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China Outlines Steps to Support Growth With GDP Target at Risk

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April 3, 2014

April 3 (Bloomberg) — China outlined a package of measures including railway spending and tax relief to support the economy and create jobs after a slowdown endangered Premier Li Keqiang’s target of 7.5 percent growth this year.

The government will sell 150 billion yuan ($24 billion) of bonds this year to help build railways mainly in the less- developed central and western regions, the State Council said in a statement last night after a meeting led by Li. Authorities will also create a development fund of 200 billion yuan to 300 billion yuan a year to increase sources of rail financing.

The measures expand on the cabinet’s plans to speed up construction projects after slowdowns in manufacturing, retail sales and investment pointed to unexpectedly weak growth. The world’s second-largest economy probably grew 7.4 percent last quarter from a year earlier, according to analysts surveyed by Bloomberg News in March, down from a previous median estimate of 7.6 percent.

“It’s a mini-stimulus package designed to stabilize growth,” said Xu Gao, chief economist with Everbright Securities Co. in Beijing. “As the growth rate is decelerating to the lower end of a reasonable range, Premier Li is trying to do something to get growth back on track.”

Read: China’s Growth is Still 3x Global Average

The policies and the government’s “clear commitment” to achieve 7.5 percent growth mean expansion will probably accelerate in the second quarter, said Xu, who formerly worked at the World Bank.

Rail stocks rose, with China Railway Construction Corp. up 7.2 percent in Hong Kong and China Railway Group Ltd. gaining 5.1 percent. The benchmark MSCI Asia Pacific Index advanced 0.1 percent, heading for a seventh straight increase.

Tax Policy

The State Council said the nation will extend a preferential tax policy to more small companies and increase financing to build low-income housing.

China plans to build more than 6,600 kilometers (4,100 miles) of new rail lines this year, 1,000 kilometers more than last year, according to the statement. Almost 80 percent of the investments by the central government will be allocated to the central and western regions, the State Council said.

“We must roll out policies that spur businesses’ vitality, effectively increase demand and boost jobs,” the government said. Accelerating rail projects will “increase effective investments and lead the development of relevant industries,” it said in the statement.

Premier Li is trying to balance sustaining growth and employment with reining in a credit surge and curbing pollution that’s shrouded cities across the nation. A Chinese building materials producer will avert what would have been the second default in the nation’s onshore bond market as its guarantor said it would step in to help, according to two people familiar with the matter, Bloomberg News reported yesterday.

Purchasing Managers

Two Chinese manufacturing gauges released on April 1 pointed to weakness in the economy last month, with a Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics falling to the lowest level since July. An official services index declined in March from February, while a private gauge from HSBC Holdings Plc and Markit Economics rose, with both indicating expansion, reports showed today.

The statistics bureau will report first-quarter gross domestic product data on April 16.

China Development Bank will create a body with an independent budget to sell housing bonds to support revamping shantytowns and urban infrastructure projects, according to yesterday’s statement. The vehicle will seek funding from financial institutions including Postal Savings Bank of China, commercial banks, social security funds and insurers.

Shantytown Transformation

“Accelerating shantytown transformation and getting millions of residents into modern buildings” can “forcefully drive investment and promote consumption,” the State Council said. The government said last month that it would invest more than 1 trillion yuan this year redeveloping shantytowns.

The government will raise the upper limit of taxable incomes of small-to-micro businesses eligible for preferential treatment and extend the policy through the end of 2016, the State Council said.

Under the previous policy scheduled to end in 2015, small businesses with annual taxable income of less than 60,000 yuan can get a 50 percent tax cut. The State Council said yesterday that small businesses with taxable income of more than 60,000 yuan can also have the tax cut, and the preferential treatment will be extended to the end of 2016.

The clarification of funding sources for redeveloping shantytowns and railway investment was important, Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong, said in a note.

“These measures clearly show that the pace of policy easing is picking up,” said Zhang, who formerly worked at the International Monetary Fund. The nation is likely to cut banks’ reserve requirements in the second and third quarters, and chances of an interest-rate reduction are rising, Zhang wrote.

– William Bi, Xin Zhou, with assistance from Allen Wan in Shanghai.

(c) 2014 Bloomberg.

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