On August 1, 2008, the State Administration of Taxation (SAT) and the Ministry of Finance (MOF) announced several changes in export tax policies.  The export tax rebate for textiles and clothing was increased from 11% to 13%.  Large export companies are speculating that this increase will boost their profits.  Certain chemical products will not be included in the tax rebate increase.

Background of Export Tax Rebate

The export tax rebate translates into a refund of the taxes paid, such as product tax, value-added tax, business tax and extra consumption tax (after your exportation). The reason the government refunds the tax is that the producing cost will decline due to such rebates, and domestic products will compete with foreign counterparts at a relatively low price resulting in the enlargement of the foreign exchange reserves. It has been 23 years since China started the tax rebate policy. Meanwhile, China has continuously been blamed for its non-market driven economic conduct that was unfair to RDEs.

The changing Chinese export tax rebate

Importance of the change

The tax rebate increase should ease pressure and boost exports. The country’s textile and clothing exports rose 11.1 percent to US$ 81.7 billion in the first half of the year, but the growth rate was 6.4 percent less than that in the same period of last year. Investments in large projects (5 million Yuan or more) totaled 126.7 billion RMB in the first half of the year, up 14.24 percent compared with the same period last year. But the growth rate was 11.5 percent lower, according to the China National Textile and Apparel Council. This is closely related to the export tax. We can see clearly from the chart that the recent rebate accounts for the first rise, which occurred during a global economic downturn, rocketing raw material prices, the newly released Labor Contract Law and appreciation of the Yuan. Thus, export-oriented enterprises have needed a loosening of trade control policies.

Global Economic Downturn. The economy has had an impact on the corporations of China. When Americans feel the have less discretionary funds available, when Germans save more than 14.4% of their incomes, when the luxury consumption drops 20% compared with last year, and when people are concerned with only rice and water, who cares what you are wearing?

Rocketing Raw Material Prices. Besides the petroleum price increase connected to the global resource crisis, the prices of coal, aluminum, non-ferrous metal and other raw materials are soaring. For most of the manufacturing factories, the increase of raw material prices has undoubtedly brought great pressure upon them.

Release of Labor Contract Law. According to Factor Endowment Theory, a country exports the products which are factor intensive. For China, such factor intensity refers to labor power. As the new law is put in place, the country aims to protect the basic rights of the mass laborers, which increases production costs.

Accelerating Yuan appreciation. To the general public, the increase translates into stronger purchasing power; while to the exporters , the appreciation results in weaker competition. Without brand recognition and the advantage of quality, many domestic enterprises can only survive with an extremely low price, in addition to inexpensive raw materials and human resources, a slight exchange rate change may be fatal for exporters.

Laughter & Tears

Often, a policy is the outcome of chance. The revenue of a country is so limited that the government could only support some of its industries, ignoring the others. And some weak industries could not survive without government subsidies. The phenomenon appears more obvious within the chemical industry. Hunan Haili listed its total exportation amount as RMB 199 million from Jan. to June 2008, and nearly a quarter of the income is related to the canceled tax rebate. Although such companies could still enjoy the former policy, how can they survive next year?

The principle of the Chinese Government is to control the export of highly polluting products, natural resource products and those that consume excessive quantities of energy to keep trade balanced, which is vital to the exporters. Just two months ago, China imposed 5%-10% additional tax on 142 different high-cost products.

17% is a gap hard to overcome, and more enterprises will be negatively impacted due to the cancellation, while the textile enterprises will surely enjoy an average 10% profit increase. One policy, two outcomes. This is an illustration of the issues facing Chinese enterprises.

Good news?

For exporters, a tax rebate is the most directly supportive policy, but 2% is far less than what they expected in comparison with the speed of appreciation. According to some analysis, this tax rebate can only bring about RMB 6.165 billion-13.387 billion this year.

Even if 2% is enough for this year, then who will be the superstar for the next or next ten years? Low technique, bad diversity and no international brand, these are most accurate words to describe the textile industry now. The Swiss sell watches by quality, the Frenchman sell perfume by scent and the Chinese sell their garments by utility. Under continuous pressure, Chinese enterprises will be eliminated in the fierce international competition.

Conclusion

One sentence that can describe the current situation of the Chinese textile industry is that in short, a quick blood transfusion could help many factories survive, but they need to transform their business style to thrive. As an investor, you should also pay close attention to the Guide of Industrial Catalog of Foreign Investors as well as other laws and regulations issued by the Ministry of Commerce , MOF and SAT, in order to make a good deal.