The biggest highlight of macroeconomic regulation in the first half of the year was “precise targeted regulation.” Through measures such as expanding investment, stabilizing foreign trade, targeted reserve requirement cuts, and tax reductions, the government precisely regulated weak links in the economy while also taking into account the goal of structural adjustment. Judging from the economic data in the second quarter, the targeted mini-stimulus policies have achieved results, and signs of economic stabilization are obvious.

Experts expect that targeted regulation will be further deepened in the second half of the year. However, there is limited room for monetary policy regulation, and fiscal policy will play a greater role. “Targeted tax cuts” for agriculture, rural areas, and farmers and for small and micro enterprises, as well as investment in public goods focusing on basic education and basic medical care, may become policy highlights.

Keywords for the first half of the year: expanding investment, stabilizing foreign trade, targeted reserve requirement cuts, tax reductions

Slowing economic growth has gradually become a new normal. Since last year, the government has also begun to adjust the direction of macroeconomic regulation. Facing economic downturn, senior officials made clear that they would not adopt large-scale economic stimulus policies, would adhere to not expanding the fiscal deficit, and would neither loosen nor tighten the money supply.

“Since last year, when introducing policies to stabilize growth, the state has abandoned the previous strong stimulus policies and instead paid more attention to multiple goals such as maintaining growth and adjusting the structure. The biggest highlight of macroeconomic regulation in the first half of this year is precise targeted regulation. This is a further improvement on last year’s policy basis, and I believe targeted regulation will be further deepened in the second half of the year,” Zhang Liqun, a macroeconomic researcher at the Development Research Center of the State Council, told the Shanghai Securities News.

After the release of economic data for the first quarter of this year, in the face of downward pressure on the Chinese economy, the state introduced a series of targeted mini-stimulus policies focusing on “stabilizing growth, promoting reform, adjusting the structure, and benefiting people’s livelihoods.”

After reviewing the targeted regulation policies introduced in the first half of the year, the reporter found that the policies were mainly concentrated in four areas: expanding investment, stabilizing foreign trade, finance, and fiscal and taxation policy. Among them, finance and fiscal and taxation policy mainly targeted agriculture, rural areas, and farmers and small and micro enterprises.

The key to stabilizing growth lies in stabilizing investment. Therefore, this year’s mini-stimulus policies also took expanding investment as the spearhead. On April 2, the State Council executive meeting decided to further leverage the supporting role of development finance in shantytown renovation and, at the same time, deepen the reform of the railway investment and financing system, establish a railway development fund, and accelerate railway construction, especially in the central and western regions.

The State Council executive meeting held on April 23 proposed launching a batch of projects in infrastructure and other fields that encourage social capital participation. These projects include transportation infrastructure such as railways and ports, a new generation of information infrastructure, clean energy projects such as major hydropower, wind power, and photovoltaic power generation, oil and gas pipeline networks and gas storage facilities, and modern coal chemical and petrochemical industrial bases.

On June 11, the State Council deployed the construction of a comprehensive three-dimensional transportation corridor to build the Yangtze River Economic Belt, covering railways, highways, and airports all at once.

“Since the second quarter, the growth rate of infrastructure investment has remained above 20%, indicating that the policy of stabilizing investment has been effective. To a certain extent, this has offset the pressure brought by the decline in real estate investment, keeping the overall investment growth rate stable at around 17%,” Lian Ping, chief economist of Bank of Communications, told the reporter.

Since the beginning of this year, affected by factors such as the external environment and the appreciation of the renminbi, the foreign trade situation has not been optimistic. To stabilize foreign trade, on April 30, the State Council executive meeting decided to support the development of trade in services, expand the import and export of services, and optimize the foreign trade structure. Subsequently, on May 15, detailed policies for stabilizing foreign trade growth were issued, proposing to further strengthen imports, expand imports of resources in short supply domestically, and expand channels for crude oil imports; at the same time, stabilize exports of traditional competitive products, maintain stable growth in trade in goods, and support the development of trade in services.

Judging from the regulatory effects, export growth was once continuously negative in the first quarter, but in May it returned to a normal level of around 7%. Lin Caiyi, senior economist at Guotai Junan, said, “Thanks to improved external demand and policies to stabilize foreign trade, the export situation in the second half of the year will be significantly better than in the first half.”

In addition, agriculture, rural areas, and farmers and small and micro enterprises have long been weak links in economic development. For this reason, targeted regulation policies in the first half of the year also worked through both financial and fiscal and taxation policies, striving to make up for these weak links and enhance economic vitality.

The central bank first lowered the deposit reserve ratio on April 22 for county-level rural commercial banks and rural cooperative banks, and then on June 9 expanded the scope of targeted reserve requirement cuts. Commercial banks that met the requirements and whose loans to “agriculture, rural areas, and farmers” and small and micro enterprises reached the standards were also included in the reserve requirement cut.

In terms of fiscal and taxation policy, “tax cuts” became the main theme. The Ministry of Finance first announced on April 8 an expansion of the scope of preferential corporate income tax for small and micro enterprises, and then issued a notice on April 30 saying that the scope of replacing business tax with value-added tax would be expanded, and starting June 1 the telecommunications industry would be included in the pilot program.

On May 14, the State Council executive meeting further proposed expanding the pilot program of replacing business tax with value-added tax to all service industries as soon as possible and orderly relaxing market access to accelerate the development of producer services. On June 11, the State Council executive meeting decided to simplify and merge the levy rates for specific general VAT taxpayers. This move will reduce the tax burden on enterprises in related fields by about 24 billion yuan per year.

Judging from many macroeconomic indicators in May and June, the effects of targeted mini-stimulus policies have already appeared, signs of macroeconomic stabilization are clear, and there have also been positive developments in structural adjustment, such as a further increase in the share of the service industry. Lin Caiyi believes that “in the second half of the year, the share of the service industry is expected to exceed 50%, accounting for half of GDP. This is the biggest highlight of the economy in the second half of the year.”

Keywords for the second half of the year: targeted tax cuts, expanding investment

Although the economy has shown signs of stabilization, downward pressure should not be taken lightly. Premier Li Keqiang emphasized at a joint press conference with German Chancellor Merkel on July 7: “We will continue to strengthen pre-adjustment and fine-tuning and implement targeted regulation. First, we will stimulate market vitality; second, we will increase the effective supply of public goods; third, we will support the development of the real economy.”

In response, several experts interviewed by the Shanghai Securities News interpreted this as meaning that targeted regulation policies will continue in the second half of the year, and the focus may be on “targeted tax cuts” for agriculture, rural areas, and farmers and for small and micro enterprises, as well as investment in public goods such as basic education and medical care.

First, from the perspective of monetary policy, there is not much room for targeted regulation.

Lian Ping believes that “there will not be a situation where policies bloom everywhere. The focus will still be on ‘aggregate + targeted,’ that is, maintaining ample liquidity so that interest rates remain low, while making some adjustments to relatively high rates in certain tenors, such as the 28-day repo rate.”

Zhu Baoliang, director of the Forecasting Department of the State Information Center, pointed out that “targeted regulation will continue in the second half of the year. If the scope continues to expand, the central bank may cut the reserve requirement ratio across the board once.” However, Zhu Baoliang believes that compared with reserve requirement cuts, tax cuts may be a more effective measure for enterprises.

In terms of fiscal policy, more may be done in the second half of the year.

“Tax cuts, especially targeted tax cuts for agriculture, rural areas, and farmers and for small and micro enterprises, are the most anticipated policy in the second half of the year,” Lian Ping said. Fiscal policy should increase support for small and micro enterprises in the second half of the year. “Compared with large enterprises, small and micro enterprises that can provide a dozen or dozens of jobs find financing more difficult. If taxes and fees can be appropriately reduced or exempted, it will greatly help their production and operations.”

In the first half of the year, the policy of stabilizing investment focused on infrastructure construction such as shantytowns and railways, highways, and airports. While these measures boosted economic growth, they also brought major side effects, namely that the process of reducing overcapacity was prolonged, which was not conducive to structural adjustment. In the second half of the year, the expansion of investment may shift direction.

Lin Caiyi emphasized that “recent speeches by Premier Li Keqiang and General Secretary Xi Jinping both revealed ‘increasing the effective supply of public goods.’ Therefore, in the second half of the year, the government is expected to increase investment in public goods such as basic education and basic medical care, which will support the rapid development of social service industries.”

Driven by policies to stabilize growth, experts expect the economy to continue to stabilize in the second half of the year.