China has long relied on export tax rebates to strengthen its export-driven economy, providing competitive advantages to manufacturers and exporters. However, recent policy adjustments may indicate a significant shift, gradually eliminating or reducing VAT rebates for certain export goods.

In 2023, the scale of China's export tax rebates reached CNY 1.7 trillion. Looking at specific product categories, 51% of China's exports accounted for more than 30% of global export shares, 16.5% of products accounted for over 50% of global export shares, and 9.1% of products accounted for more than 80% of global export shares. For industries that already hold a significant share of global exports, continuing to implement export tax rebates could ultimately lead to domestic Chinese enterprises using these rebates as a tool for price competition.

The Ministry of Finance of the People’s Republic of China recently announced the cancellation of the 13% VAT rebate for aluminum and copper exports, effective December 1st, 2024. Additionally, the rebate rate for some refined oil products, photovoltaics, batteries, and certain non-metallic mineral products will be reduced from 13% to 9%. These measures appear in contrast with China’s historically export-friendly VAT policies.

The gradual elimination of VAT rebates poses significant challenges for companies with low-profit margins that rely on China's export rebates to stay afloat. Historically, these rebates, which allowed for the recovery of certain VAT on relevant domestic purchases, effectively helped exporters maintain their competitiveness in global markets. Without such support, businesses may now receive fewer rebates and will likely need to increase their prices to maintain the same level of profitability. This could lead to the phasing out of enterprises that are solely dependent on export rebates.

For exporters in sectors such as aluminum and copper, where price sensitivity is particularly high, the loss of rebates could mean that operators will either have to absorb the increased cost burden or pass it on to buyers. Companies have already begun taking action, including renegotiating contracts and considering price increases to offset the financial strain. Such adjustments may come with short-term risks, as higher prices could make their products less attractive to international buyers. However, companies with strong core competitive advantages may ultimately benefit in the long run.  

For small and medium-sized enterprises (SMEs), the situation could be precarious. Smaller businesses often operate with limited financial flexibility and lack the resources to manage sudden changes in cost structures. For many SMEs, the end of VAT rebates could lead to shrinking profit margins or, in extreme cases, an exit from export markets altogether. Larger companies, while better equipped to weather the change, could still face strategic challenges in maintaining their competitiveness, particularly as international rivals step in to fill gaps that could be created in case of higher prices for Chinese exports.

From a broader perspective, the gradual elimination and reduction of VAT rebates for export goods could signify a significant shift in China’s trade strategy. With China spending over CNY 1.7 trillion on tax rebates in FY 2023, if this government expenditure has exacerbated domestic pricing competition, it is likely that the authorities do not want to see such effects in those industries. Additionally, we still believe that tax rebates may continue to apply to sectors like electric vehicles, the chip industry, and other high-tech fields, due to the high customs duties currently imposed on these products and also China’s growth direction would be very likely to focus on those fields. 

PHC  Advisory  is a company of  DP Group: an international professional services conglomerate of companies with approximately 100 experienced professionals worldwide. We offer comprehensive services in tax, accounting, and financial consulting, including financial supervision, financial audit, internal audit, internal control over financial reporting, and support for audited financial statements and annual audits, ensuring clients' financial transparency and compliance. 

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The content of this article is provided for informational purposes only, financial advice must be tailored to the specific circumstances on a case-by-case basis, and the contents of this article do not legally bind PHC Advisory with the reader in any way. 

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