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For China, tax cuts may work where a massive stimulus failed

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China’s economic momentum has slowed noticeably, as suggested by headline growth figures, sentiment indicators and activity data. Since the beginning of 2018, the People’s Bank of China has lowered the reserve requirement ratio for the major commercial banks by 250 basis points in total, clearly suggesting that an easing cycle has been initiated.

However, China intends to shore up growth without falling back on debt-fuelled stimulus in this easing cycle, as a massive package to boost growth would trigger a déjà vu of the debt/disinflation cycle that has repeatedly happened in the past decade.

Indeed, since the Lehman collapse, while China has succeeded several times in preventing a dramatic economic slowdown with aggressive easing policies, the rapid credit/debt expansion – with deteriorating profitability of the corporate sector – suggests that the growth model is unsustainable.

Let’s begin with a brief review. Against the backdrop of a global financial crisis following Lehman’s collapse, the 4 trillion yuan (US$582 billion at exchange rates today) stimulus package was announced in November 2008. The economic plan was seen as a success and while China's economic growth dipped sharply to almost 6 per cent during the fourth quarter of 2008 and the first quarter of 2009, it recovered to about 8 per cent in the second quarter of 2009 and over 9 per cent in the third.

However, the side effect of the large stimulus package was a steep rise in local government debt and non-financial corporate debt. As a result, non-financial........

© South China Morning Post