China Lowers Growth Target and Cuts Taxes as Economy Slows

China lowered its goal for economic growth and announced a major tax cut, as policymakers seek to pull off a gradual deceleration while grappling with a debt legacy and the trade standoff with the U.S.

The gross domestic product growth target released Tuesday morning in Premier Li Keqiang’s annual work report to the National People’s Congress was set at a range of 6 to 6.5 percent for 2019. The shift to a band from the previous practice of using a point figure gives policy makers room for maneuver and compares with last year’s “about” 6.5 percent goal.

The lower bound of the GDP target would be the slowest pace of economic growth in almost three decades, a consequence of China’s long deceleration as policy makers prioritize reining in debt risks, cleaning up the environment and alleviating poverty. Warning of a “tough economic battle ahead,” Li announced tax cuts worth 2 trillion yuan ($298 billion) for the year.

“These targets accommodate structural deceleration but not cyclical, which means that policy makers will need to flex their muscles to stimulate the economy,” said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA in Hong Kong. “It’s good news for the market in the short term; bad news for China in the medium term as more leverage will need to be piled up.”

“There are two particularly positive developments in Tuesday’s announcement: wide-ranging tax cuts, particularly reductions in value added taxes, and a signal for targeted monetary support for the economy rather than a flood of liquidity,” wrote David Qu and Chang Shu in a note. “The range signals the top leadership’s pragmatism in accepting a mild slowdown.” 

Chinese stocks continued rising on Tuesday, after climbing to their highest level since June on Monday as signs of progress in trade talks buoyed investors. Other Asian indexes fell after the S&P 500 Index dropped the most in a month.

Economists surveyed by Bloomberg see output growth slowing to 6.2 percent this year from 6.6 percent in 2018, before easing further in 2020 and 2021. The report pledged to keep China’s leverage ratio “basically stable” in 2019. Policy makers are trying to rekindle lending to the private sector while avoiding an accelerated run up in debt, with the total debt pile now approaching 300 percent of GDP.

Unlike in previous years, there were no targets for retail sales growth or fixed-asset investment in the reports.

In his speech, Li said the government would “improve the exchange rate mechanism,” phrasing which was missing from the 2018 and 2017 reports. He also pledged to keep the currency “generally stable and at an adaptive and balanced level.”