REGULATORY UPDATE

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China recently announced new restrictions on processing trade in the east and south. Central and western China are looking more attractive as a result

----By Alberto Vettoretti and Rosario Di Maggio

China announced a new policy in late July restricting processing trade in an effort to reduce a growing trade surplus. As approved by the State Council, the Ministry of Commerce and the General Administration of Customs jointly issued Announcement No. 44 introducing a new catalogue of restricted commodities.

The new policy, which took effect nationwide August 23, will affect Guangdong province the most heavily. The new processing trade restricted catalogue adds 1,853 products, accounting for 15 percent of the total list of commodities held by customs. The newly restricted products included plastics, furniture and textiles and other labour-intensive industries.

"We are striving to improve the development of China's processing trade in a bid to promote trade balance and reduce trade surplus," said vice minister of commerce Wei Jianguo.

According to the Ministry of Commerce and the Ministry of Customs, enterprises engaged in the production of the affected products are required under the new policy to have guarantee deposits in Bank of China while registering their processing trade contracts with the authorities. The deposits are required to be equal to half or the total amount of import tax payable (including custom duties and import value-added tax) on bonded import raw materials.

Processing trade: What it is

Processing trade - the business activity of importing all or part of the raw and auxiliary materials, parts and components, accessories, and packaging materials from abroad in bond, then re-exporting the finished products after processing or assembly by enterprises within the mainland - is a major component of China's booming economy. It includes processing with supplied materials (when imported materials and parts are supplied by the foreign party which is also responsible for selling the finished products) and imported materials (when the business enterprise makes foreign exchange payment for the imported materials and parts and exports the finished products after processing).

The new policy targets high-polluting and energy-intensive industries in China's developed eastern regions, including Shanghai, Jiangsu, Zhejiang, Beijing, Tianjin, Liaoning, Hebei, Shandong, Fujian and Guangdong. Enterprises in these regions that did not gain export rights as of July 23 are not allowed to engage in processing trade of products under the restricted category.

China's economy, which has grown at over 10 percent for the last 15 years, has been largely driven by processing trade factories located in South China and Yangtze River Delta regions importing tax-deductible raw materials to manufacture finished products for export. Of the over 90,000 processing trade firms operating on the mainland, nearly 70,000 are located in Guangdong province according to the National Bureau of Statistics.

In its continued efforts to develop the country's central and western regions, which have not profited from China's economic surge, Beijing has stipulated that the new regulations will not affect enterprises operating in those regions.

"Processing trade manufacturers can alternatively move to central or western regions from south and east coasts to be exempted from the export restrictions," said Wang Qinhua, the Ministry of Commerce's industry director.

What to do about it

  • Companies may also consider the following measures: Try to reclassify the HS code of raw materials, semi-finished goods and finished goods to find the possible method of reducing the deposit when the company apply for the new contract.

  • Split one contract into two contracts (one for restricted categories and another for non-restricted categories) with smaller amounts to reduce the deposit.

  • Notice 44 is not applicable to the companies in special custom zones, such as export processing zones (EPZ) or free trade zones (FTZ). Firms may consider relocating to these special customs zones.

China is looking to optimise its export commodity structure, and the new restrictions, combined with the recent reductions in VAT rates, represent an attempt to tighten controls on the export of high-polluting and high-energy and resource-consuming products, as well as ease trade frictions and outside pressure arising from the country's trade surplus.

China's trade surplus reached US$112.53 billion (€82.5 billion) in the first half of 2007, rising more than 23 percent year-on-year. Processing trade accounted for 45 percent of the country's total value of imports and exports in the first six months of this year. It is also the main source of China's trade surplus, accounting for 90 percent of it, according to some estimates.

Beijing has said that China will adopt several major measures to promote the transformation and upgrading of processing trade enterprises; including improving the classification management of commodities in processing trade, optimising access control over processing trade enterprises, and promoting balanced and coordinated development of processing trade in the east, central and western parts of China by directing labour-intensive processing-trade production to the central and western regions.

The authors are Regional Partner and Senior Associate, respectively at business advisory and tax consultants Dezan Shira & Associates in Shenzhen.
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