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End of duty benefits could deeply impact Chinese manufacturers

Production in “the world’s factory” could be severely affected by a mandate laid out by the Chinese government in July, according to a Hong Kong shippers’ advocate.
   Sunny Ho, executive director of the Hong Kong Shippers’ Council, in an interview with American Shipper in Hong Kong Monday, said Beijing is trying to rein in export volumes in Guangdong province in a bid to ease political tensions with China’s Western trading partners, most of whom have enormous trade imbalances with the Asian power.

Sunny Ho

In July, China invoked a statute that will end a benefit for manufacturers in Guangdong (as well as Shanghai and other coastal export-producing provinces) called outward processing trade. Started in the 1980s to encourage foreign investment in China’s manufacturing sector from Hong Kong and Taiwan, OPT allows manufacturers to waive payment of duties they owe on imported components and raw materials that will go into production of assembled products that will later be exported out of China.
Companies that don’t engage in OPT have to pay import duties, then get the duties refunded from the government once the finished goods are exported.

But in a bid to discourage growth in manufacturing in the Pearl and Yangtze river delta regions, Beijing has ended the scheme in those provinces. The plan has other goals aside from appeasing China’s trading partners. The central government is also attempting to encourage manufacturing development of its interior provinces, which has lagged behind the coastal provinces. A third goal is to focus China’s established manufacturing regions on production of higher-end goods. The July decree includes some 1,700 products for which OPT will no longer be allowed, most of which are low-value items like garments or commodities like stainless steel.

Again, those companies that move their manufacturing sites to inland provinces, like Hunan, which borders Guangdong to the north, will be allowed to continue using OPT.

Ho said that the economic impact of ending OPT could be severe for factories that need all the working capital they can get. Having capital tied up in import duties that will be refunded later to them could force some to move or shut down, he said.

The government decree will group manufacturers in Guangdong and Shanghai into two brackets -- those that are considered good trading partners will have to pay 50 percent of the import duties up front, while the lowest tier will have to pay 100 percent of the duties.

Here’s how it might break down. It costs a toy manufacturer $10 to make a toy. Of that $10, $5 comes from the cost of importing the raw materials to produce the toy. On that $5, a manufacturer in Guangdong will now have to pay half of the import duty, which could be as high as 27 percent, only to have that money refunded when the finished product is exported. That means 65 cents, or 6.5 percent of the factory’s working capital, is tied up in refundable duties it previously never had to pay at all.

Ho said the list of items for which OPT will no longer be offered in China’s most successful provinces will likely be expanded to 4,000 in the coming months. Companies are expected to comply within six to 12 months.

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