Analysts say moves will help offset headwinds, spur long-term growth

China's proactive fiscal policy this year will prioritize tax and fee cuts, and feature fiscal spending expansion that focuses on key areas serving high-quality growth, Minister of Finance Liu Kun said on Thursday.

Analysts said the moves will not only help offset this year's economic headwinds, but also spur long-term growth by revitalizing market entities and deepening economic restructuring.

"This year's proactive fiscal policy will give top priority to tax and fee cuts," Liu said at a news conference on the sidelines of the second session of the 13th National People's Congress.

China plans to reduce the tax burden and social insurance contributions of enterprises by nearly 2 trillion yuan ($298.4 billion) this year, higher than the 1.3 trillion yuan of tax and fee cuts on enterprises and individuals last year, according to the Government Work Report delivered on Tuesday.

This year's actual total tax and fee reduction is expected to exceed the projected nearly 2 trillion yuan, as effects of tax cut measures that came into force last year will extend into 2019, Liu said.

"Tax cuts will account for about 70 percent of this year's tax and fee cuts, while value-added tax cuts will constitute the majority of tax cuts," Liu added.

Specifically, the VAT rate in manufacturing and other industries will be reduced by 3 percentage points to 13 percent this year, while the rate in transportation, construction and other industries will see a 1 percentage point cut to 9 percent.

"The cut in VAT - a major type of corporate tax which arises from the sales of goods and the provision of services - can benefit almost all enterprises," said Yang Weiyong, an associate professor at the University of International Business and Economics in Beijing.

"This broad, efficient cut in tax burdens will spur investment by enterprises," Yang said, adding the move will also support economic restructuring.

The country has shown its support for the manufacturing sector by giving it the biggest VAT rate reduction of 3 percentage points, according to Yang. "The manufacturing sector serves as the key to stabilizing employment in the short term and a core aspect of a country's economic competitiveness."

Cheng Shi, chief economist at ICBC International, said this year's ascension of tax cuts as the major fiscal policy tool will help the policy function more efficiently by leveraging market mechanisms.

On the other hand, the expansion in fiscal spending will inject "ample" momentum for infrastructure construction investment, and spur high-quality growth by giving priority to new-generation information infrastructure, Cheng said.

The minister said that China will moderately expand fiscal spending to 23.5 trillion yuan this year, up 6.5 percent year-on-year.

The spending expansion will mainly focus on key areas, such as tech innovation, with the central government's budget spending for science and technology set at 354.3 billion yuan, up 13.4 percent year-on-year, according to Liu.

Meanwhile, this year's national quota of local government special-purpose bonds was set at 2.15 trillion yuan, 800 billion yuan more than last year, with money raised to be mainly spent on major projects currently underway and addressing weak links, Liu said.

"This year's more forceful and efficient proactive policy will not constitute a deluge of stimulus," Liu stressed. "Instead, we will adopt counter-cyclical adjustments and better leverage market-oriented and law-based measures."