CHINA ACTS TO BOOST EXPORTS, SUBSTITUTE FOR

UNCLAS SECTION 01 OF 04 BEIJING 000643

SENSITIVE
SIPDIS

STATE FOR EAP/CM SHAWN FLATT AND EEB/TPP WILLIAM
CRAFT EEB/TPP/BTA ERIK MAGDANZ
STATE PASS USTR FOR TIM STRATFORD
USDOC FOR IRA KASOFF/NICOLLE MELCHER (5130)
USDOC FOR ITA/MAC/OCEA (4420)
TREASURY FOR OASIA/ROBERT DOHNER
NSC FOR JIM LOI
GENEVA PASS USTR

E.O. 12958: N/A
TAGS: ECON ETRD EFIN WTRO CH
SUBJECT: CHINA ACTS TO BOOST EXPORTS, SUBSTITUTE FOR
IMPORTS

REFS: A.) Beijing 0433 B.) Beijing 0151 C.) Beijing
0326 D. Beijing 0425 E.) Beijing 0443 E.) Beijing
0515 F.) Beijing 00583 G.) Beijing 0585 H.) Beijing
0590

(U) This cable is Sensitive But Unclassified.
Please protect accordingly.


1. (SBU) Summary: In the past few months, China has
implemented an array of measures at the national
level designed to boost exports, promote use of
domestic products and dampen demand for imports (Ref
A). In some sectors (textiles, steel, light
industry and petrochemicals, and machinery),the
measures complement industrial restructuring
programs that seek to expand domestic demand,
protect employment, and revitalize industries hit
hardest by the global financial crisis (Reftels B-G).
The new measures include new export restrictions on
key inputs to steel production, elimination of duty-
free status for some imports, increases in export
value-added tax (VAT) rebates and other measures to
improve export competitiveness on a wide range of
goods, and regulatory reforms to help exporters.
These moves, while not necessarily WTO non-compliant,
when combined with a proliferation of "buy local"
preferences at the sub-national level (Ref H),raise
questions as to whether China's evolving response to
the global financial crisis adheres to the spirit
and the letter of the its November 2008 pledge at
the G-20 Summit to avoid new barriers to trade and
investment. End Summary.

Keeping Input Prices Low by Restricting Exports


2. (SBU) In recent months, MOFCOM and other State
entities including the Tariff Commission and General
Administration of Customs have acted to restrict key
primary exports, especially those related to steel
production. Quotas or taxes on exports of these
inputs are designed to suppress domestic prices and
ensure supply of the inputs to producers and
exporters of downstream products that heavily use
these inputs. The effect is particularly acute on
inputs for which China is the major global supplier.
For example, China controls roughly sixty percent of
the global trade volume in coke and China is also a
key exporter of phosphate ores. Major new actions
affecting trade in coking coal, phosphate ores, and
certain manufactured goods (November - present) are:

-- Phosphate Ores: establishment of an export quota
of 1.5 million tons on phosphate ore and other
measures (Ministry of Commerce, announced November
10, 2008; effective January 1, 2009);

-- Ores: levying of an export tariff on 15 products
including barites, not chemically pure magnesium
oxide, talc, brown fused alumina cobalt tetroxide,
and some fluoride products. (Notice of the Tariff
Committee of the State Council concerning Adjustment
of Export Tariff (Shui Wei Hui [2008] Number 36
announced November 13, 2008; effective December 1,
2008);

-- Coke: reduction in the 2009 initial export quota
allocation for coke to 5.78 million tons, roughly 40%
below the comparable period in 2008 (Ministry of
Commerce, announced December 30, 2008; effective
January 1, 2009) [Note: While coke quota cuts went
beyond what was expected, they may not be filled due
to declining world demand. MOFCOM officials have
indicated to Emboff that the 2009 coke quota may yet
be revised upward when the next quota announcement
is released mid-year. End Note.]

Cutting Exporters' Costs


BEIJING 00000643 002 OF 004



3. (SBU) China has also lifted or reduced export
restrictions on some finished and semi-finished
products in an effort to improve the price
competitiveness of Chinese exports:

-- Export tariff eliminations: removal of export
tariffs on 102 products, including steel products
(cold and hot rolled plate, strip, wire, large steel
sections, alloy steel products and welded pipes;
chemical products (ammonium nitrate, ammonium
sulfate, and grain products (including corn, coarse
cereals and their powders); (Notice of the Tariff
Committee of the State Council concerning Adjustment
of Export Tariff (Shui Wei Hui [2008] Number 36
announced November 13, 2008; effective December 1,
2008);

-- Export tariff reductions: reduction in export
tariffs on 23 other products, primarily chemical
fertilizers and raw materials, some aluminum
products, wheat and rice and their powder; a
reduction in special export tariffs on nitrogenous
fertilizer and phosphate fertilizer and some raw
materials (total of 31 products); (Notice of the
Tariff Committee of the State Council concerning
Adjustment of Export Tariff (Shui Wei Hui [2008]
Number 36 announced November 13, 2008; effective
December 1, 2008);

Eliminating Import Duty Waivers


4. (SBU) In December, the State Council released a
revised "Catalogue of Products for Domestic
Investment Projects Ineligible for Duty-Free Import"
that adds 36 types of equipment to a list of imports
no longer eligible for duty-free status when used in
investment projects. (State Council, Notice of the
Tariff Commission of the State Council Concerning
Tariff Implementation Plan in 2009 (Shui Wei Hui
[2008] No. 40 announced December 15, 2008; effective
January 1, 2009 (2008 Adjustment) released jointly
December 17, 2008 by Ministry of Finance, National
Development and Reform Commission, General
Administration of Customs and State Administration
of Taxation). The State Council notice justified
the change by asserting that domestic products are
sufficient to meet current demand in the following
areas:

-- agricultural machinery

-- petrochemical equipment

-- coal mining equipment

-- power transmission equipment

-- port machinery

-- air-borne equipment

-- testing instruments

-- digitally controlled machine tools

[Note: Embassy understands that the import tariffs
on products in the revised catalog are not
necessarily "increased." The prevailing tariff rate
remains the same, but domestic projects are required
to pay the full amount instead of benefiting from an
import tariff exemption as was the case previously.
End Note.]

VAT Rebates on Manufactured Goods Increased to Spur
Exports


5. (SBU) China levies a VAT on all domestic and
imported input purchases, as well as all processing,

BEIJING 00000643 003 OF 004


repairing and replacement services at either 13% or
17% level, and subsequently refunds a varying amount
of that tax for goods exported. Increases in export
VAT rebates are intended to favor designated sectors
and may also be used to direct and monitor economic
activities. As part of its ongoing VAT reforms,
China increased VAT rebates on a variety of items at
least three times in 2008: in August, November and
December and twice in 2009 as well. The Ministry of
Finance explained one of the larger rebates hikes by
noting that "The move will help ease the sufferings
of Chinese exporters and boost the country's
confidence in fighting the financial crisis." Most
recent increases in VAT rebates include:

-- February 2009 - Textiles: Export VAT rebates on
textile and apparel products increased from 14 to 15
percent, following on from three prior increases in

2008. At the time, MOFCOM stated that the purpose
of the increase was to reduce exporters' costs and
support the textile industry. (Ministry of Finance
Cai Shui [2009] Number 14, announced February 5,
2009; effective date retroactive to January 1, 2009.)

-- January 2009 - Electronics: Export VAT rebates
were increased on a broad range of electronic and
high-tech goods, including 553 types of high-tech
and high value-added products ranging from
industrial robots to aviation navigation systems as
well as motorcycles and sewing machines. Rebates
for inertial navigation instruments for airplanes,
gyroscopes, instruments and apparatus for measuring
or detecting ionizing radiations, nuclear reactors
and industrial robots from 13 percent or 14 percent
to 17 percent; motorcycles, sewing machines and
electric conductors from 11 percent or 13 percent to
14 percent (Ministry of Finance, Cai Shui [2008]
Number 177 dated December 29, 2008; effective
January 1, 2009.)

-- December 2008 - Labor-Intensive Goods: To help
support industrial restructuring, export VAT rebates
were increased on a diverse range of 3,770 labor-
intensive products estimated to represent 27.9
percent of the country's total exports. Products
include: rubber and forestry goods (from 5 percent
to 9 percent); moulds and glassware (from 5 percent
to 11 percent); certain aquatic products (from 5
percent to 13 percent); carry bags, footwear, hats,
umbrellas, furniture, bedding products, lights and
clocks (from 11 percent to 13 percent); chemical
products, stone, nonferrous metal products (from 5
percent or 9 percent to 11 percent or 13 percent);
some electromechanical products (from 9 percent to
11 percent, or from 11 percent to 13 percent, or
from 13 percent to 14 percent (Ministry of Finance,
Cai Shui [2008] Number 144 dated November 17, 2008;
effective December 1, 2008.)

In addition, the State Council in this period
confirmed in VAT interim regulations that there is a
blanket presumption that "for taxpayers exporting
goods, the tax rate shall be 0 percent, unless
otherwise specified by the State Council." (State
Council Decree Number 538 "Interim Regulations of
the People's Republic of China on Value Added Tax",
dated November 10, 2008, effective January 1, 2009).

Lifting Restrictions on Re-exports


6. (SBU) In another move to promote exports,
starting February 1 some 1,730 ten-digit tariff
lines were removed from the export-restricted
catalog of the Ministry of Commerce and General
Administration of Customs (Notice Number 44 [2007])
"Catalogue of Commodities Prohibited for Processing
Trade", lifting prior restrictions on these low-
value-added exports by allowing them to be imported

BEIJING 00000643 004 OF 004


on a bonded basis free of customs duty and VAT if
bound for re-export. Products deleted from the
catalog and therefore eligible for processing trade
include plastic material products, plastic products,
wood products, and textile products. After the
adjustment, export-restricted commodities comprise
500 tariff lines which include 106 commodities
restricted for export and 394 commodities restricted
for import. (Ministry of Commerce and General
Administration of Customs Notice 120 [2008]
announced December 31, 2008; effective February 1,
2009).


7. (SBU) Comment:

China's response to the global economic slowdown is
comprised of three main parts: a large (USD 600
billion) simulus package focused primarily on
infrastructure spending; implementation of ten
industry support/revitalization plans to help key
sectors affected by the slowdown; tax relief
primarily for business and the series of measures
described above intended to promote exports, ease
costs of producers in the export sector and reduce
imports. China's economy remains a transitional one
dominated by national and local-level state-owned
enterprises (SOEs). The trade-related measures
detailed above all serve to bolster exports in the
face of China's rapidly declining export sector.
While none of China's policy response to the
economic slowdown appears blatantly inconsistent
with its WTO commitments, the moves do raise concern
over whether China is complying with the spirit and
letter of its November 2008 commitment at the G-20
Summit to avoid new protectionist actions.


8. (U) This cable was compiled with contributions
from Embassy economic elements including Econ, FCS,
ITA/MAC, and USTR.

PICCUTA