Traders Yawn As China Pledges "Significant" Tax Cuts, More Monetary Stimulus In 2019

More tax cuts, and possibly looser monetary policy, will be adopted by the Chinese Communist Party next year as China's leadership struggles to reverse the trend of slowing economic growth and financial market instability that have been exacerbated by the trade war between the world's two largest economies instigated by President Trump.

After a separate entity - the Financial Stability and Development Committee, led by top Chinese economic official Liu He - denied online rumors about possible tax cuts next year, a statement released by the Central Economic Work Conference, published after the close of this week's meeting, indicated that China would do exactly that - imposing a "proactive" fiscal policy and "prudent" monetary policy next year - to "improve efficiency, larger scale tax and fee cuts will be implemented next year".

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Here's a summary of the statement, courtesy of Bloomberg:

  • Monetary policy should be "prudent" and strike an "appropriate" balance between tightening and loosening, officials decided at a key economic planning meeting.
  • The term ‘neutral’ was dropped from the statement, released by the official Xinhua News Agency after the annual Central Economic Work Conference.
  • Fiscal policy will be "proactive" in 2019 and should be stronger and more efficient; the government should implement reductions in taxes and fees on a "larger scale".
  • Policies should keep liquidity reasonable and sufficient, improve monetary policy transmission and boost the ratio of direct financing to address funding difficulties for companies.

The kneejerk reaction was that this may be "the thing" traders had been looking for...

... but it wasn't meant to be, because while the news appeared to stem the overnight rout in Asian and European stocks, the market wasn't terribly excited by yet another promise of more stimulus from Beijing, with US equity futures still deep in the red.

In a hint of the specific measures that might be coming down the pike, BBG pointed out that the statement used some of the same language to describe monetary policy as a similar statement in 2014, which preceded the PBOC's decision to cut benchmark interest rates and banks reserve-requirement ratios in 2015. Omission of the word "neutral" from the statement suggests "that the focus for macro policy has shifted from lowering long-term risks to boosting short-term demand," Larry Hu, head of China economics at Macquarie Securities Ltd, told BBG.

While the statement sketches out general policy objectives, detailed measures typically aren't released until after the National People’s Congress in March.

The statement was released one week after a raft of weak econ data out of China raised fears about a global recession, which hurt stocks from Asia to North America. It also comes after the PBOC cut its Required Reserve Ratio for banks four times during 2018, pushing trillions of yuan into the economy to try and stimulate private-sector growth.

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According to the statement, the CEWC will also encourage the issuance of more local government debt (which carries the added benefit of being left out of most tallies of the country's total debt burden) as China seeks to continue its stimulatory measures while continuing with its 'deleveraging'.

China also plans to implement the 'consensus on trade' reached with US leaders and push forward with negotiations with the US, according to the statement.

The big question, though, is what are the implications, if anything, for the trade war? Does this suggest that China is preparing for a scenario where the US moves ahead with its next round of tariffs after March?