China Tries to Spur Growth, Cautiously - Wall Street Journal

By AARON BACK

The latest manufacturing data out of China suggest the country's real economy is getting weaker. The WSJ's Deborah Kan speaks to Heard on the Street Columnist Tom Orlik.

As evidence gathers that the Chinese economy continued to slow in May, Beijing is outlining a series of steps to prop up growth, including targeted tax cuts and support for favored sectors like new energy technologies.

The latest sign of weak economic performance came on Thursday, with HSBC Holdings PLC's purchasing managers index, which fell to a preliminary reading of 48.7 in May from 49.3 in April, indicating that manufacturing activity declined for the seventh straight month. A reading below 50 indicates contraction; above 50, expansion. The May PMI follows a series of weak readings for April on everything from foreign trade to bank lending.

Despite the worrying economic data, analysts say a massive stimulus program like that seen during the global financial crisis in 2008 and 2009â€"which relied on state-directed bank lending to prop up investmentâ€"remains unlikely.

Instead, Beijing is turning to a patchwork of initiatives across various areas that it hopes will complement its long-term drive to shift to a more resilient, modern economy powered by consumption, innovation and private-sector activity.

Nonetheless, there remains a serious risk that events abroad, in particular a potential Greek exit from the euro, could trigger a steeper downturn in China. In such a scenario, economists say, China would still be able to unleash a stronger stimulus, though possibly at the expense of its long-term economic overhaul.

"If loan growth and investment fail to pick up soon, the state sector will come under heavy pressure to start spending," Mark Williams, an economist at research firm Capital Economics, said in a note. "Prospects that the economy will soon be put on a more sustainable, more consumer-led footing still look remote."

China appears set to expand a tax overhaul launched at the start of the year in Shanghai, where certain service sectors moved from paying a business tax to a value-added tax, or VAT, getting a substantial tax cut in the process. That system is likely to be introduced to Beijing around the beginning of July and to the entire nation within about two years, Lachlan Wolfers, a tax partner at KPMG China, told The Wall Street Journal in an interview. KPMG has been working with the government on the overhaul.

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Separately, China's Ministry of Industry and Information Technology released a statement Thursday calling for an end to administrative fees on small enterprises, as well as to a number of fines and charges imposed by local government departments, a major complaint of smaller companies.

Earlier, on Wednesday evening, China's State Council, the country's cabinet, pledged structural tax reforms to ease the financial burden on domestic companies, without giving specifics. Authorities will encourage private investment in sectors such as energy, railways and telecommunications, it said. The State Council also pledged to support the use of solar and other new energy technologies, and to accelerate deployment of fiber-optic cables for households.

Last week, the State Council unveiled a modest package of subsidies on purchases of environmentally friendly, energy-saving household appliances.

Beijing's relatively cautious approach to stimulus thus far may still be upended by events abroad.

"Europe is China's biggest export market. If there is a big growth shock in Europe, it certainly will influence China's growth," Murtaza Syed, the International Monetary Fund's resident representative in China, said at a forum on Thursday. "The good thing is that China has enough fiscal room to deal with the bad downside scenario."

â€"Grace Zhu and Liyan Qi contributed to this article.