Proactive Fiscal Policy to Be More Proactive: Takeaways From China’s State Council Executive Meeting on July 23, 2018

On July 23, 2018, China’s state council executive meeting hosted by Premier Li Keqiang announced that fiscal and monetary policy will be further fine-tuned to boost domestic demand. The meeting reiterated that China will strike a balance between “easing and tightening” and keep liquidity “reasonable and sufficient.” It was also stressed that China will not resort to outright stimulus.

More tax incentives to support technology upgrading:

  • On top of 1.1 trillion yuan in reductions in levies and fees in the pipeline for 2018, the state council announced that it will further expand the promised R&D tax credit (75% of cost) from small- to medium-sized companies to all companies, which will bring additional tax cuts worth 65 billion yuan.
  • The government requested to end the refund of 113 billion yuan from the drawback of the withholding tax to the qualified enterprises in advanced manufacturing and modern service industry.
  • The state council also requested an acceleration of the issuance of 1.35 trillion yuan of special local bonds and funds for infrastructure projects.

Prudent monetary policy to keep sufficient liquidity:

  • Keeping an appropriate total social fund, “reasonable and sufficient” liquidity, and a smooth capital transition mechanism were stressed.
  • The government requested the implementation of various incentives to small- and micro-enterprises (SME). Financial institutions were instructed to support SME and the initiative of the debt-to-equity swap by specific funds with RRR reduction. China also encouraged commercial banks to issue financial bonds for SME, waiving the requirement of the issuer’s consecutive profit.
  • The meeting also set up the target to increase the 140 billion yuan loan to around 150 thousand for SME every year.

Faster investment growth:

  • The government boosted private investment in transport, oil and gas, and telecommunications projects.
  • The statement also seeks to guide financial institutions to guarantee reasonable funding to Local Government Financing Vehicles so that essential projects aren’t held up to facilitate construction and planning of a number of large-scale projects that will meet development purposes and public demand.

Furthermore, clearing “zombie enterprises” and related invalid capital were also mentioned.

In general, the Chinese government stepped up the effort to support growth, confirming the move from consolidation to a more neutral stance amid the economic headwinds. It seemed like Chinese financial markets were recovering an appetite for risk not seen in months, taking cues from the government’s push to invigorate the economy. We have seen a 2.8% rally of the S&P China 500 in the first three days of the week.

Given the 726 billion yuan deficit in the first half of 2018 versus around 2.38 trillion yuan as the budgeted full-year deficit (2.6% of 2018 GDP), together with 5 trillion yuan in fiscal deposits and robust land sales revenue, there is still ample room for further fiscal easing.

As for the monetary policy, below-target inflation and a stabilizing debt mean that the government can afford to further lower the RRR. This can increase lending funds to facilitate corporate development. Market players expect additional cuts of the RRR rate in the second half of 2018.



The State Council of the People’s Republic of China, July 24, 2018,

Bloomberg, July 23, 2018,

Reuters, July 23, 2018,

Reuters, July 24, 2018,



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