Meeting to emphasize key role of fiscal policy

China may implement a more expansionary fiscal policy, coordinated with a cautious monetary policy, to counter economic risks and ensure that GDP growth can remain steady at around 6 percent in 2020. That viewpoint was expressed by experts before the opening of the annual Central Economic Work Conference, which is expected to open on Tuesday.

The basic policy direction was clarified on Friday by the Political Bureau of the Communist Party of China Central Committee. Experts said fiscal policy will play a major role in stabilizing growth, which is the key task for authorities.

The country's campaign of unprecedented tax and fee cuts to ease companies' burdens and boost profits will continue in 2020 and may be even more aggressive, some policy advisers close to the Ministry of Finance told China Daily over the weekend. They agreed that, in the face of economic downside risks and external uncertainties, the tax and fee cut plan for next year may increase to 3 trillion yuan ($426.3 billion), compared with 2 trillion yuan this year.

However, several weeks ago, some officials from the tax authority said the tax and fee reductions have created strains because of the rising pressure of decelerated fiscal revenue.

"In order to reduce the operating costs of companies and improve the business environment, the possibility of cutting more taxes and fees in 2020 is under discussion," said Wang Zecai, a researcher at the Chinese Academy of Fiscal Sciences under the Ministry of Finance.

Qiao Baoyun, dean of the China Academy of Public Finance and Public Policy at the Central University of Finance and Economics, believes that the 2020 tax and fee cut target will exceed 2019's historic high of 2 trillion yuan.

Value-added tax rates can be further reduced to lower costs for industrial and manufacturing companies and increase their profits. Discussions will also continue on reducing the social insurance premium rate companies must pay for their employees, Wang added.

Another key topic is whether the government will raise the budget deficit rate. A broad consensus has been achieved among officials and scholars before the high-level economic meeting that the government deficit-to-GDP ratio could be lifted to 3 percent, up from 2.8 percent in 2019, allowing the government to spend more on infrastructure construction projects.

The local governments' debt tool for raising infrastructure investment funds, which are also called special bonds, is likely to reach 3.5 to 4 percent of the total GDP, Qiao said.

Although special bonds are not calculated as part of the government budget deficit, too much issuance of such debt will still result in a larger gap between local governments' income and spending, thus Qiao says policymakers should be cautious about raising the debt ceiling.

Experts forecast that the new special bond quota will be increased to at least 3 trillion yuan next year, up from 2.15 trillion yuan in 2019. Funds will then be injected into infrastructure such as railways, airports and agricultural-related projects. This funding can used as a part of the basic capital of a project, even up to about 30 percent, allowing local governments to use it to lever bank lending and private funding.

Regarding monetary policy for the medium- to long-term, the Chinese central bank is still under pressure to lower interest rates, but the easing may be done slowly and step-by-step, said Zhu Haibin, JPMorgan's chief China economist. A rapid decline in interest rates would foster corporate and local government debt, which would weaken the efficiency of structural reforms, Zhu added.

It is likely that the loan prime rate, a newly reformed interest rate that reveals real borrowing costs, will decrease by another 0.1 percentage point in the second half of next year, Zhu predicted. The one-year LPR came in at 4.15 percent on Nov 20, down from 4.2 percent a month earlier, according to the central bank.

He said monetary policy should be managed carefully to prevent and resolve major risks — one of the three crucial government tasks in 2020 that the CPC Political Bureau meeting highlighted on Friday. The other two highlighted tasks are reducing poverty and fighting pollution.

Central bank Governor Yi Gang set the major policy tone in an article earlier this month. Yi said that monetary policy should maintain its use of conventional monetary tools. Subzero interest rates or quantitative easing will not be considered. Maintaining price stability is now the priority for monetary policy.

"Beijing's increased comfort with slowing growth combined with a resilient labor market suggest that additional stimulus is likely to be geared to managing the pace of the slowdown rather than reversing it," said Louis Kuijs, head of Asia economics for Oxford Economics.

Macroeconomic policies should be coordinated to push forward economic reforms, said Shen Jianguang, vice-president and chief economist at JD Digits, a Chinese financial technology group. "There is a trade-off between short-term stable growth and long-term promotion of reform. But the core goal is to improve opening-up," he said.