Fiscal income growth to decline
(China Business Weekly)
Updated: 2004-12-26 11:04

China's fiscal income is set to continue its rapid rise next year, but the growth rate will slow down.

A stunning year-on-year growth of 21 per cent is expected to be registered in China's fiscal income in 2004, but the growth rate will fall to 14 per cent in the new year.

Although China's rapid economic growth will continue to offer a favourable environment for tax increases, maintaining a growth rate over 20 per cent is hardly possible.

China launched a series of cooling-down measures this year to prevent the emergence of economic bubbles.

As a result, the GDP (gross domestic product) growth momentum has been slowing down. The economic growth for the whole year is projected at 9.3 per cent and the 2005 figure is likely to be around 8.5 per cent. As domestic economic growth will slow considerably over the next year, tax increases will decline accordingly.

Considering the fallout of banks' rigid lending on corporate financing, investment growth will also drop off.

As export growth momentum will ease, the industrial growth rate will also decline, meaning that the increase of tax incomes from corporate China will slow down.

Although China's retail sales will continue to increase in the new year, the expansion of the country's aggregate retail demand will shrink.

It is expected that the import growth rate will gradually fall, the tariff ratio will be pushed down in the new year, and the tariff income will therefore decline.

As the government will launch new tax policies to lower the corporate tax for domestic enterprises, China's fiscal income will also be affected.

The government is expected to implement stable fiscal policies to continually reduce the issuance of long-term Treasury bonds in 2005, giving preference to supporting projects currently under construction.

Approval of the new projects will be more strictly controlled, as it is widely anticipated that the government will prioritize capital support to projects which have already been launched to make them make profits more quickly.

Constant support will be given to high-tech industries which will help upgrade the technology and optimize their industrial structure.

In addition, the government will aid those infrastructure projects, which may otherwise hinder the development of the social economy. These sectors include port construction, railways, electricity and the exploitation of resources.

More capital will be allocated to improving the social security system, solving rural problems, stepping up environmental protection and speeding up the development of western and northeastern areas.

China will continue to increase its investment in agriculture industry and the rural economy to increase farmers' incomes.

China already set out a series of measures this year to propel rural tax reform. In the new year, China will continue to emphasize sustainable development in rural areas to improve farmers' standard of living.

The government will further increase its subsidies to the agricultural industry and reduce farmers' heavy burdens. A great number of high-tech products will be introduced to rural areas to improve the development of these vast areas.

Great importance will be attached to key industries and key projects in the new year.

China will speed up the construction of a batch of infrastructure projects in the transportation and energy sectors.

In order to maintain the balanced development of the various regions across the country, China needs to intensify the development of its heavy industrial bases in the Northeast China and in western regions.

Expanded investment will have to be accompanied by an increased employment rate. Preferential policies such as land approvals and tax incentives will be limited to those industries able to increase employment.

Great support will be given to service industries, non-State sectors, small and medium-sized enterprises and labour-intensive enterprises.

Assistance will be also given to encourage new university graduates to establish new enterprises and on-the-job training will be crucial in the improvement of professional skills.

Various non-profit, non-governmental organizations need support to develop and prosper and new positions in these organizations will be explored.

Great efforts will be made to close the income gap between rural and urban residents, and between the rich and the poor.

China will continue to improve its minimum income system in the new year and lessen the imbalance through tax reforms.

While reining in various speculative measures in hiking the property prices in big cities, China will continue to support and satisfy people's demand for housing and encourage people to purchase more cars.

Labour-intensive industries in the eastern regions will be encouraged to move to the central areas.

Tax reforms will continue to expand. On the list for 2005 are value-added tax reforms, the unification of various tax systems, improvement of the local tax system, pilot projects to scrap rural taxes and completing the tax-rebate system.

Monetary policy

China will implement stable monetary policies in the new year, which will gradually shift from being stringent to neutral.

The central bank's move last October to raise interest rates, after a gap of nine years, indicated that the country's interest rates are now at a turning point, and are set to continuously rise over the next few years.

Major global economies are starting to recover, sparking inflationary risks in the future. Led by the Federal Reserve in the United States, many countries have already launched a new cycle of rate rises.

Domestically, China's economy is now greeting another new round of growth. The CPI (consumer price index) will continue to increase, increasing the possibility of higher inflation.

It is estimated that China's CPI will continue to maintain the level of 4 per cent.

Even after China slightly raised the domestic currency deposit rate by 0.27 percentage point to 2.25 per cent on October 24, the de facto interest rate remains below zero.

The maintenance of a negative interest rate in the long term would jeopardize the stable development of the national economy as the "negative'' rate can lead to the development of "bubbles,'' particularly in the property sector.

The pressure on China to revalue the renminbi will remain strong in the new year.

On the one hand, surpluses in both the capital and current accounts have seen China's foreign reserve constantly scale new heights.

On the other hand, as overseas speculators continue to enter the country to bet on yuan appreciation, the Chinese authorities have been perplexed about how to react on this huge amount of speculative "hot money.''

These two factors will continue to exist in the new year, but China's foreign exchange policies will remain largely unchanged.

However, China will gradually relax its control on the forex system, giving the market increased flexibility.

Stock market

The potential capital supply for the stock market will remain strong and the market will achieve some breakthroughs in the new year.

Despite fluctuations, China's A-share market will remain stable in the new year. But there are still many uncertainties.

Based on an analysis of stock performance in 2004, many speculative activities have been revealed, indicating that it remains critical to educate the market on how to judge investment value.

New IPO (initial public offering) pricing system will take off with the start of the new year, which is expected to lower the P/E (price/earning) ratio in the market.

Increasing companies which have been listed overseas are considering plans to re-enter the domestic capital market. This new trend will put additional pressure on the domestic A-share markets.

Institutional investors will continue to form a strong force to add liquidity to the domestic market.

Insurance companies will be allowed to invest in the stock markets, providing a further 60 billion yuan (US$7.2 billion) to the markets.

Qualified foreign institutional investors (QFIIs) will be granted increased quotas to invest in the A-share markets.

All these factors will lead to strong capital injection in the markets, but due to strong growth of the domestic economy, China's companies are expected to require more capital support.

By Wang Yuanhong, Li Ruoyu and Xu Pingsheng, senior economists with the National Bureau of Statistics.

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