China's policies to recover from COVID downturn

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Question: 

Hello, in the article https://news.cgtn.com/news/2020-08-07/China-confident-of-meeting-2020-fi... , it says China has been implementing tax and fee cuts, and "issued 100 billion yuan (about 14.1 billion U.S. dollars) of special government bonds for COVID-19 control measures in a bid to support local infrastructure construction and epidemic prevention and control." In what ways will implementing tax and fee cuts help China's recovery? And if selling government bonds is a contractionary monetary policy, what will this do, other than fund fiscal objectives, to help a recovering economy? Why sell bonds instead of borrow more?

Answer: 

China mainly cuts corporate tax and fees (no tax cut for individuals) during the COVID-19 epidemic period so that firms could have incentive to increase the production compared to the scenario without tax and fee cuts.  

    When we are talking about contractionary monetary policy, that means the Federal Reserves or Central Bank, not the government, sells the bonds. In China's case, during the epidemic period, the government (mainly local governments) sells the bonds, which are purchased by investors in the financial market. Hence it is not a contractionary monetary policy. Instead, it is in fact a expansionary fiscal policy that the local governments borrow money (through selling bonds) from the financial market to invest in local infrastructure. 

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Last updated on October 14, 2020