China’s 2023 Government Work Report: Highlights from the Two Sessions

On the first day of the 2023 Two Sessions, the outgoing Chinese Premier Li Keqiang delivered the annual Government Work Report, one of the most important policy documents of the year. In addition to setting China’s GDP target for 2023, the report outlines various policies and goals for boosting economic and industry growth over the year, including policies to boost consumption, investment, green development, extend tax incentives, and more. We look at the major targets and proposals set out in the report.

UPDATE (March 29, 2023): At an executive State Council meeting chaired by Premier Li Qiang on March 24, 2023, China’s State Council announced the renewal of a range of supportive tax and fee policies, which includes the long-awaited extension of corporate income tax (CIT) incentives for small and low-profit enterprises (SLPE). Following this, the Ministry of Finance and the State Taxation Administration released corresponding announcements for the implementation. The reduced CIT policy for SLPE’s portion of income that is below RMB 1 million has been extended to the end of 2024. Meanwhile, SLPE will be subject to a 20 percent CIT rate on 25 percent of the taxable income amount for the portion of taxable income not exceeding RMB 1 million during the period from January 1, 2023, to December 31, 2024. That is to say, the effective CIT rate for SLPEs’ annual taxable income below RMB 1 million will increase from 2.5 percent to 5 percent.

On Saturday, March 4, 2022, the National People’s Congress (NPC) convened for the opening meeting of China’s annual Two Sessions meetings. In the meeting, outgoing Premier Li Keqiang delivered the 2023 Government Work Report (GWR) on behalf of the State Council, which sets a vast range of economic and development tasks for the country to pursue over the coming year. It includes the main 2023 GDP target and outlines how China plans to achieve these goals. 

In this article, we look at the key points from China’s 2023 GWR, including the 5 percent GDP target, preferential tax policies, industry priorities, measures to boost consumption, policies to attract foreign investment, maneuvering China’s green transition, measures to mitigate financial risks, and the shifting of healthcare priorities.

GDP target set at “around 5 percent” 

In the readout of the 2023 GWR, the government announced a GDP growth target of “around 5 percent” for 2023, which is at the lower end of expectations.  

Earlier this year, a number of global institutions, including the International Monetary Fund (IMF), raised their 2023 growth forecast window for China to 4.8 to 5.6 percent, after China shifted away from its zero-COVID policy and sent strong signals that it will prioritize economic growth in 2023 once again. 

Prior to the meeting, Reuters reported that China could set a GDP growth target as high as 6 percent for 2023, though three of their seven unnamed sources said this number would be from 5 percent to 5.5 percent. 

Considering China’s strong economic recovery in the first two months (the official manufacturing PMI reached the highest level in nearly 11 years in February and the services PMI continued to rise as well), this modest GDP growth target suggests that China will put more emphasis on high-quality growth and sustainable development and strive for economic stability amid ongoing economic headwinds, rather than aiming for the breakneck growth seen in past years.  

That said, despite being one of the lowest growth targets released in the history of the Two Sessions, the 5 percent growth rate means that China will continue to be one of the world’s fastest-growing major economies, while the US and EU face recession risks.  

On the other hand, at the local level, the average of all the regional growth targets is around 5.9 percent, indicating that regional governments won’t give up efforts for short-term growth. Businesses can still expect considerable support from various levels of government, including more infrastructure investment, incentive policies, and measures to boost domestic consumption. It is also very unlikely that China will miss its 2023 growth target unless any other “black swan” events happen.  

Preferential tax policies 

Unlike in previous years, the 2023 GWR didn’t announce any specific tax measures. Rather, it only promised that “China will improve preferential policies on taxes and fees, extend existing measures such as tax cuts, tax rebates, and tax deferments that should be extended, and optimize existing measures that should be optimized”.  

We expect that the Ministry of Finance (MOF) and the State Taxation Administration (STA) will shed more light on these extensions and optimizations in the coming months. 

Which tax measures may be extended? 

Although no official information is available for the moment, we can make some early predictions based on our understanding of previous government policy priorities.  

In the post-COVID era, the entire social economy of China is still in the process of recovery, despite the strong economic rebound seen in the past two months. Among others, small and micro enterprises, individual businesses, the lifestyle services industry, delivery services, and some other vulnerable sectors are still facing challenges. The support measures introduced for these industries in the past three years are very likely to be extended in 2023.  

For example, part of the corporate income tax (CIT) incentives for small and low-profit enterprises (SLPE) expired on December 31, 2022, as shown in the below table: 

That is to say, SLPEs can no longer enjoy the “20 percent CIT rate on 12.5 percent of the taxable income amount for the portion of taxable income not exceeding RMB 1 million (approx. US$144,246)” after December 31, 2022. 

However, the preferential policy that allows SLPEs to enjoy a 20 percent CIT rate on 25 percent of their taxable income amount for the portion of taxable income between RMB 1 million and RMB 3 million (approx. US$432,738) will be in place until December 31, 2024. It therefore doesn’t make sense for the policy for the lower income threshold not to be extended, and this policy is expected to be extended to at least December 31, 2024, to match the currently effective policy. 

Other potential extendable preferential tax policies could include (but are not limited to): 

• The super deduction policy for enterprises entitled to the current additional pre-tax deduction ratio of 75 percent for R&D expenses. During the period from October 1 to December 31, 2022, the ratio was raised to 100 percent. 
• The one-off pre-tax deduction policy for high and new technology enterprises (HNTEs) for equipment and instruments (fixed assets other than houses and buildings) that were newly purchased during the period from October 1 to December 31, 2022. During this period, deductions were allowed to be 100 percent weighted. 
• The value-added tax (VAT) exemption policy for public transportation during the period from January 1 to December 31, 2022. 
• The VAT exemption policy for delivery services during the period from May 1 to December 31, 2022. 

However, at this time, these expectations are suppositions that await legal and regulatory confirmation.

Which tax measures may be optimized? 

In January 2023, the MOF and the SAT optimized some VAT incentives for a range of market entities, including small-scale taxpayers and taxpayers in the production and lifestyle service industries.  

For example, the small-scale taxpayer policies clarify that during the period between January 1 and December 31, 2023, small-scale taxpayers with monthly sales of under RMB 100,000 (approx. US14,424) shall be exempted from VAT. This threshold is a bit lower than that in 2021 and 2022. During the period from April 1, 2021, to December 31, 2022, the VAT threshold for small-scale taxpayers was RMB 150,000 (approx. US$21,636) per month (or RMB 450,000 per quarter, approx. US$64,910).  

The VAT reduction policy for small-scale taxpayers and the additional VAT deduction policy for lifestyle and production-oriented services have also been adjusted in 2023. More details can be found in our article: China Clarifies 2023 VAT Incentives for Small-Scale Taxpayers and Lifestyle and Production Oriented Services. 

These changes are in line with the economic situation and policy development in China. In 2022, businesses in China were struggling with strict COVID-19 control and prevention measures. Now, with China reopening its borders and lifting restrictions, the economic forecasts are much improved. Meanwhile, the government will also be considering the balance of payments, after spending billions on pandemic control in the past few years.  

And what about the 2022 large-scale VAT rebates policy? There is not much information on how this policy will be implemented in 2023. But given that China has repeatedly expressed its support for foreign trade and export, this policy is expected to be continued or even optimized. We will pay close attention to any news or developments on this policy. 

Policies to stimulate domestic demand and increase investment in society 

In order to achieve full economic recovery, consumption must bounce back too. Domestic demand has been sluggish over the past couple of years due to the impact of the COVID-19 pandemic and figuring out how to stimulate it has been a headache for policymakers. 

In 2023, the government will seek to stimulate domestic demand by increasing investment in industries and society as a whole, rather than implementing specific consumption-stimulating policies. In the past, the government has provided various incentives to stimulate the consumption of specific goods, such as automobiles and home appliances.

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The GWR states that “government investment and policy incentives must effectively drive investment in the whole society”. The GWR calls for “increasing the income of urban and rural residents through multiple channels”, with the hope that more disposable income will lead to higher levels of consumption. It is currently not clear what the mechanisms for increasing income would be. 

Meanwhile, the GWR has also set a new quota for the issuance of local government special purpose bonds (SPBs). SPBs are one of the main ways that the central government provides funds to local governments to bankroll major infrastructure projects, which has been a key mechanism for boosting economic growth in the decades since China’s reopening.  

The 2023 quota has been set at RMB 3.8 trillion (approx. US$549.2 billion), a slight increase from the RMB 3.65 trillion (approx. US$527.5 billion) quota set in 2022. According to the GWR, the SPBs will be allocated to “accelerate the implementation of major projects during the 14th Five-Year Plan” period [from 2021 to 2025] and implement urban renewal activity”. 

Finally, the GWR also seeks to encourage the participation of more private capital in major construction projects. 

Expanding foreign trade and investment 

The GWR calls for attracting and utilizing more foreign capital in 2023. China’s foreign direct investment (FDI) inflows slowed slightly in 2022 but remained relatively strong. Actual use of foreign capital in 2022 reached RMB 1.2 trillion, up 6.3 percent from the previous year. 

Since China lifted almost all COVID-19 restrictions, its government officials have been espousing the importance of foreign capital to the country’s post-COVID recovery.  

One mechanism proposed in the GWR to attract more foreign capital is to “expand market access and increase the opening-up of the modern service industry”. 

China controls the industries in which foreign investors can participate by implementing a Negative List for Market Access, the Special Administrative Measures (Negative List) for Foreign Investment Access, and a Catalogue of Encouraged Industries for Foreign Investment, among other documents. The negative list outlines the industries which are prohibited or restricted from receiving private investment by companies in China (not exclusively foreign companies), while the special administrative measures list the industries that are prohibited from receiving investment from foreign companies specifically. The catalogue, meanwhile, lists the industries in which foreign investment is encouraged. 

Over the past few years, the government has continued to shorten the former two lists while lengthening the catalogue of encouraged industries. It is possible we will continue to see more market opening through the further adjustment of these lists and catalogues, in particular for sectors related to the modern services industry (such as professional services, telecommunications, financial services, tourism and entertainment, and more). 

The GWR also calls for implementing the “national treatment” of foreign companies, which means ensuring that foreign companies are treated equally to domestic companies, and calls for promoting the construction of “landmark foreign-funded projects”. 

With regard to foreign trade, the GWR seeks to promote China’s accession to economic and trade agreements, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).  

Tackling financial risks 

The GWR calls for “effectively preventing and defusing major economic and financial risks” and outlines a few key areas of focus. These include mitigating the risks of the real estate industry and of growing local government debt. 

The real estate industry has been in turmoil since late 2021 when major real estate developers defaulted on debts due to policies aimed at curbing lending to developers. The GWR does not provide specifics on how to resolve the current issues, but calls for “improving the status of assets and liabilities, preventing disorderly expansion, and promoting the stable development of the real estate industry”. 

Meanwhile, rising local government debt – and especially the so-called “hidden debt” held by local government financing vehicles (LGFVs) – has been a major concern for the central government for many years. An ongoing liquidity crunch among local governments could also stymie efforts to boost the economy through investment in infrastructure projects. Over the past few years, the government has taken aim at reducing local government debt through mechanisms such as enabling local governments to swap their debt for the SPB quotas. 

Further actions to be taken in 2023 include optimizing debt maturity structure, reducing interest burden, curbing the increase of debt, and dissolving reserves. 

Promoting China’s green transition 

The GWR does not provide any new specific policies for promoting China’s green development, but rather offers general goals and proposals. These include: 

• “Strengthening the construction of urban and rural environmental infrastructure, and continuing to implement major projects for the protection and restoration of important ecosystems.” Major renewable energy projects in recent years have included building a huge solar energy base in the desert, expansion of nuclear power capacity, and expansion of hydropower capacity, among others.
• “Promoting the clean and efficient utilization of coal and technology R&D, and accelerating the construction of a new energy system.” Despite its climate commitments, China has increased its production of coal over the past few years due to energy shortages but has continued to promote the “cleaner” production and usage of coal alongside building up its renewable energy capacity. 
• “Improving policies to support green development.” Past policies have included providing fiscal support for green development and launching a carbon trading market. 

Shifting healthcare priorities 

China has lifted almost all of its COVID-19 prevention and control policies and officially declassified the virus to “Class B Management”, meaning it is subject to less strict controls. As China emerges from the pandemic and the initial wave of cases subsides, local governments will have much more bandwidth to focus on other healthcare outcomes and address some lingering issues in the industry. 

The GWR calls for “focusing on healthcare protection and severe disease prevention” as well as focusing “on basic health care for the elderly, children and patients”. In addition, it calls for further work to be done on vaccines and drugs, including “promoting the iterative upgrading of vaccines and the development of new drugs, effectively guaranteeing the needs of the masses for medical treatment, and protecting people’s safety and health.” 

What more to expect from the 2023 Two Sessions? 

The GWR is one of the most important policy documents of the year as it sets the overall tone for economic and development policy. However, many more important announcements will be made over the next couple of weeks.

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First of all, the NPC is expected to approve a government restructuring during the Two Sessions, as is customary at the beginning of each five-year session of the NPC. As the government went through a major restructuring at the beginning of the last session in 2018, we expect this year’s changes will not be as thorough but may involve an overhaul of the financial system and the resurrection of the Central Financial Work Commission (CFWC), as reported by the Wall Street Journal. 

In addition, we will also see new appointments to several high-level positions, including vice premiers and the heads of government departments, such as the National Development and Reform Commission (NDRC) and the Ministry of Finance (MOF). 

Finally, the NPC is also expected to approve legislative amendments, including a significant amendment to the Legislation Law, which would see more powers given to local governments to formulate local laws and regulations. 

(This article was first published on March 6, 2023, and was last updated on March 29, 2023.)

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