Singapore — China’s plan to cut the rate of value added tax this year has been generally welcomed by commodity markets, as the lower cost burden would help businesses and stimulate sales at a time of slower economic growth.
Prime Minister Li Keqiang announced early Tuesday during an annual meeting of parliament that the government will cut the VAT rate for sectors including manufacturing to 13%, from 16%. VAT for the sectors including transportation and construction will be cut from 10% to 9%.
“It means that everything which currently attracts 16% or 10% VAT will benefit from the tax reduction,” a Shanghai-based accounting and finance executive with state-owned China National Offshore Oil Corporation said Tuesday. This was echoed by the general manager of a Beijing-based taxation service company.
However, market participants are waiting for more details to be released, especially the effective date at which the reduction will be implemented. According to an agent with the State Administration of Taxation, no official document or notice has been released regarding the planned VAT cut.
Manufacturing accounts for roughly 29% of Chinese GDP, according to the National Bureau of Statistics, and around 30% of the country’s steel consumption on most estimates. However, the sector has been contracting for the past three months, according to China’s two manufacturing purchasing managers’ indices.
China’s “official” manufacturing PMI, published by the National Bureau of Statistics, fell to a near three-year low of 49.2 points in February.
A steel mill official at privately owned steelmaker Shagang said the VAT cut was “good news” for the market as it would help reduce manufacturers’ costs, which should support steel demand. However, he noted that the impact on mills’ profits would continue to depend on market prices and conditions.
An official at Hangzhou Iron & Steel in eastern China said reduced receipts for China’s National Treasury as a result of lower VAT may hamper the country’s ability to provide further stimulus.
One mill said demand for auto sheet and white goods had improved significantly since January in anticipation of upcoming stimulus policies, such as VAT cuts, to be released in spring. Last year, automobile production in China fell for the first time since the early 1990s.
However, the announcement failed to excite futures markets, with the most active rebar contract on the Shanghai Futures Exchange dropping 1.3% during the morning trading session on Tuesday.
HELP TO BOOST OIL, GAS
“Overall, the widely expected stimulus programs announced by Premier Li will help improve the business environment and boost demand of oil products, particularly gasoline and diesel, and car sales in China,” head of S&P Global Analytics Asia Kang Wu said.
Most goods in the oil — including crude oil, gasoline, gasoil, naphtha, jet fuel and fuel oil — will see the VAT reduced to 13%, from 16% currently.
Meanwhile, LPG and gas, which are currently subjected to 10% VAT, will be cut to 9%.
The VAT for the transportation and construction sectors, which consume gasoil, fuel oil and jet fuel, will be reduced to 9%, from 10% currently.
“The tax reduction will help to boost enterprises’ cash flow,” the executive added.
A Beijing-based LPG trader said the move to cut the VAT reduces the financial burden on enterprises, and believes the benefit will trickle downstream, which is expected to stimulate market demand.
However, Oriental Energy, China’s biggest LPG importer and PDH plants’ operator, said the move will have limited impact on their profit as the cut is only by one percentage point.
PETCHEMS SEES LOCAL SELL-OFF
A Paraxylene trader said the changes in the VAT was likely to lead to an increase in market liquidity as the announcement would trigger a sell-off in the domestic Chinese market, with participants expected to buy back these domestic cargoes at lower prices once the VAT cut is implemented.
As the date at which the VAT changes will be implemented has yet to be announced, the market is likely to see an increase in demand for imported paraxylene.
Followed by renewed demand for imports, leading to increased market liquidity.
“Logically it will trigger people to sell cargoes in the domestic yuan market. Then they will buy back cheaper US Dollar cargoes,” the trader said.
China is the world’s largest importer of PX at 15.9 million mt in 2018, according to China customs data. PX is the feedstock to produce purified terephthalic acid, or PTA.
In a possible reaction to the VAT announcement, PTA futures on the Zhengzhou Commodity Exchange fell Yuan 62/mt during the morning trading session on Tuesday to Yuan 6,550/mt at 0325 GMT.
The futures prices rebounded later in the afternoon though due to news of unexpected plant outages in China.
PTA is one of the feedstock to produce polyester. “It is good news for the overall manufacturing sector in China.
But it could lead to falling commodities’ prices in the short term with market expectations of lower cost and low prices, which is already reflected in the fall of the commodities futures market this morning,” a Chinese PTA producer said.
“It is definitely good news for manufacturers with the reduction in operating costs. However, it is too early to say how significant the positive impact is to our business, because it could potentially lead to more competition,” a Chinese polyethylene terephthalate, or PET, producer said.
— Staff, [email protected]
— Edited by Alisdair Bowles, [email protected]
Source: S&P Global Platts
