28 April 2019
Tax Cuts in 2019 This Time May Be Different

We highlighted previously that fiscal easing via tax and fee cuts may be the “bright spot” in the policy mix going forward, while the room and necessity for further monetary stimulus have declined. In this note, we examine execution of the tax cut policies so far and provide a thorough analysis for the “path” of fiscal impulse from the 3 main tax & fee cut initiatives launching at different times in 2019. With this exercise, we aim to help “visualize” the frame by frame impact on personal income, corporate profit, & sectoral demand.

Firstly, per MOF, The annualized amount of tax & fee cuts may reach Rmb2trn (~2% of 2019 estimated GDP). If realized, it would be the largest in China’s history measured by the absolute amount or % in gov’t income.

More importantly, the execution of the tax cut measures so far has exceeded our expectations, judged by the visible tax relief from the already-implemented tax reforms for households and small enterprises.

In terms of the “path” of fiscal impulse, we expect to see a visible pick-up in personal consumption growth in 2Q. The boost to corporate profit and cash flow will likely start in 2Q19 and reach “full swing” around 3Q19.

Personal income tax reform took effect on January 1. We expect annualized tax relief to reach ~Rmb500bn (~1.2% of annual household disposable income). Under China’s personal tax regime, the impact on household disposable income may have peaked in 1Q19, but will remain positive for the next 6–8 quarters. The 1Q fiscal data shows that the tax relief may have reached ~Rmb200bn in 1Q, or ~2% of disposable income.

VAT cut and other related reforms were implemented on April 1. The MOF foresees >Rmb1trn (>1% of GDP) reduction in corporate tax burden in one year. The impact may be most notable in 3–4Q19. The benefits from small enterprise tax cuts may be visible as early as 2Q, as they were already implemented on January 1. These SME-oriented policies, which are expected to reduce Rmb200bn in SME tax payment per MOF, will likely benefit consumption and the service sector.

Payroll tax reform will take hold on May 1. We expect a reduction of Rmb500bn from the cut in payroll tax rate and taxable base in one year. The cost-cutting impact for the corporate sector is “instantaneous” and therefore most notable in 2–3Q19. Corporate cash flow and retained earnings are expected to get a “double boost” from VAT and payroll tax reforms from 2Q onwards, with the impact most notable around 3Q.

Assuming effective execution, the sizable redistribution of gov’t income among the household and corporate sectors would boost aggregate demand growth in a more sustained manner. The shift of policy mix to “fiscal easing via tax and fee cuts + stable monetary expansion” indicates that the “growth engine” may rotate towards more consumption and capex-driven in 2H19.