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China Unveils "Mini Stimulus" Targeting Small Companies

07-25 14:41 Caijing
Wednesday's tax cut was part of a three-pronged program.Others include a reduction of costs for exporters and guarantee of funds for the construction of railways.

China's State Council on late Wednesday unveiled a tax break plan for small companies in the country, as part of a broader plan to inject momentum into the world's second-largest economy.

The State Council, the cabinet, said it will scrap all value-added and operating taxes on businesses with monthly sales of less than CNY20, 000 ($3,250). It said the tax cut, which takes effect on August 1, would benefit over 6 million small companies, which employ tens of millions of people.

The announcement did not give a time span that the new measure will last, but analysts are expecting it to become a norm.

Some 12 billion yuan of revenue will be exempted for the companies in the rest months this year, according to a calculation by the Ministry of Finance.

"The policy shift will benefit the small and micro-sized companies directly, encouraging business start-ups, and reviving confidence on the development of such companies," the Ministry of Finance said in a statement published on its website, "It can also make the companies function better in stabilizing growth and creating jobs."

Yang Zhiyong, a researcher with the Chinese Academy of Sciences, applauded the move for its role in supporting a "comprehensive" development in the economy, and expected that it could be a long-standing policy.

A "healthy" development of China's economy and society should "never rely solely on big companies," he added, referring to mostly the state-owned enterprise.

Although more than 90 percent of companies in China are SMEs (small and medium-sized enterprises), the economy is still dominated by state-owned enterprises (SOEs), which are typically large in scale, low in efficiency and lavish in spending due to easy credit.

But it seems that the government has become more aware of the importance of SEMs in rejuvenating the world's second-largest economy, especially that in the job market.

While contributing 60 percent of GDP and half of tax revenue, SMEs in China provide jobs to over 90 percent of employees in the country, government data showed.

That echoes a concern of Li Keqiang, the premier, that a slowdown in the economy below 7.0 percent could deal a heavy blow to the employment, a potential source of social unrest.

Addressing a series of economic meetings in recent days, the premier said the government still maintained an official target of 7.5 percent in growth, but a growth of below 7.0 percent will be intolerable.

China's slowdown is still deepening with manufacturing activity shrinking to an 11-month low in July, according to a preliminary survey conducted by HSBC. Growth in the country sank further to 7.5 percent in the second quarter.

While hailed by some economists, the tax cut is "not big enough" in the eyes of company owners. The number of businesses is quite limited falling within the range of below 20,000 yuan in monthly sales, especially in the manufacturing sector, the Beijing News reported, quoting one of the business owners.

Tax cut could be more fined tuned targeting different kinds of companies, the state-run newspaper said.

"The tax cut is slightly small in terms of scale," said Yang Zhiyong, "Authorities should continuing hiking the threshold of related taxes to make more taxpayers involved."

His argument was also based on the fact that tax burden for business in China is higher than its peers, with tax rate at roughly 40 percent, compared with an average of 24-27 percent in the OECD countries in the past 30 years, according to a report issued by the Ministry of Finance.

Wednesday's tax cut was the most important part of a three-pronged program nailed at that meeting to support the economy. Others include a reduction of costs for exporters and guarantee of funds for the construction of railways.

Also on Wednesday, the National Development and Reform Commission, the top economic planning agency, announced plans giving small companies easier access to financing. Measures published in a statement on the NDRC's website including the expansion of a pilot program for small companies to issue collective corporate bonds.

 

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