Another Example of China Using VAT Rebates as an Economic Strategy

January 13, 2015


China spurs exports by giving VAT rebates to certain industries and products.  It also curtails exports by denying VAT rebates.

"Why would they ever deny VAT rebates if they want to continue being an export powerhouse?", you may ask.  There are probably a host of reasons all having to do with their industrial policy.  One is that they may want to curtail exporting low value products, like commodities, so they can build a valued added supply chain to export higher value products. 

The point is that the VAT is not some vanilla, no trade impact policy that other countries have in place.  See CPA's VAT/Border Consumption Tax piece here.

In this boron steel example below, China is suspending VAT rebates to begin - according to the article - shrinking capacity in the industry.

I've reprinted the article on boron steel below, but the point is that the mainstream economics notion that VAT makes no difference in trade flows is wrong. 

Here's the money quote from the article, if you don't want to read the whole thing, "The government ditched a tax rebate of as much as 13 percent on steel products that contain boron, effective this year."


China’s Steel Exports Reach Record Before Tax Rebate Dropped

By Alex Davis | Bloomberg | Jan 13, 2015

China’s steel exports jumped to a record in 2014 amid slowing domestic growth and before a tax change that’s expected to curb shipments this year.

The country shipped 93.78 million metric tons of steel products last year, 51 percent higher than 2013, according to data released by the customs administration today. Exports climbed 4.6 percent to 10.17 million tons in December, the highest monthly figure on record.

Cooling domestic demand from the construction industry prompted steel mills to turn to overseas buyers as the country grew at the slowest pace since 1990, according to economist projections. Exports are forecast to fall this year after the government canceled export tax rebates for steel alloys that contain boron, a chemical element.

“Steel exports are expected to be more volatile in 2015 than 2014, but more due to our outlook of weaker Chinese demand earlier in the year” before rising in the second half, Citigroup Inc. strategists including Ivan Szpakowski in Hong Kong said in a research note today. “Volumes are also sensitive to policy, including anti-dumping tariffs and export rebates.”

The government ditched a tax rebate of as much as 13 percent on steel products that contain boron, effective this year. Overseas steel sales will fall by 20 percent to 30 percent in the first quarter because of the rebate removal, according to Hu Yanping, a Beijing-based analyst with Custeel.com. Exports of boron-alloyed sheets, wire and rods accounted for 31 percent of China’s total steel exports in the first 11 months of 2014, the research company said.

Consolidate, Curtail

“There’s an intention to discourage further exports of Chinese lower-value steel products,” said Vanessa Lau, a senior research analyst at Sanford C. Bernstein & Co. in Hong Kong. “It’s a different way of the government asking for the industry to consolidate and curtail capacity over time.”

The country’s crude steel output rose 5 percent in the first 11 months of the year to 749 million tons, according to the latest figures from the National Bureau of Statistics. Production was sustained by plunging prices for iron ore, a feedstock for blast furnaces, which slumped 47 percent last year to $71.18 a dry metric ton.

Demand for finished steel in China slid 1 percent to 689 million tons in 2014, ending at least six years of growth, according to Morgan Stanley estimates in a Dec. 16 report. The bank forecasts it will rise to 697 million tons this year.

China’s crude steel capacity will be little changed this year at 1.1 billion tons as new additions must meet government requirements tied to its goal of closing polluting and inefficient industries, according to Bloomberg Intelligence.

The price of steel reinforcement-bar, used in construction, closed 0.4 percent higher at 2,511 yuan ($405) a ton on the Shanghai Futures Exchange. Prices dropped 27 percent last year.

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