China to adopt supporting measures that reduce tax burdens

2018-09-10

Sep 3– Sep 7, 2018

China will implement supporting measures to the newly revised law on personal income tax, and maintain the current tax policy as unchanged before the completion of social security collection organization reform, a State Council executive meeting presided over by Premier Li Keqiang decided on Sept 6. The country will also accelerate the proper reduction of social security fee rates to ensure no further financial burdens to enterprises and to stimulate market vitality. To promote entrepreneurship and innovation, the country will perfect its tax policies to further support the development of venture capital funds based on the principle of non-retroactivity and not increasing overall tax burdens. China will also upgrade the entrepreneurship and innovation program to further promote employment, scientific and technological innovation, and industrial development vitality, according to the State Council.

London stock trade connect taking shape

The highly anticipated Shanghai-London Stock Connect Mechanism - a further step connecting the Chinese mainland and international capital markets - is taking shape as the central regulator started to solicit public opinion on detailed rules last Friday. Analysts from China Securities wrote in a note that the first companies included in the Shanghai-London Stock Connect are very likely to be from the UK's FTSE 100 index, focusing on traditional economic sectors such as finance, energy, industry and consumption With that Chinese investors will be able to invest in overseas products via the local market. A-share listed companies will be able to seek financing from overseas. Companies will also be supported with this mechanism to conduct cross-border mergers and acquisitions. The Shanghai-London trading program is another major step forward following the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect mechanisms implemented in 2014 and 2016 respectively. By the end of July, capital flowing northbound to the A-share market exceeded 200 billion yuan ($29 billion), which was much higher than the 70 billion yuan capital inflow to Hong Kong contributed by Chinese mainland investors.

Switzerland and China updating free trade agreement

Switzerland is seeking a new round of discussion on its free trade agreement with China and expects medicines to be included, Swiss Federal Councillor Johann N. Schneider-Ammann said during his visit to China from Sep 5 to 9, who also noted China has not responded on the subject yet. The FTA came into effect in 2014 and eliminated tariffs fully or partially in multiple sectors, marking the first free-trade deal between China and a continental European economy. Earlier in 2017, China and Switzerland have agreed to upgrade their free trade agreement to further boost trade in clean energy, sports, customs and intellectual property. "We hope to see a detailed discussion in the pharmaceutical industry during a new round of discussions on FTA," said Schneider-Ammann. China is now Switzerland's third-largest trading partner after the European Union and America. In 2017, bilateral trade hit $37.79 billion.

Sector Overviews

Top-and bottom-5 performing CITIC securities sectors of this week

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Indexes performance (as of Sep 7, 2018)

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Market Outlook

The market is expecting a move towards quasi-stagflation this week. Economic growth should slow in the second half of the year, while a rise in rents and vegetable and pork prices will cause concern about upward pressure on CPI. The recent rise in energy and consumer stocks is a result of this shift towards quasi-stagflation. We expect this risk to increase in the future, warranting a more defensive investment strategy. We believe the energy and consumer sectors may be able to resist inflation.

The impact of industrial policies on market risk appetite continues. The base for social security payments has been raised, tax incentives on venture capital investments have been eliminated, and games and education policies have been tightened, all of which increase market pessimism. We believe concerns about China's industrial restructuring and reform and transformation will continue to plague the HK stock market. (GF Securities HK Brokerage Limited)


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