Promoting consumption

July 27, 2011 / By

Recently China’s National People’s Congress (NPC) approved changes to the Individual Income Tax (IIT) Law, which will take effect on 1 September 2011. The IIT will be going from 9 tiers down to 7 tiers with dramatic changes for average income earners. Previously people earning employment income of RMB 2,000 per month and below were exempt from the IIT, that will now rise to RMB 3,500 per month, thereby reducing the number of people subject to the IIT from approximately 84 million down to 24 million. This effectively takes the middle class and lower middle class out of the income tax range, increasing their disposable income. And, at a time of high food price inflation, this will come as very welcome news.

In terms of the upper middle class consumer – the key demographic for China’s ‘mass market’ residential sector and the target for so many of the modern shopping malls being constructed in cities across the country – their effective tax rates will be going down as well. In fact, all employees earning less than RMB 38,600 per month or about US $72,000 per year will receive a tax cut. For those earning RMB 10,000 per month, or the lower end of the ‘upper middle class’ range, their IIT will go down from RMB 1,225 to RMB 745 per month a 39% decrease!

When it comes to the Really Big Challenge for China over the coming decade – shifting from an investment led growth model to a consumer driven growth model – putting more money in the pockets of those most likely to spend it, is a really good way to work toward that end. The changes in IIT are but one of many efforts to promote consumption in China, adding to policies that have strengthened the social safety net, increased transfer payments to retirees and pensioners, and provided tax credits for the purchase of big ticket items like cars, white goods, and electronics.

Of course more needs to be done, and in many real ways promoting consumption is one of the top 3 policy priorities for the Central government. With authorized credit on credit cards barely pushing 5% of GDP but growing fast, there is plenty of scope for China’s consumers to step up and start punching their weight.

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