Should Chinese Exporters Lower Prices After VAT Cut?

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Should Chinese Exporters Lower Prices After VAT Cut?

The annual National People’s Congress(NPC) ended and important news released: cut the value-added tax (VAT) rate for manufacturers from 16 per cent to 13 per cent this year, our Premier Li Keqiang announced early March. –Will it lead to lower price for importer or buyers?

Secretary general of the Beijing-based China Enterprise Institute, Tang 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. But the cut in the VAT rate “remains small (compared to corporate expectations)”, 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.

VAT rate has been lowered from 17% to 16% last year, now it will be 13% and formally carry out from 1st April 2019. For transport and construction firms VAT rate cut from 10% to 9%, while whose current 6% VAT will remain the same unchanged. It’s really good news to ease some burden on the shoulder.

China’s current three-tiered VAT tax system also planed to be simplified, since almost half of countries that have adopted VAT taxation only have one tier, the report said. ​Premier 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. ​​Maybe our next VAT cut will get to 10% too the same as our other Asian brothers.

VAT cut is indeed good news, but for us the exporters, the related Tax rebate rate will be adjusted (lower) accordingly which is really bad news. For most of guys, who greatly rely the Tax rebate as the main margin, the news eventually make us very nervous and worried recent days.

It’s reasonable and predicable though, just as a friend asked: for example if their product tax rebate rate is 15% (which is a very high level), if VAT lowered to 13%, it would be funny if they pay only 13% while get 15% rebate. It looks not realistic at all, right?

Dear purchasers / buyers, if you think after 3% VAT cut, Chinese manufacturer / exporters should lower 3% of the selling price, then it’s totally wrong. Because this 3% VAT cut is only the value-added part, the overall is less than 3%, while if our tax rebate rate cut off 3%, it’s overall 3%. As a whole, we won’t get any advantages but loss some margin finally, that’s why there are already ​​some brave guys informing a new price-up from next month 1st April 2019 the same date new policy implement, check below photos:

Chinese manufacturers’ profit margin is really poor while we have to keep updating equipment and expand marketing input. The real economy is so difficult nowadays, that China lowers 2019 GDP growth target to 6-6.5 per cent range. 2018 China GDP growth 6.6%, already the lowest during recent 28 years.

When reporter interviewed, a Zhejiang-based manufacturer Jason told: “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 RMB appreciates past 6.5 against the dollar, then the tax cut is probably meaningless.”

We can’t agree more, compared with tax cut factor, RMB appreciation is a much bigger killer, or NO.1 margin killer besides raw materials / labor cost raising. Let’s put an example: 2018 year end USD against RMB rate is around 6.9, now it’s about 6.7, then exporter’s 3% margin disappeared. If the rate further lower down to 6.2-6.3, then exporter’s 10% margin would vaporize. How much margin an ordinary Chinese manufacturer / importer could have? Remember we are at the bottom of “smiling Curve”. Actually we are more sensitive to RMB appreciation, which could eat out all our profit.

While the trend for RMB appreciation is unstoppable. US-China trade war will last another 10 years, or even 20 years. During the process as Chinese market opening more wider, China becoming more and more a heavy player in the international market, RMB will definitely keep appreciating without any doubt. It is predicted the USD/RMB rate will get to: 6.0-6.3 during 2020; ever further around 5.8 in 2021; more terrible about 5.5 in 2023; and probably 5.0 when 2025……

As an exporter, we can’t imagine how much high the price will raise then, how the exporting life could be under such low rate, and how many companies could survive if we don’t improve our core values: improve better quality products, improve our service, and improve ourselves to adapt to the fierce competition.

If we are still alive since rate around 8.0 in 2005 falling to around 7.0, now 6.7, we have no reasons to believe we can’t survive in another RMB rate battle to 5.0-5.5.

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. So don’t expect the cut tax to turn the economy around. It never did in the past.

For dear buyers / importers, please don’t expect price down either, China’s VAT cut definitely not lead to lower prices. If your suppliers still haven’t informed a deadline to raise price, you should be happy for that. While our suggestions to all of our customers are:

1, Try to place all the recent 3 months shower enclosures | bathtubs | vinyl flooring | hand tools anything orders ASAP, and it’s better to manage the shipment within the following 3 months, Government give us 3 months as buffer period.

2, To guarantee a stable price, fix the price or just plan a whole year’s order in advance if possible in case USD/RMB Rate fluctuate too much and lead to price up suddenly, in this way, you shift all the uncertainties to your dear suppliers.

3, For potential customers who are still hesitating, just hurry up to place your first PO to confirm down the prices within the quotation valid date. As a future long-term based partner, usually we won’t change prices easily except we really can’t take it any more, this helps you to win a better start up benefit. After all the boots to the ground and price quotation becomes invalid, we are afraid there might be an around 5% price up.

Oh, why should we tell this here? It should be top secret only be whispered to our dearest partners.

By | 2019-03-22T20:33:35+00:00 March 22nd, 2019|未分类|Comments Off on Should Chinese Exporters Lower Prices After VAT Cut?

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