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Chinese economy takes centrestage

AS we stare down this path of global economic weakness potholed by trade wars and higher interest rates, the one notable stimulus to watch will be from China. As our chart suggests, over the past two decades, investments have been the major propellant of China's GDP growth.

In terms of contribution to GDP, investments rose from 34 per cent in 1998 to 43 per cent in 2017. Meanwhile, household consumption has not been able to keep pace. In the latest GDP for 3Q '18, growth dawdled to 6.5 per cent. This was its slowest in almost a decade. A major reason has been slowing investments. Fixed asset investments, a notable monthly indicator of capital expenditure, grew at a record low of 5 per cent this year. Five years ago, growth was almost triple of that. More restrained infrastructure spending by the public sector has been pulling down total investments. This in part reflects deleveraging efforts by the authorities, mainly to contain hidden debt at local governments. China is also attempting a strategic rebalancing to be more consumption and services dependent. In the process, there will be speed bumps. The rate of decline is what the government is looking to engineer.

The foremost emphasis by the government has been on the consumer. In its latest salvo, Beijing introduced the largest personal tax cut package in China's history. Step 1 lowered the taxable income bracket for individuals and raised personal deductions from 42,000 renminbi (S$8,324) to 60,000 renminbi, from this October. Step 2 is to introduce tax deductions for child and adult education, housing interest payments, healthcare expenses for serious illnesses and elderly care. These will kick in from January next year.

The relief package is expected to boost GDP by one percentage point, by putting more disposable income in the hands of the consumer. The largest beneficiary should be the middle class. Elsewhere, to help exporters cope with current trade tensions, there are VAT export rebates. A 5 per cent decline in the renminbi this year has also helped.

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Some old and stalled infrastructure projects have been revived. The central bank has cut bank reserve requirements by four times this year. This has released 2.3 trillion renminbi of liquidity.

Funding pressure, especially for private enterprises, came to the limelight recently after a 25 per cent collapse in the Chinese stock market this year. It triggered widespread margin selling as an estimated US$620 billion of shares have been pledged by companies to fund the running of their businesses. To support the private sector, the central bank wants more than a third of new corporate loans to be allocated to private companies. The central bank will be accepting small business loans from commercial banks as collateral for short-term liquidity. In addition, it has also assisted in bond issuances by private companies.

But a looming concern for businesses in China is the tougher enforcement of social security. Social security is a form of pension for ordinary Chinese, with monthly contributions from both employees and employers.

Its combined contribution is as high as 28 per cent of total wages. In the past, enforcement was "light" by local social security bureaus. The responsibility for collection will now fall on the tax authorities, which have a more comprehensive database of employee wages. This will be effective in 2019.

Some surveys suggest that only a third of Chinese businesses currently make full social security payments. There are fears that tighter enforcement will trigger widespread layoffs and even business closures.

A more colourful dampener to the economy is the result of a recent high-profile tax evasion case that has reverberated among the wealthy. The case has raised the spotlight on tax avoidance by the wealthiest among the Chinese population. The government has responded by announcing a form of tax amnesty.

Individuals who make remedial payments for unpaid taxes by the end of this year will be exempted from penalties. Spending on luxury goods and real estate appears to have been affected. The wealthy could either be dodging the spotlight or concentrating on accumulating funds to settle their tax bills.

As we wait for more stimulus, the event to watch - after the Trump-Xi G20 summit at the end of this month - will be the fourth plenum of the 19th Party Congress. China holds seven plenums every five years. The current fourth plenum has been delayed but is eagerly awaited by the market for the potential announcement of key plans to reinvigorate the Chinese economy.

  • The writer is head of research, Phillip Securities.

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.