More tax incentives required to boost domestic consumption

On Tuesday, the Ministry of Finance posted on its website an article about what it has done this year to maintain economic growth. At a time when China's economic slowdown seems wider and deeper than expected, this supportive fiscal measure reminds us of the government's acts and determination to overcome the economic difficulties.

In a speech at Summer Davos, the World Economic Forum in Dalian, Northeast China's Liaoning province, on Thursday, Premier Li Keqiang said a more encouraging sign is that China's economy is more oriented toward consumption, which accounts for half of China's economic output and 60 percent of growth.

However, if China is to expedite the economic transformation in order to reduce its reliance on fixed-asset investment and export growth and, further, boost consumption and innovation to drive sustainable growth, policymakers need to stay focused on implementing the consumption-related tax reforms under consideration.

Buried deep in the to-do part of the job list the Ministry of Finance has released is a brief mention that it would reform the consumption tax and give due consideration to reforming the personal income tax regime.

The fact that China's tax revenues increased only 4.5 percent year-on-year in the first seven months of this year, the slowest growth since 2010, indicates there is not much room for reducing taxes right now.

Yet China can hardly afford to wait any longer for a big tax boost for consumption growth as its economic transformation enters a crucial stage when traditional growth engines like investments and exports are losing steam and the increasingly obvious potential of consumption-led growth has not been fully tapped into.

The recent downbeat news about the Chinese economy is that its imports shrank 13.8 percent from a year earlier in August. It is worrisome not only because the drop is much more than expected but also because it has fallen for the 10th straight month.

But do falling imports mean the world's second-largest economy is grinding to a halt?

Certainly not. The composition of China's imports tells another story. That China's key imports such as iron ore, crude oil and soybeans are dropping suggests cheaper prices in the world markets can no longer prompt Chinese manufacturers to stock up further. But it doesn't point to sluggish consumption.

Though China's economic growth slowed to 7 percent, the slowest in years, in the first half of this year, retail sales have held up relatively well at 10.4 percent. In particular, online retail sales have witnessed growth of as much as 39.1 percent during the same period.

While the latest producer price index - a measure of costs for goods at the factory gate - declined 5.9 percent in August underlining an oversupply from factories, the consumer price index, a main gauge of inflation, rose 2.0 percent year-on-year, the strongest since August 2014, indicating Chinese shoppers' robust appetite.

Though consumption is now contributing about 60 percent to China's economic growth and despite being less than in many developed countries, the trend of the shift in growth drivers toward consumption has become clearer than ever.

To achieve the immediate growth target of 7 percent in 2015, the Ministry of Finance has promised to strengthen the "proactive fiscal policy, fine-tune the measures in a timely manner and accelerate reforms that will help stabilize growth".

But to significantly boost consumption to make it a powerful driver of, not merely a result of, transforming growth pattern, policymakers should give concrete tax incentives to help strengthen the new engines of consumption growth as well as expand people's purchasing power by timely reforming the current personal income tax regime to introduce family tax credit.

Admittedly, tax incentives are not the only tool available to boost consumption. But given the huge potential of consumption-led growth, it would be penny wise and pound foolish to put tax revenues before a massive fiscal boost for consumption.

The author is a senior writer with China Daily. zhuqiwen@chinadaily.com.cn