Reuters Edge

China adjusts taxes as export worries weigh

BEIJING (Reuters) - Chinese commodity tax changes unveiled this week reveal a delicate re-balancing to help out some struggling industries, especially steel, without abandoning a long-term goal to move domestic industry up the value chain.

The reduced taxes, effective December 1, represent a retreat from China’s dismantling of a tax structure designed to promote export-led growth, and are a defensive move against the strains to China’s economy of the global financial crisis.

The changes still promote value-added production, for instance of flour or higher-end steel products, at the expense of the most basic industry. Reductions in grains and flour export taxes help prevent fast-falling grains prices from discouraging farmers and endangering China’s food security.

Data released on Friday shows that Chinese capital spending was lower than expected in October, reflecting a downturn in the property market and factory production, which together account for more than half of capital investment.

“We estimate that there’s been an 8 million tonne per month demand destruction in steel compared with this spring, which works out to about 20 percent,” said a steel analyst at a multinational firm.

High steel export prices in the early summer helped mask a sharp deterioration in domestic Chinese steel demand, but Chinese steel prices have collapsed, and many mills announced output cuts, after the export market virtually disappeared as a global financial crisis spread.

October steel exports, at 4.6 million tonnes, were 31 percent below September levels and well below the average export of 5.4 million tonnes a month in the year through September.


Central planners in Beijing have striven unsuccessfully for years to force smaller mills, which are often more polluting and less energy-efficient, out of business. The new tax changes, combined with poor profits and more stringent environmental regulations, may finally succeed in that goal.

Earlier in the week, China said it would raise the value-added tax on all minerals, including iron ore, to 17 percent from 13 percent.

While mills and metals smelters can pass through VAT to customers, the higher rates tie up cash and make it harder for smaller mills and smelters, which constantly struggle with cash flow.

Some metals traders expect China to soon announce bigger VAT rebates for some metals products exporters, which like the lower export taxes on cold rolled and galvanized steel, will help higher-quality producers while continuing to squeeze those at the low end of the chain.

The world’s largest steel exporter will also scrap export taxes on hot-rolled steel, section steel and steel rods and wires, according to a document posted on the ministry’s website,

“The move may trigger regional steel mills to cut prices as Chinese products, already among the cheapest in the world, will gain further price competitiveness. But it’s positive that rebar is excluded from the list of items with zero export tax,” said Kim Hyun-tae, a Hyundai Securities analyst.

Taxes on rebar, a relatively cheap steel product that is already in oversupply in China, have been left unchanged in an effort to force smaller, opportunistic steel mills to shut down permanently.

Increased high-end steel exports could cause tension with China’s trading partners.

“The move will increase steel exports out of China to Japan and South Korea and may lead to further price declines as Chinese products are cheaper,” said Jung Jiyun, a Hi Investment & Securities analyst in Seoul.

“But I don’t expect exports to increase dramatically because demand is not there.”

Additional reporting by Alfred Cang in SHANGHAI, Miyoung Kim in SEOUL, and Niu Shuping in BEIJING; Editing by Michael Urquhart