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China to shore up growth through targeted policies

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BEIJING, Feb. 26 (Xinhua) -- Targeted policies favoring small and medium-sized enterprises (SMEs) have become the order of the day for China to bolster growth.

"In the past, proactive fiscal polices almost always meant just more investment and an increase in the fiscal deficit. To make proactive policies more effective in the future, the burdens on SMEs shall be reduced further," said Li Keqiang during an executive meeting of the State Council on Wednesday.

The State Council decided to extend tax break policies to more micro and small businesses. From 2015 to the end of 2017, companies with annual taxable income under 200,000 yuan (32,573 U.S. dollars) will have their corporate tax halved. Previously, the threshold was 100,000 yuan.

In an effort to free up more cash and encourage private investment, the State Council said taxes on investment earnings from non-monetary assets would be levied periodically rather than once yearly collection.

In addition, China will reduce the unemployment insurance rate to 2 percent from 3 percent previously, which is expected to save more than 40 billion yuan for businesses and employees annually.

"Various social security outlays ate up one quarter of the company's profits. It's a huge burden," Beijing-based bakery Daoxiangcun told Xinhua.

"Companies can give employees higher salaries with the money saved by reducing unemployment insurance. Higher salaries can make the workers stay," said Ren Lihua, owner of a cosmetics company in central China's Hunan Province.

Wednesday's meeting coincided with HSBC's release of its preliminary purchasing managers' index (PMI) for China in February, which beat market expectations and rose to a four-month high of 50.1 from a reading of 49.7 in January.

A reading above 50 indicates expansion, while anything below that represents contraction.

"The data pointed to a marginal improvement in the Chinese manufacturing sector going into the Chinese New Year period in February. However, domestic economic activity is likely to remain sluggish and external demand looks uncertain," said HSBC chief China economist Qu Hongbin.

China's policy makers have shown more ingenuity in supporting growth. Aside from a universal cut of 50 basis points in the reserve requirement ratio (RRR), the minimum level of deposits banks must hold in reserves, the central bank earlier this month increased support to targeted areas, cutting the RRR by an extra 50 basis points for qualified city and rural commercial banks engaged in proportionate lending to small firms, the farming sector and major water projects.

Though it may be too early to say that China's economy has regained lost momentum, analysts said the latest PMI figure gives hope that China's targeted measures have begun to take effect.

"Targeted policies such as tax cuts for SMEs and collecting taxes in stages free up cash to encourage the birth of more startups and boost innovation, which benefit the economy," said Wang Zecai, a researcher at the Research Institute for Fiscal Science under the Ministry of Finance.

"We expect more such policies to come," he said.

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