Wen May Cut China Taxes to Spur Growth at 2012 Economic Planning Session

Fitch Ratings said China faces slower growth in home sales and construction next year and UBS AG predicted stagnant exports as top officials meet in Beijing for an annual conference to map out economic policies.

Lending to developers will remain tightly controlled as the government prolongs a campaign to stabilize property prices, Fitch said in a report today. The slowdown in trade may add pressure for monetary and fiscal easing, UBS said separately.

China’s leaders, who began meeting in Beijing yesterday, may cut taxes to spur growth after already reducing banks’ reserve requirements, according to China International Capital Corp., Goldman Sachs Group Inc. (GS) and Barclays Capital. Lower levies would spur consumption without the bad-debt risks that were triggered by a record 17.5 trillion yuan ($2.7 trillion) of lending in 2009 and 2010 that funded infrastructure projects and spurred real-estate speculation.

“China is no longer able to rely on massive investment in infrastructure building to stimulate the economy,” said Yao Wei, a Hong Kong-based economist with Societe Generale SA and the only analyst to accurately forecast China’s growth last quarter in a Bloomberg News survey. “Tax cuts are unavoidable.”

Europe’s debt crisis is cutting demand in China’s biggest export market. The nation’s economic growth cooled to 9.1 percent last quarter, the least in more than two years, and the increase in exports in November was the weakest since 2009 excluding seasonal distortions.

The MSCI Asia Pacific Index (MXAP) slid 1.1 percent as of 2:43 p.m. in Tokyo today on concern that more European nations face rating downgrades.

Trade Slowdown

In the latest sign of a slowdown in global trade, Philippine exports fell in October for a sixth straight month, a report released in Manila showed today. China’s trade surplus may shrink to 2 percent of gross domestic product in 2012 from an estimate of more than 3 percent this year, Hong Kong-based UBS economist Wang Tao said in an e-mailed note today.

The People’s Bank of China, may this week give loan data for November, after reports for trade, inflation and industrial production showed growth weakening. The money supply figures are not released to any fixed schedule.

Fitch said some smaller builders are “more vulnerable” as the government maintains property curbs. Housing transactions declined in 27 out of 35 cities tracked by Soufun Holdings Ltd. (SFUN) from Dec. 5-11.

France, Europe

Inflation reports are scheduled in France and the U.K, along with a measure of business confidence across the euro zone. In the U.S., retail sales data for November are due, with the median forecast in a Bloomberg News survey showing a 0.6 percent gain, up from 0.5 percent in October. Purchases excluding autos rose 0.4 percent after a 0.6 percent advance, the survey showed.

In China, the government is wrestling with the aftermath of past stimulus, including the debt burdens of local-government investment vehicles. Companies also face rising labor costs, which contributed to retailer and beermaker China Resources Enterprise Ltd. (291) reporting a decline in profit in the third quarter.

While the 25-member Politburo last week affirmed an unchanged “prudent” monetary and “proactive” fiscal stance for next year, a Nov. 30 cut in banks’ reserve requirements indicated a shift toward a bigger emphasis on supporting growth.

Inflation is moderating after reaching a three-year high of 6.5 percent in July.

Consumption taxes and corporate income levies may be cut, while taxes may be increased for some industries to achieve energy-saving and emission targets, according to Peng Wensheng, an economist for CICC who works in Hong Kong and Beijing.

China Eastern

A trial to reduce levies for service industries in Shanghai may be rolled out nationwide, cutting taxes by about 70 billion yuan, Peng said. Shares in companies including China Eastern Airlines Corp. (670) and Shanghai International Airport Co. (600009) rallied after the October announcement of the experiment.

“A lot of our portfolio managers are still very much focused on consumer-related areas,” Catherine Yeung, a Hong Kong-based investment director at Fidelity Worldwide Investment, said in an interview with Bloomberg Television yesterday. Tax cuts are helpful to consumer spending, which is “very much on track” after a November year-on-year retail-sales gain of about 17 percent, she said.

Turning on the Taps

China will “preset or fine tune policies in light of changes in economic development,” the Politburo said last week, adding that the government will seek “stable and relatively fast economic growth while adjusting the economic structure and regulating inflationary expectations.”

Standard Chartered Plc forecasts five reserve-ratio cuts next year as the economy grows 8.1 percent.

China has less capacity now to “turn on the taps” of stimulus than in the aftermath of the Lehman Brothers Holdings Inc. collapse in 2008 mainly “because of problems in the banking system,” Andrew Colquhoun, the Hong Kong-based head of Asia-Pacific Sovereigns for Fitch, said in an interview with Bloomberg Television yesterday.

Nomura Holdings Inc. estimates that China’s economy may expand 7.9 percent in 2012, the slowest pace in 13 years.

China routinely exceeds its projections for revenue, the World Bank noted in a report in April. The 27 percent increase so far this year compares with an 8 percent goal.

Eleven-month fiscal revenue was 9.73 trillion yuan, the finance ministry said, boosted by higher-than-anticipated tax takes from industrial profits and imports. The full-year goal laid out in this year’s budget in March was 8.97 trillion yuan for central and local governments, and a 9.12 trillion yuan total including money from a so-called stabilization fund.

In November, revenue growth slowed after the economy cooled, car and property purchases moderated, export tax rebates rose and the threshold for personal income tax increased, according to the Ministry of Finance.

To contact Bloomberg News staff on this story: Victoria Ruan in Beijing at vruan1@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst in Hong Kong at ppanckhurst@bloomberg.net

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