Manufacturers in China are weathering a multi-front assault on their bottom line, including ongoing changes in China law for value added tax (VAT) rebates, RMB exchange rate, as well as changes in China economic policy for the purchase of raw materials. All on top of the ongoing increases in raw material prices.

As of 1 July, 2007, China reduced the VAT (sales tax) refund China exporters recieve. Products for export will now be treated more like products for domestic consuption and will incur a higher VAT charge (or, more precisely, receive less of a VAT refund). This will raise prices in the 2,268 product categories (one-third of the total) affected. The most common VAT rebate moved from 11% to 5% although other rates changed as much as 8 percentage points. More details can be found in Earnst & Young's China Further Reduces VAT Refunds on Export Goods.

Changes in the US$/RMB exchange rate compound the changes in VAT rebate - the net price increase on products from before December 2006 to July 2007 from just these two changes is 16.4% based the US China Chamber of Commerce's calculations.

In addition, on July 23rd, China said it would raise a levy on the import of 1,853 commodities including copper, lead, zinc, some and some plastics, textiles and yarns. According to the South China Morning Post, the levy requires "exporters to pay as a deposit half the amount they spend importing 1,853 raw materials" to be returned if the companies sell products within the time scale dictated by the process trade contracts. The contract must be registered with the authorities so they can track all this. The new rules are scheduled to come into effect on 23 August and will not apply to enterprises in the western regions; they do apply to businesses in Shanghai, Jiangsu, Zhejiang, Beijing, Tianjin, Liaoning, Hebei, Shandong, Fujian and Guangdong provinces. Also, businesses in these provinces that do not currently have export rights in the listed products will not be able to get them. These rules target mainly low end and labor intensive products. Such processing trade accounts for 45% of China's imports and exports and will increase working capital requirements (which have an associated cost, often in the form of borrowing interest rates).

This policy has several goals - develop the western regions, move the coastal regions to higher value added products, create economic policies that discourge energy intensive and highly polluting industries and reduce the trade surpluss. This will affect companies cash flow increasing the likelihood that they'll have to borrow money to meet these requirements - the interest on which increases costs and ultimate prices. 1 2 3 4

Finally, China has also said that it would expand the list of goods subject to mandatory export limits later in the second half of 2007, again as an economic policy to drive manufacturers into higher value added products. The list of goods subject to export limits would come from the ones who's VAT taxes had declined on July 1st. 1 2 3 4 5

Labor costs also continue to rise.  China's National Bureau of Statistics reported that in the first half of 2007 wages were up 18.5% compared to the year earlier period. 

Added on top of this are rising raw material costs.

What should importers do? Each importer's products are affected differently - an importer should know why he's moved (or moving) sourcing overseas (often because of low labor costs) and ensure that original strategy continues to be appropriate in an evolving environment. Then assess the impact of these ongoing changes to the landed cost of your products. Second step is to assess whether pricing has changed enough to justify looking at additional or alternative sources of supply or whether future price changes mean you should start looking now. The middle slides in this Surviving China's Rapidly Changing Sourcing Tides presentation suggest starting to look alternative sources if your savings are currently less than 10%, especially in light of recent increases of 16%. The same slides include survey results showing that 79% of international buyers will continue increasing sourcing from China in the long run.

Overall, manufacuring in China continues to be extremely competitive, and it is unlikely that these changes will move sourcing out of China. But costs will go up, and the end consumer may start to see higher prices on the retail shelf. Meanwhile, China will likely continue moving its manufacturing and exporting strategy to more value added products, much as Japan did in the 1980s.

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One person has commented on this article.

 1. Sales Manager
Guest User, Unregistered

it is true, and I am happy that this article is on the internet.
We are antique exporters/sourcing, and our workshops complain about the rise in costs, inflation, ... we about exchange rate and stricter export rules.
We also have a blog on these matters : www.acf-china.com/blog

 Posted 2008-02-21 14:37:07

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