Trade Surplus

VAT rebate adjustments implemented this year should have a very material impact on exports in 2008. The largest rebate cut occurred in early July and was such a surprise that few vendors had an opportunity to react. There was a rush to get goods to port and out of the country prior to the effective date of the regulations, but given that there were only three weeks between the announcement and implementation of the cuts, there was little people could do.

The Ministry of Finance said adjustments to import and export duties have ‘played a positive role’ in containing the country’s expanding trade surplus. In a statement posted on its website, the ministry said China’s trade surplus growth slowed markedly the second half as a result of the measures taken.

The ministry said that from August to October, China exports’ year-on-year growth was 6.1 percentage points lower compared to the first seven months of the year, while trade surplus growth decreased by 50 percentage points.

Since November 2006, China has cut import duties several times on products the country needs urgently while beginning to levy or increase taxes on exports of natural resources or products whose manufacture is energy-intensive or highly polluting. China — previously a net coal exporter — became a net importer in the first 10 months this year, due to lower import taxes, the ministry added.

Because of existing contracts, many US buyers were unable to react in 2007. In 2008, that will change.

The Chinese government carefully picked industries that drain its natural resources or heavy polluting industries. These were industries that the government hoped to discourage anyway. Obviously these changes don't affect companies producing for the domestic market, because they aren't eligible for VAT rebates.

It predominantly affects straight export and processing trade.