Premier Li Keqiang - Photo by The State Council The People's of Republic China

JAKARTA (TheInsiderStories)–China will adopt a combination of fiscal and financial policies as an effort to boost the domestic demand amid trade war threat, the State Council’s executive meeting chaired by Premier Li Keqiang decided on July 23.

The government will issue targeted and well-timed regulations in the face of external uncertainties and ensure the economy performs within a reasonable range, and it will firmly refrain from resorting to a deluge of strong stimulus policies, the meeting announced.

The Chinese government puts developing the real economy high on its agenda. President Xi Jinping underlined the importance of improving the fiscal spending structure by prioritizing funding in key areas and projects. In this year’s Government Work Report, Premier Li Keqiang stressed the need to focus on the real economy and leverage the proactive fiscal policy to tackle the financing difficulties facing small and micro businesses.

In the first half of 2018, the government made tremendous efforts to cut costs for the real economy, including by maintaining robust public spending and scaling up tax and fee cuts. The government also introduced tax incentives and other measures to make financing more accessible and affordable for small and micro enterprises.

The meeting agreed that a more proactive fiscal policy will be pursued. The government will focus on introducing deeper tax cuts and non-tax fee cuts, and more companies will be eligible for preferential policies of additional deduction of R&D spending in taxable income, a policy that is expected to cut another 65 billion yuan ($9.6 billion) in taxes this year, on top of an initial goal of cutting taxes and fees by 1.1 trillion yuan.

Efforts will be stepped up in issuing 1.35 trillion yuan in special bonds for local government to see more tangible progress in ongoing infrastructure projects.

Prudent monetary policies will be neither too tight nor too loose, and aggregate financing and liquidity will remain sufficient, the meeting announced. A better and smoother transmission mechanism is needed to see credit policy incentives effectively introduced and delivered. Financial institutions will also be called on to use the money released from cuts in their required reserves to support small and micro businesses and debt-to-equity swaps.

The government will step up efforts to ensure delivery of the initial contribution to the state financing guaranty fund, targeting 140 billion yuan in loans for about 150,000 small and micro firms each year.

Solid implementation of the re-lending policy targeting small businesses is urged. Commercial banks will also be encouraged to issue financial bonds to small businesses, with the bond issuers exempted from the requirement of continuous profit-making.

Local authorities that have made visible progress in expanding financing guarantee and reducing costs for small businesses will be rewarded.

At the same time, the government will resolutely phase out the “zombie” companies to free up their under-used funding, and crack down on illegal financial institutions and activities to forestall risks.

“Any financial and fiscal policy measure must be considered in a broader context, and all measures are well coordinated and fully delivered to reduce costs for businesses in the real economy and sustain the sound momentum of growth through the latter half of the year,” Premier Li said.

Tax Reform

Furthermore, the Chinese government also released a national and local tax reform plan in an attempt to create more effective and united tax collection system.

The General Office of the Communist Party of China Central Committee and the General Office of the State Council released the plan with details of the tax reform including the main tasks and principles. The tax reform plans to integrate the national and local taxation offices at and below the provincial level to enable taxation system in order to create a better system to support the state governance.

“More efforts will be made to ease collection procedures for taxes and fees, lower collection cost and improve the business environment,” according to the plan.

The plan aims to improve the tax transparency and consistency. There will be different responsibilities specified for taxation organs and government authorities at different levels to mobilize central and local efforts after After the integration of national and local taxation offices.

Starting Jan 1, 2019, China will transfer the collection responsibility of social insurance charges, including basic pension and healthcare insurance, to taxation authorities, according to the plan.

A total of 8.2 trillion yuan ($1.2 trillion) were collected in the first six months of this year, excluding export tax rebates, up 15.3 percent year on year, according to the State Administration of Taxation.