China Considers Tax Breaks for Manufacturers as Economy Cools

China is considering new tax incentives for high-end manufacturing companies, according to a person familiar with the matter, as Beijing seeks to bolster the economy and encourage more innovation in technology to counter US competition.

The tax policy being considered could save advanced manufacturers hundreds of billions of yuan, said the person, who asked not to be identified because the information isn’t public. The plan is still subject to approval and could undergo changes, the person said.

China’s post-Covid economic rebound is losing momentum, with latest data showing exports and investment weakening across the board, a recovery in the property market fizzling and youth unemployment soaring to a record. Chinese stocks have slumped, the yuan has breached 7 to the dollar, and prices of key commodities like copper and iron ore have plunged as investors reassess the outlook for the world’s second-largest economy.

President Xi Jinping cited a “modern industrial system” as one of China’s top economic priorities at a high-profile meeting earlier this month, prompting expectations Beijing would roll out measures such as subsidies for manufacturers. A State Council meeting in May also discussed supporting China’s advanced manufacturing businesses, which covers a wide range of industries from new material, chips, artificial intelligence to bio-pharmaceutics.

The Ministry of Finance didn’t immediately respond to faxed questions seeking information.

Beijing is under pressure to ramp up monetary and fiscal stimulus, although with a relatively modest growth target of around 5% this year, most analysts don’t expect policymakers will open the floodgates. Instead, they may opt for more targeted measures, like tax incentives, to boost business confidence.

The government had previously announced tax breaks this year of 1.8 trillion yuan ($255 billion), down from a record 4.2 trillion yuan last year as the economy gradually recovers. A move to now boost tax incentives suggests officials may be growing more concerned about the outlook.

The planned tax breaks for high-end manufacturers also provides further evidence that Beijing is prioritizing support for a sector that’s key to supply chain security, particularly in semiconductors, as tension with the US and its allies intensified.

Last year, the People’s Bank of China provided more than 200 billion yuan in relending loans for commercial banks to encourage cheap lending to manufacturers and other sectors.

Despite the government’s support, manufacturers have seen their revenues and profits squeezed because of falling demand. Factory activity contracted in April for the first time in four months, while data this weekend showed manufacturing profits plunged 27% in the first four months of the year from the same period in 2022.

The government’s ability to apply large-scale fiscal stimulus is limited, though. Revenue from land sales, a key source of income for local governments, has plummeted because of the downturn in the property market, while debt risks have climbed.

China’s tax income weakened to 13.8% of gross domestic product in 2022 from 17% in 2018 after the government made aggressive tax cuts in previous years to boost the economy. Finance Minister Liu Kun has warned of “outstanding conflicts” between income and spending this year.

Source from: Bloomberg