China economy

‘Too little to dent US-China trade war costs’: Guangdong’s tax cuts leave export manufacturers cold

Ten-point plan to reduce burden on business won’t be enough to offset American tariffs and the general decline in economic activity, industry players say

PUBLISHED : Thursday, 13 September, 2018, 3:23pm
UPDATED : Thursday, 13 September, 2018, 11:29pm

A southern Chinese province’s emergency package of business cost-cutting measures will do little to offset rises in operating expenses and damage from the trade war with the United States, according to factory owners and industry analysts.

Authorities in Guangdong, the country’s manufacturing heartland, unveiled a 10-point plan on August 31 to ease the strain on the provincial economy inflicted by the trade war since the US and China imposed reciprocal tariffs in July.

The plan included reductions in transport and electricity charges, discounts on land use costs and caps on mandatory corporate pension payments.

But exporters and analysts said the modest cuts in government charges and taxes were little more than cosmetic given the bruising business was taking from the domestic economic slowdown and high US tariffs.

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Gloria Luo, a sales manager at a Guangdong-based manufacturer of automotive parts and industrial moulds, said the cuts in electricity fees, social insurance payments and transport costs were too limited to offset the rises in costs from trade tariffs, tighter social welfare taxes and higher wages.

“The measures are a prescription with good intentions but not right to treat the disease,” Luo said.

Liu Kaiming, head of the Shenzhen-based Institute of Contemporary Observation, which monitors working conditions at and the performance of hundreds of Chinese contract manufacturers, said the breaks would be helpful if the overall economy was growing.

“But they are only a modest help given the tough economic situation at present,” Liu said.

“Orders and profits [at both large and small export businesses] will fall dramatically because of the US tariffs already in place, and new tariffs are on the way.”

The Guangdong government estimated the plan would cut business costs by 200 billion yuan (US$29 billion) in the next three years, but Liu said that would not be enough to revive profitability or confidence among small enterprises, which are feeling the brunt of the trade war impact.

Guangdong, whose export-led economy is about the same size as Russia’s, has felt the pain from the trade war mostly acutely. The province’s manufacturing sector contracted in August for the first time in 29 months, according to the official purchasing managers index published last week. According to official customs data, exports dropped by 3.3 per cent in yuan terms in the first six months of this year from a year earlier, even before the first round of US tariffs was imposed on July 6.

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To cushion the impact, the Guangdong government said it would levy corporate income tax at the lowest rate permitted by the central government; offer a 30 per cent discount on land use costs for certain new investment projects; and give priority to digital, networking, intelligent manufacturing or green-tech businesses.

In addition, industrial firms with an income of more than 10 million yuan will be eligible for tax refunds and subsidies for technical upgrade projects; and manufacturers that expand their capital base or have an initial public offering before 2020 can qualify for a government grant of up to 3 million yuan.

Ren Zeping, chief economist at property developer Evergrande Group, said the overall tax burden in China had been higher than that in the United States since 2009, and US President Donald Trump’s business tax cuts had widened the gap.

On top of that, electricity for businesses in China cost 1.3 times that in America, logistics expenses were 1.9 times higher, and social security contributions paid by Chinese companies were 43 per cent of wages – much more than the 13 per cent US businesses paid, Ren wrote in a research note last month.

The US trade tariffs are the last straw for struggling Guangdong export manufacturers, many of whom are considering moving their operations offshore to avoid US trade tariffs and reduce labour costs.

A senior executive at a company making tablet and television screens said there was a lot of talk among exporters about moving to South Asia because buyers from the US and Europe were shifting orders from China to the region.

“If we want to stay in business, we need to follow the others to relocate to South Asia,” the executive said. “That means the measures to reduce land use costs for expansion [in Guangdong] are not helpful for us” because there are no expansion plans to begin with.