Many exporters of processed goods will have a hard time this summer as government policies force them to give up labor-intensive, high-polluting products and climb the value chain.
The Ministry of Commerce (MOFCOM) and the General Administration of Customs said last week it would expand the catalog of processed goods that are subject to the export limit.
That means some manufacturers who import raw materials into China for use in products that will in turn be shipped abroad will have to deposit half of their payable levies, including duty and value-added tax in the Bank of China, Customs' designated bank.
The new policy will take effect from August 23. It covers 1,853 products in plastics, furniture and textiles and other labor-intensive industries, accounting for some 15 percent of the country's exports.
Wang Qinhua, director of MOFCOM's Department of Mechanical, Electronic and Hi-Tech Industries, says more categories are expected to be included in the catalogue this year, and the government is also poised to raise limits on processed goods that take environmental protection and social responsibility into consideration.
The adjustment of the processed goods policy is targeted at controlling exports of polluting and resource-intensive as well as low value-added products to balance the country's foreign trade and ease conflicts resulting from the bloating trade surplus, according to the commerce ministry.
"The new policy will add to exporters' costs and will affect their cash flow, especially those in the labor-intensive part of the industry," Wang says. She also expects the new policy will force exporters to increase the value of their products, upgrade their technology and climb the industry chain.
Huang Yiping, an economist with Citigroup Inc, was quoted by Bloomberg as saying many companies in China are already moving up the technology ladder and value chain, and that "this new policy will only accelerate this process".
HK businesses hit
The new limit is set to add about 8 billion yuan to exporters' costs, 50 percent of which are backed by Hong Kong-based companies.
"Hong Kong-invested producers will probably be the hardest hit by this move," Wang says. "Due to the overall international trade situation, they will have to make the sacrifice and transform their structure. The government will provide some assistance and incentives to help them with this transition."
MOFCOM and the State Council sent delegations to Hong Kong in May and July to get feedback from the Hong Kong SAR government and 11 major industry bodies in the city before they made the decision.
According to Wang, the updated catalogue of restricted processed goods was originally scheduled to be published in May, but was postponed to July at the request of the Hong Kong government.
Companies have a transition period of up to a year to implement contracts signed before August 23.
According to the ministry's statement, the move targets high-polluting, energy-guzzling industries in China's eastern regions, including Beijing, Tianjin, Shanghai, Liaoning, Hebei, Shandong, Jiangsu, Zhejiang, Fujian and Guangdong. Western and central China are being encouraged to accept process manufacturers from the coastal provinces.
"Costs are comparatively low and human resources are abundant in western and central China, so it is an alternative for labor-intensive sectors," Wang says. "These regions also welcome certain process businesses that are restricted in eastern China."
She says companies that take on process manufacturers could overcome the short-term negative impact and lay a solid foundation for long-term development.
China has seen its trade of processed goods jump from $2.5 billion in 1981 to $831.9 billion in 2006. Customs data shows the nation's processed goods trade in the first six months rose 17.6 percent to $440.9 billion, accounting for nearly half of China's imports and exports.
Facing bottlenecks
Although exports of processed goods have played a key role in China's development, it still faces bottlenecks, says Vice-Commerce Minister Wei Jianguo.
For example, China's processed goods are at the low end of the international value chain and the development is not balanced between the east and the west of the country, he says.
Processed good exports are also considered a major source of China's record high trade surplus, which hit $112.5 billion in the first half of this year.
The government has been trying to encourage transnational companies to shift their hi-tech and high value-added process businesses and research institutions to China since 2003, to advance its industrial capability.
