As a potential economic growth offset to the impact of US tariffs, Chinese authorities cut individual income taxes on June 19, 2018. Citi analysts estimate that this could affect 80% of 340mn urban registered workers. The tax cuts could reduce household tax burden by RMB183bn (28bn USD) and boost consumption by RMB125bn (19bn USD), or 0.15% of GDP. While the cuts represent a small percentage of GDP they are likely to provide a significant lift to sentiment, particularly alongside monetary easing.
Monetary easing is also underway: The People’s Bank of China (PBOC) announced that it would use monetary policy to pre-emptively support the real economy, promote small businesses and defend against external shocks. PBOC will employ targeted reserve requirement ratio (RRR) cuts, medium-term lending facilities (MLF) and other open market operations, as well as structural support for key sectors.
On 24 June 2018, the PBOC cut the reserve requirement ratio (RRR). The cut is a broad based addition to liquidity, worth about CNY700bn (50bps of CNY140tn deposits). Citi analysts believe that there is substantial room for Chinese authorities to relax policy in an effort to tackle excessive growth of leverage and expect another 50-100bps cut in the second half.
Given continued support from Chinese authorities, Citi analysts believe this latest trade-related selloff has created opportunities for a meaningful rebound.
China’s A-shares have fallen more than 10% this year, while earnings have grown, bringing the CSI 300 index valuation to just under 11.3x forward earnings, its lowest level since Jan 2016. MSCI valuations for MSCI China index are also looking attractive, as it trades at 12.4x forward earnings. 2018 earnings growth is also expected to support equity valuations at 14% growth in CSI 300 companies and 16% for MSCI China companies.