Chinese VAT and manufacturing tax cuts aim to bolster sluggish GDP growth

Chinese VAT and manufacturing tax cuts aim to bolster sluggish GDP growth

Value-added tax (VAT) reforms will come into effect across China today, with manufacturing taxes to reduce from 16% to 13%

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Photo: Reuters

Value-added tax (VAT) reforms will come into effect across China today, with manufacturing taxes to reduce from 16% to 13% and transportation and construction rates lowering from 10% to 9%.

The tax cut is expected to produce a $90 billion—0.6% of GDP—boost to the economy. The move, led by Premier Li Keqiang, comes at a time where China’s economy faces pressure from the US trade war and high domestic debt, especially among state-owned enterprises. Beijing has increasingly turned to tax policy to support economic growth, as opposed to the traditional method of debt-fuelled spending.

Expect these tax reforms to continue throughout the year as Beijing continues to open its economy to foreign investors. Wholly foreign-owned ventures are increasing, like US-owned Tesla’s opening of a $7.2 billion plant in Shanghai last year.

These reforms will serve a dual-purpose. On one hand, they will signal to the US that China is serious about opening its economy and resolving their bilateral trade dispute. On the other, the reforms will also provide a key structural support for China’s long-term goal for an economy driven by high-end manufacturing.

Overall though, China’s opening up will remain glacial and foreign access likely remain tightly regulated in other industries, such as cloud services.

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