|
News and Comments on Reduction of VAT Rebates
The recent announcement on June 19 of the reduction and elimination of VAT
rebates for certain export products will have a significant impact not
only on China’s export of manufactured goods to the U.S. but also on the
fundamental structure of the manufacturing sector in China. The following
is a summary of the current status:
VAT rebates will be reduced or eliminated for more than 2,800 export items
or 37% of all export items. Such a change in policy will become effective
July 1, 2007. Specifically, tax rebates on 553 “high energy-consuming” or
resource intensive products such as cement, fertilizer, and non-ferrous
metals will be eliminated; tax rebates on 2,268 “easy to trigger trade
frictions” will be reduced from a range of 8 to 17% to a range of 5 to 11%
on items such as garments, toys, and steel products.
To illustrate the impact on the cost of export of manufactured goods, I
have prepared a simple worksheet for your review (please see attachment).
Additional information on specific items subject to elimination or
reduction will follow shortly.
Comments
China recorded a trade surplus that soared by 83.1% to US$85.7 billion in
the first five months of 2007. This trade surplus has reached an alarming
level that aggravates trade disputes and raises threats of sanctions and
retaliations. In fact, in the last 24 months, the Chinese government has
imposed a number of measures including the valuation of the currency, RMB;
reduction of liquidity; imposition or increasing export tariffs on certain
products; warnings of over-investment in fixed assets; and others, and
yet, those measures have not done much to slow down the growth of exports.
In our opinion, the surge of surplus is primarily due to the following:
(1) more efficiency in the manufacturing process in China; (2) a shift to
higher value added exports; (3) Chinese companies becoming more aggressive
in selling their products directly overseas; (4) too much liquidity
resulting from a frenzied capital market, an increasing competitiveness in
the banking industry, and an uncontrollable rise in real estate values;
(5) too much inflow of private equity to China; (6) a continued rush of
outsourcing to China because most U.S. companies have come to accept that
this seems “inevitable”; and (7) most damagingly, an overcapacity in
nearly all industries resulting from uncontrolled investments in fixed
assets.
In the very near term, this will help to slow down the growth in trade
surplus and will have a drastic negative impact on US importers from
China. In the immediate term, the trade surplus will continue to grow as
excess capacity exists, and Chinese companies will adjust by becoming more
aggressive and efficient. As long as the world economy continues to grow
and consumers continue to look for the lowest possible price, it is highly
unlikely that China’s trade surplus will be reduced. In the longer term,
the manufacturing sector in China will be re-shuffled. Trading companies
will face a more difficult task to justify why they should continue to
play a role. Many of them will need to transform themselves into primarily
marketing oriented companies or even into buying factories themselves.
Many less efficient factories which make “knock-off” products will be
phased out, and consolidation is expected in the next three to seven
years. Factories that are large, well-managed, with engineering capacity
will probably survive and grow. On the other end, small “mom and pop”
shops with very little overhead will probably survive. The result is: this
will help to slow down the growth of overcapacity and better reallocate
resources. One caveat though: as long as real estate values continue to
rise and easy credit is available, some of the less efficient factories
will still be around as most of them are not merely players in the
manufacturing sector, they are also players in the real estate market –
they own the land on which their factories are located.
As usual, any comments will be appreciated.
For Your Reference :
VAT_Calc.ppt
VAT_Calc.pdf
VATAnnouncement_USCCC.doc
Please note that there will be discussion on the VAT Rebates in our
upcoming Third Midwest Manufacturers’ Conference on June 28.
|
