Reports in recent weeks have suggested that the US-China trade war, while doing damage to both sides, will hurt American consumers more than their Chinese counterparts. That aside, concerns about how a trade war will affect consumer spending in China as Beijing tries to boost domestic consumption remain.
But economists at Barclays say that new Chinese income tax cuts, coming into effect in October, will boost consumption and GDP growth, offsetting some of the pain felt by tariffs.
Contrary to some early skepticism that the tax cuts will go far enough, the economists wrote in a report released today that, depending on details yet to be released, the reforms could add 0.2-0.3% to GDP growth.
The raising of the maximum income level for the lowest bracket alone could reduce taxes by 332 billion yuan per year, which exceeds the number projected by China’s Ministry of Finance. Extra deductions allowed could boost those household savings to as much as 472 billion yuan.
While the tax relief will help support growth, it is not likely to fully offset the impact of tariffs, should the US go ahead with another escalation. Because of this, Barclays expects more policy easing if needed to further offset the trade headwinds.