China Will Ramp Up Infrastructure Spending in 2020, JPMorgan Says

(Bloomberg) -- China’s fiscal stimulus is shifting back to a focus on infrastructure investment, away from the approach of cutting taxes for businesses the government favored in previous years, according to economists at JPMorgan Chase & Co.

“We expect no major further tax cuts in 2020, though the effect of tax cuts will linger into this year,” JPMorgan economists including Zhu Haibin wrote in a note. Infrastructure will be a “key beneficiary” of fiscal policy in the year and will contribute to the cyclical bottoming in the first half, he said.

Zhu said the government has to make the shift because tax cuts have a weaker multiplying effect in driving economic growth than direct government spending, and the financial condition of local authorities is increasingly stretched, as revenues fell and land sales slowed. Zhu said he expects infrastructure growth to rise to 5-6% in 2020 from 4% in the first 11 months of 2019.

The Chinese government said this month that it achieved its goal of cutting taxes for businesses and households by more than 2 trillion yuan ($288 billion) in 2019, boosting economic growth by about 0.8 percentage point. Growth in corporate profit and manufacturing investment, however, didn’t improve significantly in the year, raising doubts about the effectiveness of the measures.

Signs of a shift in the easing approach started to take shape at a top economic meeting last month, at which policy makers said they’ll work to “cement” tax reduction effects while refraining from pledging fresh commitments as they did in 2018. Whether the change of focus will be effective is uncertain as the constraint on local government borrowing remains in place, limiting the scope of the funds they can utilize.

©2020 Bloomberg L.P.

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