BEIJING: Hong Kong’s stock market regained its momentum last week after consolidating for a while in mid-April. Was the strong performance spurred by investor relief over the results of the first round of the French presidential election, or by China’s firm economic data for the first quarter? In my opinion, the massive tax cut plan announced by the State Council was a key factor. Premier Li Keqiang last week unveiled a new round of tax cuts worth 380 billion yuan (US$55.15 billion). Assuming China’s 500 largest companies account for half of China’s corporate earnings, 380 billion yuan of tax cuts would boost corporate earnings by 7 percent.
While most companies would benefit from the tax cuts, some may benefit more as the policy direction is not only to reduce business costs but also to facilitate economic reform. For example, from July 1, the value-added tax rate for natural gas will be cut from 13 percent to 11 percent. Natural gas companies would be the biggest beneficiaries of this move, which is clearly aimed at promoting the use of clean energy. There are also tax breaks for small and medium-sized high-tech firms involved in new technologies and products. The government plans to launch a pilot program to offer tax rebates to tech firms in trial zones in Beijing, Tianjin, Hebei, Shanghai, Guangdong and the Suzhou Industrial Park. This goes to show that the government is keen on supporting the internet sector.
Premier Li has pledged to cut taxes eventually by 1 trillion yuan. This will further improve corporate earnings in the coming quarters. Outside China, the United Kingdom has cut the corporate tax rate to 17 percent after last year’s Brexit vote. And in the United States, President Donald Trump also intends to cut the corporate tax rate to 15 percent. Such favorable tax measures would help stimulate economic growth and consumption, which in turn would boost the prospects of Chinese exporters.
