Latest round of stimulus measures in Shanghai seek to reactivate local economy

The latest round of COVID-19 lockdowns left deep scars on the Chinese economy. With a focus on business resumption and employment stabilization, the Shanghai authorities rolled out a new series of stimulus measures to support and reactivate the local economy.

Last September, the Shanghai Municipal Government released 22 measures in a document introduced as Several Policies and Measures of Shanghai on Supporting Industries, Bolstering Market Entities and Stabilizing Growth (“new measures”), to promote economic recovery and the expansion of several sectors, including tourism and aviation.

The epidemic situation has eased to a great extent, but the economy has taken a serious hit with consumption slumping and production capacity being restricted. However, experts believe that the stimulus policies should hasten the recovery of the city's economy, which could take a few months to achieve pre-epidemic levels.

The new measures aim to bolster the economy, including work resumption, the stabilization of foreign capital and the reactivation of consumption.

This is the latest effort by the local authorities to help companies and stabilize growth, after launching in March the 21 policies ‘to fight the pandemic and help enterprises promote development’, and the 50 measures for ‘economic recovery and revitalization’, announced at the end of May.

According to the local customs agency, Shanghai’s overall foreign trade volume in the first eight months of 2022 was RMB 2.7 trillion (US$390 billion), up 4.8 percent year on year, reversing a minor annual dip in the first half of the year due to the impact of the COVID-19 lockdown.

The Chinese government prioritized the protection and survival of small and medium sized enterprises (MMEs), which represent the majority of companies in the country and are responsible for more than half the national GDP. The measures include mechanisms to help them recover and grow.

In China, MSMEs respond to specific legal designations illustrated in regulatory documents, such as the Small and Medium-Sized Enterprises Classification Standard.

The new measures seek the implementation of the national requirements for establishing loan risk compensation funds for both MSMEs and self-employed businesses. They also call for the promotion of a long-term mechanism for credit awards and subsidies. This is because measures, such as the loan risk compensation scheme and subsidies, are used to stimulate the spending of MSMEs to generate overall growth.

MSMEs will be given a two percent discount interest subsidy in the fourth quarter of 2022, with a maximum amount of discount interest for a single enterprise amounting to RMB 200,000 (US$28,105).

A clear goal of the policy package is to ensure employment. The new measures call for the implementation of the requirements of the national one-time post-expansion subsidy policy, and further expand the subsidy scope to key groups such as unemployed college graduates and registered unemployed youth.

College graduates who have been unemployed for over two years will receive social security subsidies.

To support the manufacturing industry, the government will implement preferential tax policies and extend the deferment of several taxes such as the income tax for another four months after the expiration of the deferred period from September 1, 2022.

Several initiatives are proposed in the policy package to support foreign investment projects and attract additional foreign investment, as well as to support foreign trade and commerce

Banking institutions are encouraged to reduce or exempt the relevant exchange rate hedging fees, guide port units to further reduce the fees for empty container transfer, cancel the third-party testing requirements for enterprises to apply for exemption of customs duties and import-related taxes on returned goods and give priority to the testing of qualified vehicles participating in the ‘Fifth China International Import Expo’ (CIIE).

The Shanghai government announced that it will continue to reduce the processing time of export tax rebates to ensure that it remains within five working days, and the average time for processing tax rebates for export enterprises classified as Category I and Category II stays within three working days.

The measures encourage foreign trade enterprises to expand their market in the region, by setting up a Regional Comprehensive Economic Partnership (RCEP) consulting station and launching an inquiry system for RCEP optimal tariff rate and certificate of origin rules.

Foreign companies interested in setting up a R&D center, bringing talent and creating scientific and technological innovation in Shanghai will receive support from the policy package. The measures call for the improvement of intellectual property protection as well.

Another important goal of the government is to promote consumption and stimulate growth. These two factors are critical for the recovery of the local economy, especially after the recent lockdowns. The authorities announced spending-increase initiatives, ranging from the short-term stimulus in the form of coupons and subsidies to long-term improvement of retail facilities.

Several of the new measures resemble the previous ones. However, the latest package includes concrete efforts to stimulate consumption in some of the city’s most important industries, such as automobiles.

The plan seeks to boost sales in the car and housing sectors by lifting restrictions on the migration of small non-operating used cars that meet the national five and above emission standards and extending the purchase tax exemption of new energy vehicles until the end of 2023.

The measures will increase the financing for the construction of affordable rental housing and strive to build a multi-level rental housing supply system of “one bed, one room, one suite” to ensure the stable and healthy development of the real estate market.

To support economic growth, the policy package encourages the local government to issue special-purpose bonds (SPBs), an important instrument to collect funding for infrastructure and public service projects.

The new plan encourages the upgrading and transformation of key industries. It expands the limit of support for major technological projects to RMB 100 million (US$14.52 million) and uniformly increases the deduction ratio in the fourth quarter of 2022 to 100 percent for industries that currently deduct R&D expenses before tax at 75 percent.

The manufacturing industry, social services, small and medium-sized enterprises (SMEs), and self-employed businesses will enjoy financial discount policies to upgrade their technical equipment in the fourth quarter of 2022.

Advanced manufacturing enterprises of different scales, such as those whose gross industrial output value has exceeded RMB 1 billion (US$139.240 million), RMB 5 billion (US$96.204 million), and RMB 10 billion (US$1.39 billion) for the first time in 2022, will receive extra support.

Companies that engage in green and innovative activities will receive special incentives to speed up their layout and development and implement a new round of discount policies for new infrastructure construction, providing overall support up to RMB 20 million (US$2,81 million).

Half of Shanghai’s economic activity comes from the private sector. For this reason, the measures support the innovative development of private businesses through the promotion of bond financing tools, such as scientific and technological innovation corporate bonds, or innovation and entrepreneurship corporate bonds.

The stimulus plan reinforces the basis provided by the previous two rounds of policies, upgrading them from the status of ‘emergency’ to that of ‘developmental’ policies. The new package shifted from epidemic prevention and enterprise assistance to all aspects that affect economic development.

The latest measures took effect from October 1, 2022, while the city’s ’21 policies’ for anti-epidemic assistance and the ’50 policies’ for economic recovery and revitalization will continue to be implemented.

On the bright side, experts noted that Shanghai's economy is already starting to turn upward, and the process of recovery will speed up with the support of the latest government policies.

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