China businesses offer mixed reaction to VAT cut as exporters still call for more help amid slowdown
- New 13 per cent value-added tax rate announced by Premier Li Keqiang on Tuesday still higher than in competitors across Asia like Vietnam, South Korea and Indonesia
- Exporters remain under heavy pressure from lack of access to credit and the impact of US-China trade war
China’s cut in the value-added tax rate provided an immediate boost to corporate confidence amid the slowing economy, but exporters said that they still need more help from the government to offset their lack of access to credit and the effects of the continuing US-China trade war.
The government is redoubling its efforts to this year to stabilise the economy, but is relying on fiscal policy, rather than monetary stimulus, to boost growth.
Tax cuts are one of the most powerful weapons Beijing can bring to bear to boost activity, although budget contrasts limit how much the government can trim levies.
The government has targeted the tax cuts to those sectors hit hardest by the economic slowdown.
Its move would be to cut the value-added tax (VAT) rate for manufacturers from 16 per cent to 13 per cent this year, Premier Li Keqiang announced on Tuesday.
China will also cut the VAT rate for transport and construction firms from 10 per cent to 9 per cent and offer more tax rebates to some service sector firms, whose current 6 per cent VAT rate will remain unchanged.
The VAT system is the largest source of the government’s tax revenue, bringing in 6.15 trillion yuan (US$917 billion) last year.
Wang Yiming, deputy director of the Development Research Centre of the State Council, said this year's tax cut is “unprecedented” and that pressure on the traditional manufacturing sector will be largely relieved.
“The signal is clear and positive, which is that the market should play a bigger role,” he said.
The tax cuts were first signalled during the government’s policy setting Central Economic Work Conference in December.
The VAT cut also falls into a moderate scenario mapped out by Ding Shuang, chief China economist from Standard Chartered Bank, who predicted a saving of about 500 billion yuan for manufacturers.
Tang Dajie, secretary general of the Beijing-based China Enterprise Institute, said the VAT burden on Chinese manufacturers would to be lowered by 713.2 billion yuan, an increase from last year’s 260 billion yuan savings based on a 1 percentage point cut in May.
Still, the cut in the VAT rate “remains small [compared to corporate expectations],” Tang said.
Compared to an average 10 per cent VAT rate in other Asian economies including Vietnam, Laos, South Korea, and Indonesia, the 13 per cent VAT rate for Chinese manufacturers is still high, according to a research report from Xingye Securities.
China’s current three-tiered VAT tax system also needs to be simplified, since almost half of countries that have adopted VAT taxation only have one tier, the report said.
Li promised again in his speech that the government would work to simplify the VAT system to two tiers, a commitment first made a year earlier.
Nevertheless, the tax cut generated immediate excitement among corporate representatives at the National People’s Congress (NPC).
Lei Jun, founder of Chinese mobile phone maker Xiaomi, shared his excitement on Weibo, the Chinese version of Twitter, saying the cut would allow the firm to invest more resources in research and development as well as production.
Dong Mingzhu, chairwoman of appliance maker Gree Electric, said that the VAT cut was “very large,” but did not guarantee the survival of companies without competitive core technologies.
But export manufacturers, hit hard by the trade war with the US, urged the government to do more to help them, from additional tax cuts to ensuring that the yuan exchange rate does not appreciate further.
Pan Xinhua, chairman of Jiangxi Xiankelai Biotechnology, said that the VAT cut is likely to save his company 1 million yuan (US$149,000) annually from the company’s annual sales revenue of 500 million yuan (US$74.6 million).
“Our profit margin is slim. The real economy is very difficult nowadays as we have to keep updating equipment and expand marketing input,” he said.
Pan, however, emphasised the challenges in the export market amid the US trade war, saying the government should increase tax rebates to encourage overseas sales of farm and biotech products.
Jason Chen, a Zhejiang-based furniture maker and exporter, echoed that concern.
“A nearly 20 per cent cut on VAT tax is helpful, but it’s hard to say how helpful it would be for people like us in the export business. The key factor for our business is the stability of the strength of the US dollar. If the yuan appreciates past 6.5 against the dollar, then [the tax cut] is probably meaningless.”
Lu Bingyang, a professor of fiscal science at Renmin University of China, said the cut in the VAT rate is the right move against the backdrop of the economic slowdown, but it will not solve all the problems facing Chinese businesses.
“Their difficulties are actually a result of many factors. The government needs to step up financing support through its monetary policy, open the [domestic] market wider and create a unified and level playing field,” Lu said.
And to be sure, cutting the VAT rate does not necessarily ensure a turnaround in the economy, based on previous policy efficiency, said Larry Hu, head of Greater China Economics at Macquarie Group.
The government will lose some revenue from the tax cut, but can increase tax collection enforcement to fill the gap, Hu said.
Last year, Beijing said it cut taxes by 1.3 trillion yuan (US$193 billion), but its tax revenue still increased by 8.3 per cent from a year earlier.
“Overall, the tax cut is positive for sure, but we don’t want to get too excited as the fiscal deficit target [raised to 2.8 per cent from 2.6 per cent in 2018] created only small room for a potential cut,” Hu said.
“We don’t expect the tax cut to turn the economy around. It never did in the past.”
