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 (Image Courtesy: World Bank)
 
China’s growth slow-down has transformed it into an intense subject of crystal-gazing.  Reputed global entities have lately released interesting studies measuring the impact of slow-down on different countries, industries and commodities market under different scenarios. 
Some studies have drawn policy lessons for other countries as well. They have also figured out opportunities for other countries to fill the gaps in global economy resulting from China’s slowdown. Another study has voiced concern over China’s tax receipts getting subdued under the impact of growth deceleration. 
Crystal-gazing outcomes should, however, be accepted with a pinch of salt as the studies have not reckoned the growth-accelerating potential of stepped-up tax reforms, structural reforms and recently approved 13th five year plan in China –the world’s 2nd largest economy & the world’s largest exporter. 
The impact and contours of inter-play of all variables might well be different from what analysts are predicting.
Before discussing the tax and other growth-stimulating moves, take a look at the basic issues and forecasts. According to Asian Development Bank’s (ADB’s) latest Brief, “Growth in the People’s Republic of China (PRC) has been moderating and is expected to continue to slow over the medium term. The PRC grew 6.9% in 2015—almost half a percentage point below 2014, and the first time in a quarter-century that annual growth fell below 7%. The growth moderation is not new, nor is it a surprise. There has been a continuous downward drift in growth, by 2.6 percentage points since 2011. A slowdown was expected, but its extent unforeseen....”
Summarizing the findings of the forthcoming ADB report captioned ‘Moderating Growth and Structural Change in the People’s Republic of China: Implications for Asia and Beyond’, the Brief notes: “The decline in PRC growth is expected to reduce gross domestic product (GDP) growth in the rest of developing Asia by about a third of a percentage point per year over the next 2 years.”
The Brief continues: “It will also reduce Japan’s GDP growth by a fifth of a percentage point. These reflect the PRC’s strong intraregional trade and production linkages. The impact on the United States (US) and Europe will be negligible, as their relatively small trade exposure to the PRC will be offset by a boost from the lower commodity prices induced by lower PRC growth.”
Econometric analysis by ADB staff finds that a 1 percentage point reduction in the PRC growth lowers prices of coal and metals 7%-22%, and oil and natural gas prices 5%-7%. These suggest that the 2.6 percentage point fall in PRC growth since 2011 can explain a significant portion of the decline in coal and metals prices over the same period, but only a small portion of the decline in oil and natural gas prices. 
An ADP Working Paper (WP), which has also been released in March, has come out similar findings and interesting prospects. Titled ‘Impact of the People’s Republic of China’s Growth Slowdown on Emerging Asia: A General Equilibrium Analysis’, WP says: “a growth slowdown of 1.6 percentage points in the PRC would bring about a growth deceleration of 0.26 percentage points in developing Asia as a whole (excluding the PRC). In most regional economies, the induced growth losses are less than 0.5 percentage points. Taipei, China and Hong Kong, China are most vulnerable to the PRC’s economic downturn, while South Asia is the most isolated from changes in the PRC.”
Furthermore, two counterfactual scenarios, which take into account the changes in growth conditions of the US and India, show that strengthened growth in the US and India would help dampen the negative shock from the PRC’s slowdown, but not fully offset it.
WP says that one percent growth acceleration in the US can offset 60% of the adverse growth effect of PRC’s slowdown on developing Asia. Under this scenario, the impact on global growth would be negligible. 
A WP released by International Monetary Fund (IMF) on 15th March 2016 has studied the impact of slowdown on 26 countries selected from different regions of the world. Captioned ‘China's Slowdown and Global Financial Market Volatility: Is World Growth Losing Out?’, WP says: “our results suggest that following a one percent permanent negative Chinese GDP shock (equivalent to a one-off one percent real GDP growth shock), global growth reduces by 0.23 percentage points in the short-run and oil prices fall by around 2.8% in the long run. There is also evidence for a fall in both global inflation and short-term interest rates, and while the median effect on global equity prices is negative, it is not statistically significant.”
In a note prepared for G-20 Finance Ministers & Central Bank Governors conference held during 26-27 February, IMF reckons that a 1 percentage point drop in China’s growth could result in a 6 percent average decline in commodity prices after two years.
It has also concluded that a 1 percentage point investment-driven fall in China’s output growth would reduce G-20 growth by ¼ percentage points.
Another IMF WP titled ‘China’s Imports Slowdown: Spillovers, Spillins, and Spillbacks’ concludes: “A hypothetical drop of China’s imports by 10 percent below the baseline in 2016 and 2017 would lead to a loss of about 1.2 percent GDP of export revenue in 2016 for all countries, which with network effects may increase to 2.0 percent of GDP in 2017 before abating gradually by 2020 to about 0.2 percent of GDP in 2020.”
IMF has filled up the cup of worries over China with a WP titled ‘Tax Administration Reform in China: Challenges, and Reform Priorities’ released on 17th March, the country’s slowing economy could have significant implications for tax administration. 
It says: “The economic slowdown can be expected to reduce the rapid growth in tax revenue that had been achieved in previous years. The revenue decline is not a concern in itself to the extent it reflects the normal operation of automatic stabilizers, but would pose a problem for tax administration if it causes a decline in taxpayer compliance. The latter can occur because economic stress creates incentives for distressed taxpayers to use tax evasion as an alternative form of finance for their operations and a means to avoid bankruptcy.”
Chinese Government is apparently putting up a brave face amidst all this impact analysis. It has announced a slew of tax and non-tax initiatives that might help it manage slowdown in a better way, if not stop or reverse the trend.  
On 19th March, PRC’s State Council decided that value added tax (VAT) would replace business tax in all sectors in 2016. VAT is currently levied in the manufacturing sector and has been introduced as pilot in a few service industries. 
The changeover is expected to reduce taxes on companies by more than 500 billion yuan ($77.3 billion) this year.
As put by an official release, “The important measure of replacing business tax with VAT is to further deepen the fiscal and taxation reform, and carry out the proactive fiscal policy.”
On January 27th, the State Council decided to cancel a series of fees for government-controlled funds in a bid to relieve corporate burdens. 
An official release says: “Cost reduction for enterprises has been a major focus for restructuring the economy this year. However, it remains a difficult task as a report in 2015 showed that 52 percent of surveyed enterprises have been suffering heavy tax burdens”
The Council decided to lower the price of coal-fired electricity from the beginning of this year. In addition, the government has also abolished a series of administrative examination and approval items. 
China is thus improving the business environment for enterprises to improve sales and earn profit amidst the downturn. 
IMF has suggested a slew of tax reforms for China. On 23rd March, the former signed with China’s State Administration of Taxation (SAT) a Letter of Understanding (LOU) on a technical cooperation project on advancing tax policy and administration reform in China.
China has, however, ruled separate carbon tax for climate change management. This tax is likely to be incorporated into either the environmental protection tax or resource tax.
On 18th March, the Council set development targets for 2016 and pursue 50 reforms in 10 sectors. These include government function transformation, tax and finance and State-owned enterprises.
The Council pitched for structural reform, especially the supply side reform, to promote system innovation that helps create new supply and release new demand.
Chinese officials exuded confidence at the recently concluded meeting of China Development Forum (CDF). 
As put by Xu Shaoshi, head of the National Development and Reform Commission at CDF, “Despite the obvious downward pressure, China’s economic fundamentals remain sound, and its economy is tenacious with sufficient potential and leeway.”
He added: “China will continue to improve and innovate macroeconomic policies, provide better forecasts on growth, and coordinate financial, monetary, industrial, regional, investment and consumption policies.” 
                                                                                              
Published by http://taxindiainternational.com/ on 29th March 2016
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