China’s desperate move to boost economy by cutting tax on trading backfires

In one of the biggest moves, Beijing slashed a tax on trading for the first time in 15 years on Monday.

According to a statement released by the Ministry of Finance and the State Administration of Taxation, the halving of the stamp duty on securities transactions was designed to “activate the capital market and boost investor confidence”.

It came amid a brutal sell-off from nervous foreign investors, who have offloaded a staggering $A17 billion of Chinese shares in just three weeks as the nation’s economy – and particularly its real estate sector – lurches from crisis to crisis.

Other rules were also rolled out, including placing restrictions on major shareholders of listed companies and slowing the pace of initial public offerings (IPOs).

But it proved to be little more than a sugar hit, with gains disappearing within a few hours of the announcement being made on Monday after a brief spike.

In a clear sign of how dire China’s economic outlook has become, the last time the tax was decreased was in April 2008 as a direct response to the Global Financial Crisis.

“While the Chinese government managed to lift investors’ sentiment temporarily, more concrete measures are required to resolve the property sector crisis and … to reverse bearish expectation for the China economy,” Mizuho Bank’s chief Asian foreign exchange strategist Ken Cheung told Bloomberg.

Meanwhile, China has also introduced a raft of other measures, including two interest rate cuts this year, most recently on August 15.

While the government is so far refusing to introduce stimulus packages in the form of cash handouts, there are plans in place to incentivise households to stimulate the economy by buying household goods and cars, and authorities have also hinted at loosening restrictions on property purchases.

But it hasn’t been enough to reverse China’s fortunes yet, with the nation facing a drastic slowdown after being expected to drive a third of the planet’s economic growth in 2023.

That hasn’t happened, and it’s causing panic internationally.

In fact, US President Joe Biden went as far as saying recently that China’s financial woes were a “ticking time bomb”.

Speaking at a political fundraiser earlier this month, he predicted that China was in “trouble” and that it had the “highest unemployment rate going”.

China also officially slipped into deflation – the opposite of what’s happening in many countries across the globe including Australia, where inflation has caused a cost of living crisis – in July.

And on Monday, China’s struggling real estate industry faced a fresh blow after Evergrande – once China’s second-largest property developer, and now the world’s most indebted real estate firm – was hit by a share price bloodbath after slumping by up to 87 per cent in Hong Kong trading after a 17-month hiatus.

The shocking update saw Evergrande fall to just HK$0.35 on Monday, hot on the heels of an announcement that it had recorded a staggering $A7 billion loss.

The stock price wipe-out saw Evergrande’s market value plunge to $A910 million – a far cry from its heyday in 2017, when it was worth more than $A77 billion – and comes as China’s tanking real estate sector continues to spark fears of widespread economic contagion.

In early August, China’s leading property firm Country Garden also missed bond payments and warned of multibillion-dollar losses, which sent its share price plunging.

It is now on the brink of default, with insiders expecting the firm to announce a first half loss soon.

‘Near-perfect storm’

IG Australia market analyst Tony Sycamore told news.com.au that Australia could easily be significantly impacted by China’s crisis.

“As we know, growth in the Chinese economy faltered just a few months after the reopening of Covid lockdowns and has gone from bad to worse in recent weeks,” he said.

“A near-perfect storm is now buffeting the Chinese economy. Inflation, employment and growth data have continued to come in well below already downbeat expectations, fuelled by missed coupon payments from giant Chinese property developer Country Garden, the default of Zhongrong Trusts and missed coupon payments from Chinese Local Government Financing Vehicles (LGFVs), which provide funding for Chinese infrastructure projects.

“Over the past week, Chinese authorities have responded by supporting the Chinese currency, cutting key lending rates and announcing measures to restore confidence in the property and stock markets.”

However, he said those measures would not be enough.

“While this shows more urgency and intent to stem the downward spiral, the measures announced are piecemeal, and more needs to be done,” Mr Sycamore continued.

“What is worth keeping in mind is while we have seen economic flashpoints like this before in China over the past decade, thankfully for Australia, none of them have ignited and Chinese authorities have managed all away after a period of stress.

“If Chinese authorities fail to do so this time around, economies with significant exposure to China, such as Australia and Europe, would be significantly impacted.”

Mr Sycamore explained that China’s woes could easily decimate the Aussie dollar.

“For us here in Australia, the price of our key commodity exports including iron ore and copper and our currency, the AUD, would fall sharply,” he said.

“The impact of which would be acutely felt throughout the economy in terms of lower growth and higher unemployment.

“On the flip side, the RBA would likely be quick to respond by cutting interest rates.”