China is expected to take a more proactive stance on fiscal policy to steady growth and help restructuring in the second half of this year.
The State Council, China's cabinet, issued a plan on effective use of fiscal capital with ten specific measures last week, to put surplus funds to good use and speed up public private partnerships (PPP).
China's factories did better last month, with the HSBC flash manufacturing purchasing managers' index (PMI) creeping up to 49.6 in June from May's 49.2, but still a notch below the 50-point boom-bust line.
"The data adds to evidence that the sector has lost momentum in the second quarter as a whole, and suggests that authorities may step up growth stimulation and job creation in the second half," Markit economist Annabel Fiddes said.
China's central bank has cut interest rates three times since November last year and twice this year, and has lowered the amount of cash banks must hold as reserves, to boost growth.
Compared with monetary policy, fiscal expenditure can be a more direct and flexible management tool. China's fiscal deficit this year is to be raised to 2.3 percent of gross domestic output from 2.1 percent in 2014 with the aim of expanding investment in infrastructure and creating jobs.
Unlike the 4-trillion yuan stimulus package in late 2008, current measures focus on financial burdens for businesses and the provision of public goods and services.
"More proactive fiscal policies will help steady growth in the second half of this year with more effective use of surplus budgetary funds," said Bian Quanshui, an analyst with China International Capital Corporation Ltd.(CICC).
"It will have the same effect as adding more fiscal capital without raising the government's debt and help fiscal policy play a better role in macro-economic management," Bian added.
One key measure to make good use of funds on hand is to speed up major projects. The Ministry of Finance has rolled out 30 PPP projects since last June and almost each province has developed PPP projects of over 100 billion yuan (16.4 billion U.S. dollars).
Local governments have been issuing local debt to improve capital use. New net local government debt reached over 600 billion yuan in June.
Another key fiscal policy to boost economic growth is structural tax reduction. Analysts expected that China will replace business tax with value-added tax (VAT) across the board.
The tax reform is likely to cover all sectors including construction, real estate and finance this year, with an estimated tax reduction of about 200 billion yuan, according to Liang Hong, chief economist with CICC.
"If the rate of VAT can be adjusted after the reform is completed, we can expect a total tax reduction of about 900 billion yuan, which will boost local economies and ease fiscal pressure," Liang added.
