China Bolsters Supply Chains, Signaling ‘Our Doors Are Open for Trade’
As Chinese factories open their doors, American buyers close theirs. Amid the backdrop of waning foreign demand, Beijing has introduced several critical trade-friendly policies intended to support the resumption of ordinary Chinese operations. Once the coronavirus outbreak subsides and global demand recovers, China may be the only viable trading partner left standing.
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Despite Beijing’s best efforts to keep the economy afloat amid the coronavirus pandemic, the near-term outlook for the Chinese economy remains grim. China’s economy is still heavily dependent on manufacturing, with the industrial sector contributing approximately 40% of China’s annual GDP and 30% of domestic employment. In January and February 2020, Chinese industrial firms saw their profits drop 38% year-over-year, adding significant pressure to an already slowing economy. Poignantly, one-fifth of annual growth is export-driven, and due to waning foreign demand, the rebound of this sector will not be as rapid or “V-shaped” as expected. While Chinese factories are opening their doors, American buyers are closing theirs. To combat the downward economic pressure from waning demand, China has taken a calculated approach with a clear objective: keep businesses afloat to capitalize on post-coronavirus trade opportunities.
Although China has elected against massive stimulus packages that many Western counterparts have enacted in response to the COVID-19 pandemic, it has still been active in initiating important countermeasures. Among the more notable policy proposals is a plan to alleviate cash flow and insolvency issues for firms in the short-term while bolstering China’s position as a key global supplier over the long-term through stable foreign trade. During a State Council meeting on March 10, 2020, Premier Li Keqiang announced numerous measures intended to support these objectives and, in the weeks following, both the public and private sector have answered the call.
Focusing on the Present: VAT Rebates, Trade Financing, and Export Insurance
Increased cash flow through VAT rebates
Premier Li called for local government bureaus to focus on promptly distributing value-added tax (VAT) rebates to traders and distributors at increased rates. VAT is commonly levied across most consumer import products and many export products at varied rates. As of March 20, 2020, domestic and foreign traders in China have benefited from increased tax rebates on 1,464 products ( full list in Chinese), with approximately two-thirds of goods receiving refunds of 13% and the remainder at 9%. Those trading pandemic prevention materials, such as PPE, will have customs fees waived.
VAT rebates will help exporters stay afloat in the short-term and aid in the supply of critical medical supplies overseas. Many businesses currently face cash constraints and the additional rebates will help to resume operations and retain employees. It is unclear whether China will maintain these higher rebates in the longer-term; however, past trends suggest that Beijing intends to expand trade by reducing VAT and VAT rebates over time. In March 2019, the Ministry of Finance cut VAT and VAT rebates by approximately three percentage points — possibly indicating that Beijing looks to gradually soften its trade policies.
Access to capital through lenient trade financing
The State Council called for loan providers and financial institutions to increase leniency for outstanding loans belonging to importers and exporters. Specifically, Premier Li advised to allow loan principal and interest payment deferments for SMEs suffering from hardships due to the coronavirus pandemic. Furthermore, banks are expected to provide additional trade financing where feasible in order to boost exports.
China provides over 15% of the world’s exports and requires strong trade financing capabilities to lubricate the global supply chain. China’s Bank of Communications (“BOC”) recently answered the call and launched an online trade financing platform to facilitate transactions with increased efficiency. BOC claims that traders can now open a financing application in 20 minutes or less.
Additionally, China’s CITIC Bank is collaborating with local banks to extend coverage for traders with annual exports of US$5 million or below and up to US$30 million. Chinese distributors are known for extremely deep-tier supply chains. Insolvency at any level could cripple entire networks and, as such, Beijing intends to inject liquidity indiscriminately to maintain structural integrity and prepare for an influx of global demand once the coronavirus subsides.
Business confidence through short-term credit export insurance
Premier Li called for insurance agencies to offer additional short-term export credit insurance coverage and temporarily reduce rates and fees. Export credit insurance mitigates payment risk for traders by insuring account receivables in cases of delayed payment or nonpayment due to political, economic, or environmental risk or customer bankruptcy. In response to the State Council’s request, Sinosure, China’s largest export credit insurance agency, responded with 23 measures to boost short-term credit insurance.
Sinosure revamped its policy offerings to include additional short-term packages that cover a myriad of cases, including currency risk, pre-export coverage, and comprehensive coverage. In most cases of customer insolvency, political loss, or customer refusal to accept goods, policy holders will be entitled to 90% repayment of losses.
Trade-friendly practices like increased VAT rebates, easier access to trade financing, and comprehensive credit export insurance are intended to support SME operations while propping up foreign trade through the distribution of urgent medical materials across the globe. As reeling Western economies induce demand-side shocks in Chinese markets, increased cash flow, easier access to liquidity, and heightened business confidence will be paramount to returning to operational normalcy and preparing for trade at elevated levels.
Looking to the Future: the Canton Spring Fair
Among Premier Li’s proposals was a more symbolic point: preparing for the Canton Spring Fair. The biannual fair is China’s largest and oldest trade show for importers, exporters, and distributors. The spring session from 2019 attracted 200,000 buyers from over 200 countries. Although the event is currently postponed until further notice due to coronavirus concerns, the Chinese government is sending a clear message on the importance of preparing to become the premier hub for foreign trade and supply chain growth once the pandemic subsides.
Beijing’s adamance towards hosting the event has received criticism in recent weeks as attending merchants would face mandatory self-paid quarantine requirements and risk contracting the virus. Regardless, in an attempt to signal its darkest days are in the past, Beijing continues to push forward. While economies around the globe succumb to the coronavirus pandemic, China has a clear message — ‘our doors are open for trade.’
The Chinese Dream: ‘Un-diversification’ of Supply Chains
In recent months, the US government has strongly advocated the need for American businesses to diversify their supply chains. After the United States struggled to acquire necessary medical supplies, PPE, and pandemic prevention equipment in the early stages of the coronavirus outbreak, US Trade Representative Robert Lighthizer said at the G20 forum on March 30, 2020 , “…we are learning in this crisis that over-dependence on other countries as a source of cheap medical products and supplies has created a strategic vulnerability to our economy.” The message has resonated with many countries across the globe that face similarly grim realities.
However, as the tides change and China begins its return to normalcy, Beijing’s gaze is fixed on bolstering foreign trade and, more poignantly, solidifying its position as the world’s premier export hub. Should other manufacturing-based economies succumb to the pressure of the coronavirus, China could become the only viable trading partner in the short-term — and US businesses may find themselves with no alternative options. US lawmakers have proposed policy solutions to this over-dependence, such as prohibiting pharmaceutical and medical imports from China; however, should these measures fail to pass, it is possible that China’s short-term market dominance could become the new global normal.
Originally published at https://www.thechinaguys.com on April 7, 2020.