, reducing indirect taxes is slightly better than reducing corporate income tax. Taking into account the continued downturn in the domestic and international economy during the sample period, it confirms that when the economy is sluggish, enterprises will only convert the income generated by tax cuts into their own profits, and will not use them to expand investment and increase employment. Therefore, the policy of reducing the turnover tax can at least partially be passed on to the final consumption through the

3.2 Policy Simulation 7.2

45

% 7.11 7.03

6.9 6.73

6.75

6.72

6.71

6.6

6.3 2016

2017 baseline

scenario1

scenario2

Fig. 3.7 Changes in growth rates of GDP. Note Baseline denotes the baseline simulated value, Scenario 1 denotes the Scenario 1 simulated value; and Scenario 2 denotes the Scenario 2 simulated value. Source CQMM team calculations

change of the price level, while the corporate income tax is directly reduced, most of the reduced turnover tax income will only be converted into corporate profits. Second, the growth of household consumption is basically similar to the growth of GDP. In Scenario 1, the growth rates of household consumption have a small increase. The simulated household consumption growth rates reached 9.79% and 7.53% in 2016 and 2017, respectively, higher than the baseline value of 1.17 and 0.94 percentage points over the same period. The growth rates of household consumption in Scenario 2 were slightly lower than the baseline value of 0.01 and 0.04 percentage points in 2016 and 2017, respectively (see Fig. 3.8). It indicates that the reduction of personal income tax, compared with the turnover tax and corporate tax cuts, will be more conducive to the increase in consumer consumption. Third, the growth rates of urban FAI are slightly different. In 2016, the growth rates of urban FAI in both scenarios exceeded the baseline values, up 0.54 and 0.40 percentage points respectively compared with the baseline values. The simulated value in Scenario 1 was higher than that in Scenario 2. In 2017, affected by the high base effect in the previous year, the growth rate of urban FAI in Scenario 1 fell to 6.44%, still 0.34 percentage points higher than the baseline value, while the simulated value in Scenario 2 dropped to 6.07%, 0.03 percentage points lower than the baseline value (see Fig. 3.9). This shows that the investment effect brought about by tax cuts, increased household income and consumption is not only higher than that caused by the direct decline of tax burden cost, but also more sustainable. Fourth, in the aggregate demand structure, the proportion of household consumption to GDP by the expenditure approaches in Scenario 1 was 38.213% and 38.392%

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% 9.79

10

8.61

8.62

7.53

8

6.69

6.65

6 4 2 0 2016 baseline

scenario1

2017 scenario2

Fig. 3.8 Changes in growth rates of real household consumption. Note: Baseline denotes the baseline simulated value, Scenario1 denotes the Scenario 1 simulated value; and Scenario 2 denotes the Scenario 2 simulated value Source CQMM team calculations

10 9

% 8.31

8.85

8.71

8 7

6.10

6.44

6

6.07

5 4 3 2 1 0 2016 baseline

scenario1

2017 scenario2

Fig. 3.9 Changes in grow rates of urban FAI. Note: Baseline denotes the baseline simulated value, Scenario 1 denotes the Scenario 1 simulated value; and Scenario 2 denotes the Scenario 2 simulated value. Source CQMM team calculations

in 2016 and 2017, respectively, 0.27 and 0.47 percentage points higher than the baseline value. The proportion of household consumption to GDP in Scenario 2 was only 37.940% and 37.921% in 2016 and 2017, respectively, which was almost the same as the baseline value (see Fig. 3.10). It can be seen that the earlier tax cuts for individual residents to increase residents’ disposable income would be more conducive

3.2 Policy Simulation 38.7

47

%

38.392

38.4 38.213 38.1 37.940

37.939

37.921

37.919

37.8

37.5 2016

2017 baseline

scenario1

scenario2

Fig. 3.10 Changes in the proportion of household consumption by the expenditure approach. Note Baseline denotes the baseline simulated value, Scenario 1 denotes the Scenario 1 simulated value; and Scenario 2 denotes the Scenario 2 simulated value. Source CQMM team calculations

to increasing the proportion of household consumption, which would help to further improve the structure of aggregate demand. Fifth, as to the effect of fiscal revenue, the simulated growth of fiscal revenue in Scenario 1 reached 6.14% and 8.66% in 2016 and 2017, respectively, 1.41 and 0.59 percentage points higher than the baseline value. The simulated growth of fiscal revenue in Scenario 2 increased by 3.94% and 8.17% in 2016 and 2017, respectively, 0.79 percentage points lower than the baseline value in 2016 and 0.10 percentage points higher than the baseline value in 2017 (see Fig. 3.11). It can be seen that due to the positive effect on economic growth, tax cuts for individual residents would be more conducive to promoting the growth of fiscal revenue, while tax cuts for enterprises would only lead to a pure decline in income. Therefore, from the perspective of policy feasibility and the stability of growth of fiscal revenue, reducing personal income tax would undoubtedly be more advantageous in terms of policy sustainability and easing fiscal deficit pressure.

3.3 Conclusion In summary, based on the above simulation analysis within the CQMM framework, we expect that during the period when the economy enters the new normal and the macro-debt ratio rises rapidly, the effect of tax cuts for individual residents is better than that of tax cuts for companies. Whether it is to boost economic growth and promote household consumption, or to stimulate FAI and promote fiscal revenue growth, the policy effect of reducing personal income tax is better than that of the

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10

% 8.07

8

8.66

8.17

6.14

6 4.73

3.94

4 2 0 2016

baseline

scenario1

2017 scenario2

Fig. 3.11 Changes in growth rates of fiscal revenue. Note Baseline denotes the baseline simulated value, Scenario 1 denotes the Scenario 1 simulated value; and Scenario 2 denotes the Scenario 2 simulated value. Source CQMM team calculations

actual policy implementation, and better than that of reducing corporate income tax as well. The reasons for this difference in policy effects may be: First, compared with entrepreneurs, behavior of individual residents is relatively less constrained by the Ricardo equivalence theorem. In general, entrepreneurs are more rational than individual residents in assessing the likely effects of relevant policies. This may be due to the fact that entrepreneurs have more information channels, or that entrepreneurs are more capable of making reasonable responses. As a result, the tax cuts for residents is more likely to stimulate the growth of household consumption, while the tax cuts for enterprises may not promote the growth of corporate investment. Second, empirical evidence shows that the main bearers of personal income tax are working-class in the middle-income and high-income groups,8 who have high marginal propensity to consume. Therefore, the reduction of personal income tax for residents will benefit the residents of this group and will stimulate household consumption most effectively. On the contrary, due to the complexity of the reality, most of the beneficiaries of tax cuts for enterprises are large and medium-sized enterprises, especially state-owned and state-owned holding companies. Small and micro enterprises actually do not bear a large tax burden. As investment decisions by large and medium-sized enterprises rely on the total effects of various factors, the tax incentives generated by tax cuts alone are not large enough to change the way companies make investment decisions. 8 Statistical

data show that the wages paid by the working-class in the four first-tier cities, Beijing, Shanghai, Guangzhou and Shenzhen, account for 40% of China’s total personal income tax revenue, http://www.sohu.com/a/130030698_456914.

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Third, the rise in household debt ratios does produce an erosion effect on household consumption. On the one hand, as China’s economy gradually becomes a uppermiddle-income economy, there is a need for structural upgrading in household consumption, and residents are eager to pursue more quality goods consumption and higher-priced service consumption. On the other hand, the increase in the household debt ratio induced by the expansion of housing loans has effectively restrained consumption upgrade and outbreak of consumer demand. Therefore, once the residents’ disposable income is raised, this incremental income will have a higher propensity to consume and be easily converted into consumption. And the increase in household consumption will further stimulate the investment demand, which in turn will lead to the growth of corporate investment. In contrast, tax cuts for enterprises does not necessarily lead to an increase in residents’ income, which also depends on the conscience of entrepreneurs, the bargaining between entrepreneurs and worker, and the ability to transfer taxes in different product markets, etc. It is absolutely not a fairy tale transmission path as “reduction of corporate tax burden—increase of corporate profits—enterprises increase investment, reduce product prices or raise workers’ wages—increase in residents’ income”. Especially at the backdrop of sluggish consumer markets, it is more likely to be a luxury. Nonetheless, it is necessary to point out that raising resident’s income by cutting personal income tax deductions is by no means a long-term solution. In fact, there are many factors that stall the growth of household consumption in China. In the long run, the slowdown in labor productivity and the institutional reasons, such as education, medical care, and housing, have led to a high propensity to compulsory savings and a decline in marginal propensity to consume. The decline in the proportion of labor-intensive manufacturing has caused the contradiction between industrial structure transformation and employment improvement. The phenomenon of ‘high employment, low income’ is formed by the high proportion of traditional service industry. The income gap widens and the income distribution structure is distorted. These are all important factors affecting the long-term sustained and rapid growth of residents’ income. Therefore, policy incentives are only temporary measures. To truly reverse and improve the slowdown of the growth of residents’ income, it is necessary to start from the fundamental factors that restrict the growth of residents’ incomes, such as institutional barriers, market structure, and labor productivity, and make market-oriented reforms and breakthroughs in institutional mechanisms to achieve sustained growth of residents’ income, and thus driving the continuous and steady rise of household consumption. To this end, our team proposes that the current macroeconomic policy should focus on the following points: First, now that China’s current enterprises still bear high tax burden, it is still one of the important aspects of the macroeconomic policy to continue attaching importance to tax cuts and fee reductions for enterprises. However, according to our simulation results, we should note that, to strengthen the policy effect of tax cuts and fee reduction, it is necessary to change the previous cost reduction orientation, and strive to shift the policy focus to guide and promote enterprises to increase investment

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by reducing taxes and fees, so that the tax cuts and fee reduction for businesses can produce hematopoietic function. Specifically, link the tax cuts and fee reduction policy to the employment indicators of enterprises, so that it tends to encourage and support those enterprises that can generate new employment. Implement differentiated tax cuts and fee reduction policies, and increase tax cuts for innovative companies and high-tech enterprises to promote the transformation and upgrading of industrial structure and product structure. Increase the deduction of R&D expenses to encourage enterprises to invest in R&D and enhance the innovation capability. Further optimize business environment in key areas, and improve investment-related services, and so on. Second, while attaching importance to tax cuts and fee reductions for enterprises, it is necessary to increase direct tax reductions and exemptions for individual residents. The focus of the support policy will be shifted from taking the enterprises as the main body to both the enterprises and the residents. Taking improve the residents’ disposable income as an important policy goal, through further personal income tax reform, simplify the tax rate, reduce the marginal tax rate, and combine the reduction of the comprehensive social security rate, effectively convert the effect of tax cuts and fee reduction into rapid growth of residents’ disposable income. Besides, while reducing taxes and fees, we should pay attention to constraining the government’s macro debt ratio and fiscal deficit rate. In order to strengthen the investment and consumer confidence of market players, we should do our best to achieve fiscal balance tax cuts and avoid debt-finance tax cuts. Third, accelerate the reform of the services supply system that is of the greatest concern to the people, such as education, medical care, and housing. Difficulties, pain points, and focus issues in these areas should be addressed and focused on. Replace personal services with social services, reduce the precautionary saving motives of residents, and create a good consumer environment. In addition, controlling inflation and maintaining price stability are also important means to stabilize and promote household consumption. Furthermore, in the current sluggish consumer demand, it is not appropriate to depreciate the RMB. It is necessary to be wary of the purchasing power of consumers shifting from the depreciation of the currency to the depreciation of the exchange rate, thereby damaging the fragile capital market and further combating consumer confidence and entrepreneurial investment confidence.

References André, C. (2016, August). Household debt in OECD countries: Stylised facts and policy issues. In The Narodowy Bank Polski Workshop: Recent Trends in the Real Estate Market and Its Analysis-2015 Edition. Benzarti, Y., & Carloni, D. (2019). Who really benefits from consumption tax cuts? Evidence from a large VAT reform in France. American Economic Journal: Economic Policy, 11(1), 38–63.

Chapter 4

Conclusions and Policy Suggestions

4.1 Introduction In the first half of 2019, China’s real GDP grew by 6.3% year-on-year, 0.5 percentage points lower than the same period of the previous year. As China’s current economic growth has not reversed the investment-driven growth model, the continued decline in investment growth has always been the main factor in the economic slowdown. Total FAI (excluding farmers) rose by 5.8%, down 0.2 percentage points over the same period of the previous year. Of which the decline in manufacturing investment growth was particularly significant, with an increase of 3.0%, 3.8 percentage points lower than the same period of the previous year. As manufacturing investment accounts for 33.4% of total FAI, its slowdown is the major factor in curbing total investment growth. Since the global financial crisis in 2008, China’s manufacturing investment growth has dropped markedly and maintained a low growth rate. The main reasons are as follows: First, due to factors such as rising wages, the proportion of processing trade exports has fallen sharply, which has led to a decline in the growth rate of export-oriented labor-intensive manufacturing investment. Second, although hightech manufacturing investment has been accelerating in recent years, its proportion to total manufacturing investment is less than 15%, which makes it difficult to drive the rapid growth of total investment. Third, the slowdown in world trade growth has curbed the growth of China’s manufacturing investment. Since the global financial crisis, world trade growth has continued to shrink (see Fig. 4.1). In 2016, world merchandise exports increased by only 2.1%. Affected by this, China’s manufacturing investment growth rate fell to 4.2%. As nearly 88% of China’s manufacturing investment is made by private enterprises, the growth rate of private investment has also fallen to a recorded low of 3.2%. The recovery of the world economy in 2017 led to the recovery of international trade, and the growth rate of world commodity volume once rose to 5.4%. And it also stimulated the recovery of manufacturing investment and private investment. However, in the © Springer Nature Singapore Pte Ltd. 2020 Center for Macroeconomic Research at Xiamen University, China’s Macroeconomic Outlook, Current Chinese Economic Report Series, https://doi.org/10.1007/978-981-15-3223-8_4

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Fig. 4.1 Growth rates of world merchandise exports, China’s manufacturing investment and China’s private investment. Note The growth rate of world merchandise exports in 2019 is the predicted value by the IMF in July 2019. The growth rate of China’s manufacturing investment and private investment growth in 2019 is the cumulative year-on-year growth rate in June 2019. Source IMF and CEIC

second half of 2018, the US unilaterally provoked trade frictions against China and other economies, which began to hinder the pace of recovery of the world economy. In 2018, the growth rate of world commodity volume turned back to 3.5%. China’s rush exports to avoid tariffs and the widespread optimism about the trade friction between China and the US once drove investment in manufacturing. The growth of manufacturing investment rebounded to 9.5% in 2018, and that of private investment rebounded to 8.7% as well. In 2019, the escalating trade friction between China and the US has significantly increased the uncertainty of global manufacturing investment and inhibit the growth of equipment investment and durable consumer goods trade. The manufacturing PMIs of the US, China, Japan and Germany have all fallen below the boom-bust line. The IMF forecasts that the world commodity volume would further decline to 2.9% in 2019. The slowdown in world trade growth is expected to further curbed the growth of China’s manufacturing and private investment. In the first half of 2019, China’s private investment grew by 5.7%, down 2.7 percentage points from the same period of the previous year. Meanwhile, the cumulative value added of manufacturing rose by 6.4%, and the cumulative total profit dropped by 4.1%, decreased by 0.5 and 18.4 percentage points respectively over the same period of the previous year, indicating that the negative impact of the escalating trade friction between China and the US on China’s manufacturing production and investment is accelerating. Looking forward to this year and next, if the Sino-US trade friction continues to escalate, it is set to slow the growth of US private consumption expenditure and the

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US economy. In addition, the German economic slowdown and the uncertainty of the Brexit process is anticipated to curb the Eurozone economy. The external market faced by China’s export-oriented manufacturing industry is expected to stay sluggish. It is expected that the growth rate of China’s private investment fall to 4.07% (see Table 2.3), 4.63 percentage points lower than that in 2018, and rebound to 6.13% in 2020, indicating that the recovery of China’s manufacturing and private investment growth from 2017 would be reversed in 2019 and the growth of FAI would continue to slow. The downward pressure on China’s economic growth will continue to increase. It is expected that China’s real GDP expand by 6.21% in 2019, down 0.39 percentage points over the previous year, and further drop to 6.09% in 2020 (see Fig. 2.4). To address the rapid decline in China’s manufacturing investment and private investment owing to the weak growth of international trade, China’s central government has implemented expansionary fiscal policy to adjust economic structure and stabilize growth since 2016. Various measures have been adopted such as the reform of changing business tax to VAT, lowering the VAT rate, and a series of tax incentives for small and micro enterprises, combined with simplifying administrative procedures and reducing administrative fees. From 2016 to 2018, the total of fiscal tax cuts and fee reduction reached 619.6 billion yuan, 1.0 trillion yuan and 1.3 trillion yuan, respectively. Since 2019, the escalating Sino-US trade friction has dramatically increased the uncertainty of investment, and the growth of world equipment investment and durable consumer goods trade has declined rapidly. To address this problem, the Chinese government has further introduced the larger tax reduction and fee reduction measures to stabilize the growth of manufacturing and private investment. In the first half of 2019, the scale of new tax reductions and reductions reached 1.17 trillion yuan, exceeding the total of 2017. However, the macroeconomic effects of this round of tax cuts and reductions appear to be relatively limited. The growth rates of China’s GDP and investment are still falling, and the downward pressure on China’s economy is still increasing. Compared with 2017 and 2018, the incentive effect of the larger tax reduction and fee reduction policy on China’s manufacturing investment in the first half of 2019 has been significantly weakened. The main reasons are as follows: First, the tax cuts and fee reduction policies implemented in the past three and a half years have promoted their investment by cost reduction for enterprises, thereby stabilizing employment and stabilizing economic growth. In 2017, the strong recovery of world trade strengthened the investment expectations of enterprises from the demand side, and the tax cuts and fee reduction policy on the supply side reduced costs for enterprises further strengthened the enterprises’ profit growth expectations and investment willingness. In contrast, in 2019 the rise of trade protectionism and the escalation of Sino-US trade frictions not only weakened the enterprises’ investment expectations, but also directly worsened the enterprises’ profit growth expectations. At this backdrop, even if the larger tax cuts and reductions policy further reduced the cost of enterprises, the great uncertainty faced by China’s major export partners would also inhibit the willingness of export-oriented manufacturing enterprises to accelerate investment.

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Second, in the first half of 2019, the larger tax cuts and fee reduction policy for the first time implemented measures such as increasing the exemption and deduction for personal income tax, and lowering the social insurance rate, hoping to accelerate the domestic demand for consumption. However, in recent years, as the real disposable income growth of residents has slowed down (see Fig. 1.14), the income gap between urban and rural residents has not narrowed significantly, and the household debt ratio is still high, the demand-side consumption growth maintains stable and a downward trend (see Fig. 1.11). With the slowdown of the growth of current consumer market, the businesses are unable to quickly increase their investment after destocking, thereby inhibiting the incentive effect of the tax cuts and fee reduction policy on the investment. At the backdrop of current uncertain external demand and slowing growth of domestic demand, how can we maximize the macro-effects of tax cuts and fee reduction policy to promote structural adjustment and achieve the goal of steady growth? First, the implementation of differential tax cuts and fee reduction policy for manufacturing enterprises and the private economy should be an important long-term measure to promote the transformation and upgrading of China’s manufacturing. (a) It is necessary to increase the tax reduction for innovative enterprises and hightech enterprises, increase the deduction of research and development expenses, and encourage enterprises to invest in R&D, thereby enhancing the innovation capability of enterprises and promoting transformation and upgrading of the industrial structure and product structure of the manufacturing industry. (b) The tax cuts and fee reduction policy for the private economy can boost market confidence and strengthen profit growth expectations, thereby enhancing the innovation and entrepreneurial vitality of private enterprises. (c) Lowering costs on the supply side can enhance enterprises’ profit growth expectations, which in turn will help increase fiscal revenue. From this perspective, the tax cuts and fee reduction for manufacturing enterprises and the private economy should be a policy with hematopoietic function. The differential tax cuts and fee reduction should accelerate the transformation and upgrading of China’s manufacturing industry and address uncertain risks in the external market. Second, the current slowdown in consumer demand growth is a major factor that constrains the tax cuts and fee reduction policy to stimulate investment growth. (a) In the short term, the rapid increase in household debt ratio resulted from residents’ investment in real estate has inhibited the rapid growth of consumer spending (see Fig. 3.1). (b) The current decline in the proportion of labor-intensive industries in manufacturing has intensified the contradiction between industrial transformation and employment promotion, which may weaken the expectation of household longterm income growth and curb the rapid growth of consumer spending. (c) Although the increase in the proportion of tertiary industry effectively guarantees the expansion of new employment, the proportion of current low-income traditional service is still high. Therefore, the employment created by the tertiary industry is mainly the employment growth of low-income jobs, which is not conducive to the rapid growth of consumer spending. Therefore, it is necessary to take effective measures to stabilize

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the household debt ratio, resolve the contradiction between industrial transformation and employment improvement, and promote the rapid growth of high-income jobs in the service industry, so as to stabilize and accelerate the rapid growth of consumer demand in the domestic market, and strengthen enterprises’ profit growth expectations and investment willingness. Third, while attaching importance to tax cuts and reductions for enterprises, it is also necessary to increase direct tax incentives and reductions for individual residents, and shift the focus of support policies for enterprises to pay equal attention to enterprises and residents. Increase the real disposable income of residents by tax cuts and fee reduction policy, and thus drive the rapid growth of consumer spending, and strengthen enterprises’ profit growth expectations and investment willingness from the demand side. Finally, monetary policy should comprehensively implement a series of measures such as finance services to the real economy, preventing and resolving financial risks, deepening financial reforms, and continuously expanding financial openness. In addition, accelerate to dredge the transmission mechanism of monetary policy to service the real economy, thereby ensuring the capital demand for effective investment expansion and effectively stimulating the vitality of the market players. To this end, our CQMM team proposes that the current macroeconomic policy should focus on: First, continue to increase tax cuts and fee reduction efforts for innovative enterprises and high-tech enterprises, increase the deduction of research and development expenses, and encourage enterprises to invest in research and development, thereby enhancing the innovation capability of enterprises and promoting industrial upgrading and product upgrading of manufacturing industries. Second, continue to increase tax cuts and fee reduction efforts for the private economy, and effectively solve the problem of difficult and expensive financing for export-oriented manufacturing private enterprises. In addition, accelerate the establishment of a fair competition business environment and improve the property rights protection system. Enlarge the development space of the private economy, boost corporate confidence, and stabilize the growth of private manufacturing investment. Third, increase direct tax incentives and reductions for individual residents, continue to promote the transfer of part of state-owned capital to enrich social security funds and ensure that the social security rate steadily decrease. Fourth, as the expansion of housing loans is the main reason for the sharp increase in the debt ratio of residents, as to real estate regulation policies, while limiting the amount of domestic loans flowing into real estate investment, we should develop the housing leasing market, promote the balance of supply and demand in the regional real estate market, and accelerate the establishment of a long-term mechanism to promote the stable and healthy development of the real estate market. Fifth, the monetary policy should focus on adjusting the credit structure to ensure that the proportion of loans to non-financial enterprises and institutional groups is stable at more than 60%, so as to truly implement the goal of financial services to the real economy. Meanwhile, promote the marketization of interest rates and reduce the financing costs of enterprises.

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Sixth, we should guide the coordinated development of industrial transformation and employment promotion to achieve steady growth in employment. We should further support entrepreneurial innovation activities, promote the development of small and medium-sized enterprises, and strengthen vocational skills training.

Appendix A

Report on Questionnaire Survey on the Outlook for China’s Economy and Policy

September 2019, No. 13. In order to keep abreast of China’s macroeconomic situation and policy trends in time, an annual questionnaire survey of the outlook for China’s macroeconomy and policy has been taken jointly by the Economic Information Daily of Xinhua News Agency and the Center for Macroeconomic Research at Xiamen University, which is one of the Key Research Institutes of Humanities and Social Sciences of the Ministry of Education of China, twice a year since the first time in August 2013. This is the thirteenth questionnaire survey about the study. There are 20 questions directly about the outlook for China’s macroeconomy and policy in the questionnaire, and we invited many domestic economists in relevant fields for this survey by email in August 2019, and got responses from 121 of them. The experts provided their latest understandings and judgments of the prospects of the world and China’s macroeconomy and policy in 2019. The results of this survey are presented as follows.

Outlook for the World Economy in 2019 According to the latest forecast of the IMF on July 23, 2019, the real GDP of the US is expected to grow by 2.6% in 2019, 0.3 percentage points lower than that in 2018. According to data released by the US Department of Commerce on July 26, the US GDP in the second quarter of 2019 increased by 2.1% year-on-year, lower than the growth rate of 3.1% in the previous quarter. Then, what is the expected change in the US economy in 2019? According to the survey, 73% of the experts expect the US economic growth rate to be in the range between 2.1 and 2.5% in 2019; 13% of experts expect to be in the range between 1.5 and 2.0%; 13% of experts expect to be in the range between 2.6 and 3.0%, and only 1% of experts expect to be in the range between 3.1 and 3.5%. Overall, almost all experts expect the US GDP growth rate in 2019 to be lower than that in 2018.

© Springer Nature Singapore Pte Ltd. 2020 Center for Macroeconomic Research at Xiamen University, China’s Macroeconomic Outlook, Current Chinese Economic Report Series, https://doi.org/10.1007/978-981-15-3223-8

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According to the latest forecast of the IMF on July 23, 2019, the Eurozone GDP is set to rise by 1.3% in 2019, 0.6 percentage points lower than that in 2018. Then, what is the expected economic growth rate of the Eurozone in 2019? According to the survey results, 66% of experts expect the economic growth rate of the Eurozone in 2019 to be within the range of 1.0–1.2%; 24% of experts expect its growth rate to be within the range of 1.3–1.5%; 9% of experts expect that the growth rate to be be less than 1.0%; 1% of experts expect the growth rate to be between 1.6 and 1.8%. Overall, all the experts surveyed agreed that the euro zone’s economic growth rate in 2019 is anticipated to be lower than that of 2018. In the second half of 2019, the escalation of Sino-US trade friction is set to lower the growth rate of US private consumption expenditure and slow down the growth of the US economy. Meanwhile, the German economic slowdown and the uncertainty of the Brexit process is projected to curb the Eurozone economic growth. At the end of 2018, the exchange of the euro against the US dollars was 1 e to 1.145 US dollars. By the end of June 2019, 1 e could be exchanged for 1.138 US dollars, down 0.61% from the beginning of the year. By the end of July 2019, the exchange rate of the euro against the US dollar further dropped to 1 e to 1.115 US dollar. Then, what is the projected trend of the exchange rate of the euro against the US dollar in 2019? According to the survey results, 62% of the experts surveyed forecast that the euro would continue to depreciate against the US dollar in 2019. At the end of 2019, 1 e can be exchanged for 1.0–1.1558 US dollars. The expected average value is about 1.0134. 30% of experts expect the exchange rate of the euro against the US dollar to remain almost stable in 2019. Another 8% of experts surveyed expect the euro to appreciate against the US dollar with 1 e exchanging for 1.1 to 1.55 US dollars at the end of 2019. The expected average value is about 1.1361. Overall, more than 60% of experts expected that compared with the end of 2018, the euro would continue to depreciate against the US dollar in 2019, but 30% of experts project that the exchange rate of the euro against the US dollar would stay almost stable in 2019. On July 31, 2019, the US Federal Reserve lowered the federal funds rate by 25 basis points for purpose of preventing of systemic risks in the financial market, maintaining it in the range of 2–2.25%. What is the expected position of US monetary policy by the end of 2019? According to the survey results, 53% of experts expect the Fed to start a long-term interest rate cut cycle. Of those experts anticipate that the Fed would begin a long-term interest rate cut cycle, 34% of them expect that the Fed to lower interest rates once this year, and 18% of them anticipate that the Fed to reduce interest rates twice this year. 1% of them project that the Fed to cut interest rates three times during the year. 23% of experts expect the Fed’s monetary policy to be uncertain; 18% anticipate the Fed to stop reducing interest rates during the year; 2% of experts forecast that due to the US strong economy, the Fed is expected to raise interest rates twice to four times during the year to prevent the economy from overheating. 4% of experts anticipate the Fed to lower interest rates once to twice during the year, but it does not mean that the Fed start a long-term interest rate cut cycle.

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Outlook for China’s Economy in 2019 China’s GDP grew by 6.3% in the half of 2019, decreased by 0.5 percentage points over the same period of the previous year. As to China’s annual GDP growth rate in 2019, the survey results show that 59% of the surveyed experts expect it to be between 6.1 and 6.2%, 31% of them forecast it to between 6.3 and 6.4%. 5% of them project it to be below 6%, and 5% of them anticipate it to be between 6.5 and 6.6%. Overall, all experts expect that China’s real GDP growth rate in 2019 to be lower than that of 6.6% in 2018. In the first half of 2019, China’s CPI rose by 2.2% year-on-year, an increase of 0.4 percentage points over the first quarter; and the core CPI, which is deducted by food and energy price, grew by 1.8% year-on-year, dropped by 0.1 percentage points from the first quarter. As to China’s CPI growth in 2019, 55% of experts expect it to be between 2.2 and 2.5%, 24% of them forecast it to be between 1.9 and 2.1%, 13% of them project it to exceed 2.5, and 8% of them anticipate it to be between 1.6 and 1.8%. Overall, more than 90% of them expect that China’s annual CPI increase in 2019 to be higher than that of 1.18% in 2018. In the first half of 2019, China’s PPI rose by 0.3% year-on-year, an increase of 0.1 percentage points over the first quarter. Regarding the trend of China’s PPI in 2019, 55% of experts expect that China’s PPI increase would be between 0.1 and 1.0%; 16% of them project that it would be between −1.0 and 0.0%”; 13% of them anticipate that it would be greater than 2.0, and 13% of them forecast that it would be between 1.1 and 2.0%. Overall, almost all experts expect China’s PPI increase in 2019 to be lower than that of 3.5% in 2018. In 2018, China’s total FAI (excluding farmers) at current prices increased by 5.9%. Of which manufacturing investment rose by 9.5%; real estate investment expanded by 8.3%; and infrastructure investment went up by 3.8%. In the first half of 2019, total FAI (excluding farmers) picked up by 5.8%, down 0.2 percentage points over the same period of last year. Of which manufacturing investment increased by 3.0%, dropped by 3.8 percentage points compared with the same period of last year; real estate investment rose by 11.0%, up 3.6 percentage points over the same period of last year; infrastructure investment climbed by 4.1%, down 3.2 percentage points over the same period of the previous year. Regarding the growth rate of China’s total FAI in 2019, 79% of experts expect it to be between 4.0% and 6.0%; 17% of them expect it to be between 6.0 and 8.0%; 2% of them expect it to be between 2.0 and 4.0%; 1% of them expect it to be above 8.0%; 1% of them project it to be between 0.1 and 2.0%. As to China’s manufacturing investment in 2019, 67% of experts expect that its growth to continue to decline and the growth rate to be lower than that of 2018. 22% of them anticipate it to be almost the same as in 2018; 8% of them forecast it to accelerate and to be significantly higher than that of 2018. 3% of them hold different views, such as: the growth rate in the second half of 2019 is set to rebound slightly, and the annual growth rate is projected to be lower than that in 2018; the growth rate of manufacturing investment is forecast to remain stable, with an annual growth rate of 3–4%; and the growth rate of manufacturing investment is set to be the same as that in the first half of 2019.

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As to China’s real estate investment in 2019, 49% of experts expect its growth to slow down. 32% of experts expect the growth of China’s real estate investment is set to stay almost stable; 15% of them expect it to accelerate and its rate to be significantly higher than that of 2018; 3% of experts hold different views, such as: it is set to be slightly faster than that in 2018; it is projected to slow, with its rate slightly higher than that in 2018; it is anticipated to remain relatively stable in 2019; and it is expected to slow down in 2019, with its rate slightly higher than that in 2018. Regarding 2019 China’s infrastructure investment, 33% of experts expect investment growth to continue to accelerate, significantly higher than investment growth in 2018; 32% of experts expect infrastructure investment to remain basically stable; 31% of experts expect its growth rate to slow down and to be lower than that of 2018; 4% of the experts hold different opinions, such as: it is set to be about 4% in 2019; it is anticipated to be the same as that in 2018; It is projected to accelerate and to be higher than that in 2018; or it is expected to accelerate and to be slightly higher than that in 2018. Overall, more than 80% of experts expect that the nominal growth rate of China’s FAI in 2019 to be higher than that of 5.9% in 2018; nearly 70% of them expect it to slow down, which is lower than that in 2018. Nearly half of them project that China’s real estate investment in 2019 would slow down. More than 30% of them anticipate that China’s infrastructure investment would remain stable in 2019, and more than 30% of them forecast its growth would accelerate or slowing down. In 2018, investment by state-owned and state-controlled enterprises in China increased by 1.9% and private investment rose by 8.7%. In the first half of 2019, the investment of state-owned and state-owned holding enterprises expanded by 6.9%, down 3.9 percentage points over the same period of the previous year; the private investment climbed by 5.7%, down 2.7 percentage points over the same period of the previous year. As to the investment of state-owned and state-owned holding companies in 2019, 63% of experts expect that its growth rate would be within 6.0% to 8.0%; 15% of them forecast its growth rate would be in the range of 4.0–6.0%, 13% of them project that its growth rate would be between 2.0 and 4.0%; 5% of them anticipate that its growth rate would be in the range of 0.0–2.0%; 4% of them expect their growth rate to be high than 8.0%. Regarding the growth rate of private investment in 2019, 67% of experts expect it to be between 5.0 and 7.0%; 21% of experts expect its growth rate to be lower than 5.0%; 12% of experts expect its growth rate within 7.0–9.0%. In 2018, the total retail sales of consumer goods in China increased by 9.0% in nominal terms. In the first half of 2019, the total retail sales of consumer goods increased by 8.4%, a decrease of 1 percentage point over the same period of the previous year. What is the growth rate of China’s consumer goods retail in 2019? According to the survey results, 59% of experts expect the nominal growth rate of total retail sales of consumer goods in 2019 to be within 8.0–8.5%; 26% of experts expect it to be between 8.5 and 9.0%”; 8% Experts expect it to be below 8.0%; 7% of experts expect that its growth rate is within 9.0–9.5%. Overall, 93% of experts project that the nominal growth rate of China’s total retail sales of consumer goods in 2019 would be lower than that of 9.0% in 2018. In 2018, China’s total value of exports of merchandise measured in RMB increased by 7.1%. In the first half of 2019, the total export of goods increased by 6.1%, and the

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growth rate decreased by 1.2 percentage points over the same period of the previous year. Regarding China’s total value of exports measured in RMB in 2019, 53% of the surveyed experts expect their nominal growth rate to be between 5.1 and 6.0%; 32% of experts expect their nominal growth rate to be within 6.1–7.0%. 12% of the experts expect their nominal growth rate to be less than 5.0%; only 3% of experts expect that the nominal growth rate of total exports in 2019 is between 7.1 and 8.0%. Overall, for China’s total exports, 97% of experts expect that China’s export growth rate in 2019 will be lower than the 7.1% level in 2018. In 2018, China’s imports of goods measured in RMB increased by 12.9%. In the first half of 2019, the total import of goods increased by 1.4%, and the growth rate decreased by 10.1 percentage points over the same period of the previous year. Regarding China’s total imports in 2019 measure in RMB, 74% of the experts surveyed expect that it is between 0.0 and 5.0%; 8% of experts expect it to be higher than 10.0%; 7% of experts expect it to be between 5.1 and 8.0%, 7% of experts project it to within 8.1 and 10.0%; and 4% of experts expect it to be below 0.0%. For China’s total value of imports, more than 90% of experts expect that China’s import growth rate will be less than 10.0% in 2019. At the end of 2018, the central parity of the RMB against the US dollar was 6.863. By the end of June 2019, the central parity of the RMB against the US dollar was 6.875, a depreciation of 0.39% from the beginning of the year. Affected by the United States’ continued import tariffs on Chinese exports, the offshore RMB exchange rate against the US dollar fell below 1 US dollar against 7 yuan on August 5. Affected by market supply and demand and fluctuations in international exchange markets, the central parity of the RMB exchange rate against the US dollar on August 7 also began to break 7. Then what is the trend and magnitude of the change in the central parity of the RMB against the US dollar at the end of 2019? The survey results show that 62% of experts expect the renminbi to continue to depreciate against the US dollar. At the end of 2019, the median price of 1 US dollar convertible RMB about 6.854–7.5160 yuan, and the average median price is expected to be 7.0532. % of the experts surveyed expect the exchange rate of the RMB against the US dollar to remain basically stable; 3% of experts expect the RMB to be converted to appreciation. The median price of the US dollar convertible to RMB at the end of 2019 is about 6.855–7.05 yuan, and the average median price is expected to be 6.9263 yuan. Overall, more than 60% of experts expect that the renminbi will continue to depreciate against the US dollar in 2019.

Outlook for China’s Macroeconomic Policy in 2019 China’s broad money (M2) grew by 8.1% in 2018. By the end of June 2019, M2 increased by 8.5% year-on-year, 0.5 percentage points higher than the same period of the previous year. What is the expected growth rate of M2 in 2019? 56% of experts expect China’s M2 growth rate to be between 8.5 and 8.9% in 2019; 27% of experts expect it to be within 8.0–8.4%; 12% of experts expect it to be between 9.0% and

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9.4%; 4% and 1% of experts expect it to be lower than 7.9% and higher than 9.5%, respectively. Overall, more than 90% of experts expect that the growth rate of China’s M2 in 2019 will be higher than that of 8.1% in 2018, indicating that most experts expect that the Chinese government will continue to adopt a neutral or structurally loose monetary policy in 2019. In the first half of 2019, the total amount of social financing in China increased by 13.2 trillion yuan, an increase of 3.2 trillion yuan over the same period of the previous year. Of which RMB loans totaled 9.7 trillion yuan, an increase of 1.1 trillion yuan over the same period of the previous year. Among the new RMB loans, the proportion of loans to non-financial enterprises and government groups was 64.8%, an increase of 7.5 percentage points over the same period of the previous year and an increase of 13.4 percentage points over 2018. What proportion of non-financial enterprises and government group loans will be in the 2019 RMB new loans? According to the survey results, 57% of experts expect that the proportion of loans to non-financial enterprises and government groups in the new RMB loans in 2019 will be between 60 and 65%; 29% of experts expect that their proportion will be higher than 65%; 11% of experts expect that their proportion will be between 55 and 60%; 3% of experts expect their proportion to be between 50 and 55%. Since 2019, in the face of complex and severe domestic and international economic and financial situations, the Chinese monetary authorities have further clarified the need to comprehensively implement a series of measures such as “financial services to the real economy, prevent and resolve financial risks, deepen financial reforms, and continuously expand financial openness. The overall sustainable development of society provides a good monetary and financial environment. So, what are the focus of China’s monetary policy in the second half of 2019? According to the survey results, 83% of the experts expect that accelerating the transmission mechanism of monetary policy to the real economy and further stimulating the vitality of the market micro-subjects; 81% of the experts expect that “while maintaining a reasonable and sufficient liquidity, the focus is on adjusting the credit supply structure. Significantly increase the proportion of loans to non-financial enterprises and government groups in new RMB loans; 73% of experts expect that “continue to deepen interest rate marketization reforms and effectively promote the actual financing costs of enterprises”; 67% of experts expect that “serious implementation The long-term mechanism of stable and healthy development of the real estate market, safely dispose of and resolve various risks and hidden dangers, and hold the bottom line of systemic financial risks”; 29% of experts expect that “continue to relax market access and steadily promote the opening of RMB capital projects and promote Expand the cross-border use of the renminbi.” In addition, 3% of experts have put forward other ideas, such as: increasing exchange rate flexibility, seeking more space for monetary policy autonomy; improving macroprudential policies, including improving financial risk monitoring, assessment and early warning system construction; The LPR formation mechanism promotes the market-based reform of interest rates and unblocks the transmission mechanism of monetary policy. Since 2019, China’s fiscal policy has promoted the implementation of larger tax cuts and fee reduction measures. In the first half of the year, the cumulated tax

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reductions and reductions totaled 1,170.9 billion yuan, including tax reductions of 1.04 trillion yuan. Of all new tax reductions, taxpayers in the private economy have increased tax cuts by 671.2 billion yuan, accounting for 65% of the total tax reduction. So how do you evaluate the effect of tax cuts and fees? According to the survey results, 90% of the experts expect that “the tax cost of enterprises has been reduced to a certain extent, and the profitability of enterprises has been improved”; 59% of experts expect that “one tax reform increases the income of residents and is conducive to stimulating social consumption growth”; 55% of experts expect that the “tax reduction and fee reduction policy significantly enhances the innovation and entrepreneurial vitality of private enterprises, and stabilizes and boosts market confidence”; 50% of experts expect that “the increase in research and development expenses and deductions will intensify the incentives for enterprises to invest in R&D. It is conducive to enhancing the innovation ability of enterprises”; 50% of experts expect that “the reduction of the real economy and efficiency, can effectively promote enterprises to increase investment.” In addition, 6% of experts have put forward other different views. For example, the effect of tax reduction and fee reduction on stimulating consumption growth needs to be strengthened. Further attention should be paid to income distribution, increase the tendency of super consumption, and resolve financial risks; the strength needs to be further improved. The effect of tax reduction and fee reduction is not obvious; the tax reduction and fee reduction should be combined with the reform of the tax and fee system, the reform of the social security system and the improvement of the collection and management capacity; and the tax reduction for innovative enterprises and hightech enterprises, especially the research and development expenses Add deductions and high-tech corporate income tax preferential policies to enhance the company’s willingness to continue to innovate. Reducing the social security rate is an important measure to reduce the burden on enterprises and stimulate the vitality of market players. In the first half of 2019, various policies to reduce social security rates have already implemented expenditure relief of more than 128 billion yuan. On July 10, the executive meeting of the State Council of China decided to comprehensively push forward some of the state-owned capital to enrich the social security fund to avoid the funding gap. Then, what effective measures will the Chinese government take to reduce the social security rate in the next stage? According to the survey results, 72% of the experts expect that “the social security rate must be reduced. In addition to the stable payment method, the implementation of the basic pension insurance unit payment ratio is not higher than 16%”; 70% of the experts expect that “the comprehensive push will open the central And 10% state-owned shares of local state-owned and state-owned large and medium-sized enterprises and financial institutions, transferred to social security foundations and local related entities, and as financial investors, in accordance with the provisions to enjoy the right to income and other rights; 68% of experts expect that “In order to enhance the sustainability of the social security fund, the foundation of the social security system for the elderly is further strengthened”; 42% of the experts expect that “the basic pension must be guaranteed to be paid in full and on time”.

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In addition, 3% of experts have put forward different views, such as: full implementation of social security national co-ordination as soon as possible; reducing non-principal allocation between regions; and verifying the reduction of social security contributions base; The Political Bureau of the CPC Central Committee held on July 30, 2019 considered that the current “downward pressure on the domestic economy has increased.” While continuing to ensure the realization of the “six stable” goal, it has clearly put forward “stable manufacturing investment.” So, what are the current policy measures to stabilize manufacturing investment? According to the survey results, 88% of the experts expect that “building a fair competitive business environment, improving the property rights protection system, boosting business confidence and stabilizing manufacturing investment”; 81% of experts expect that “encourage and support advanced manufacturing and promote manufacturing Industry upgrades and product upgrades; 71% of experts expect that “effectively solve the problem that financing is both difficult and expansive for export-oriented manufacturing private enterprises”; 58% of experts expect that “minimize trade friction for manufacturing exports and investment Expected impact.” In addition, 6% of experts have put forward different views, such as: protecting the industrial chain, improving the industrial base capacity and industrial chain level; accelerating the construction of new infrastructure such as 5G commercial, artificial intelligence, industrial Internet, Internet of Things, and ecological environment; Continue to strengthen innovation drive, and accelerate the withdrawal of zombie enterprises; increase manufacturing technology transformation and equipment renewal, strengthen new infrastructure construction, promote artificial intelligence, industrial Internet, Internet of Things construction, accelerate the pace of 5G commercialization; In the environment and other actions, we must prioritize and implement them step by step. We will have a period of adjustment for the “buffering” and transformation and upgrading of manufacturing enterprises. We should not engage in administrative uniformity, so that the industrial chain “forging chains” and letting enterprises “suddenly die”. “Stable employment” is the focus of the “six stable” work in 2019. In the first half of 2019, there were 7.37 million new jobs in urban areas in China, and 67% of the annual target tasks were completed. So, what are the policy measures for stable employment in the second half of 2019? According to the survey results, 71% of the experts expect that “further strengthen vocational skills training”; 69% of experts expect that “guided industrial transformation and employment promotion synergistic development”; 69% of experts expect that “precise measures to do key job employment work”; 66 % of experts expect that “more efforts to support entrepreneurial innovation activities”; 61% of experts expect that “to expand and open up to help stabilize growth and stabilize employment”. In addition, 8% of experts put forward other different viewpoints, such as: exerting the multiplier effect of entrepreneurship to promote employment; increasing the governance of the fake and inferior online economy; paying attention to the management and use of unemployment insurance funds, and reviewing the implementation of phased reduction in accordance with the requirements of the State Council. Policies and implementation of unemployment insurance rates; stop expelling the socalled low-end urban population, stop expanding the anti-urbanization behavior of

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governments such as “demolition”; effectively protect the property rights of private enterprises; the government further promotes the reform of distribution services”. Optimize the business environment, activate the innovation ability of market participants, and effectively reduce the burden on SMEs and indirectly create jobs through a series of measures such as “reducing the rate of social insurance premiums and increasing the return of unemployment insurance premiums”; encourage employers to provide internships. Posts; strengthen unemployment statistics work, establish risk early warning mechanism; the most fundamental is to reduce burdens for enterprises, especially to enhance the innovation vitality of small and medium-sized enterprises; transfer and re-employment work under the background of industrial chain transfer and external migration, in order to avoid unemployment, it is mainly to strengthen the advent Bankruptcy and crisis enterprise treatment, unemployment insurance relief Increase new formats/service development; actively expand domestic demand to ease business sales difficulties.

Appendix B

Forecast of Major Indicators of China’s Economy in 2019 by the CQMM Team and Experts

Major indicators in 2019 GDP growth rate CPI growth rate

By CQMM team (%) 6.21 2.54

By experts (%) Interval

Ratio

6.1–6.2

59

6.3–6.4

31

2.2–2.5

55

1.9–2.1

24

PPI growth rate

0.08

0.1–1.0

55

−1.0–0.1

16

Growth rate of total value of exports measured at current RMB

4.3

5.1–6.0

53

6.1–7.0

32

Growth rate of total value of imports measured at current RMB

3.7

0.0–5.0

74

Growth rate of total retail sales of consumer goods

8.37

8.0–8.5 8.5–9.0

26

Growth rate of total FAI

5.12

4.0–6.0

79

6.0–8.0

17

6.0–8.0

63

4.0–6.0

15

2.0–4.0

13

5.0–7.0

67

10.0

6.42

4.07

© Springer Nature Singapore Pte Ltd. 2020 Center for Macroeconomic Research at Xiamen University, China’s Macroeconomic Outlook, Current Chinese Economic Report Series, https://doi.org/10.1007/978-981-15-3223-8

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