SOURCE: Technomic Asia

August 15, 2007 12:40 ET

Western Importers Express Concerns Over China VAT Refund Policy Changes

Survey Shows Most Companies Expect Negative Impact From Changes, but Few Expect to Change Sourcing Plans

SHANGAI, CHINA--(Marketwire - August 15, 2007) - Most Western companies that import materials and products from China expect negative effects, including price increases, from China's new VAT refund rate policy, according to a recent survey. The survey, conducted by China strategy consulting firm Technomic Asia, examines the impact this new VAT policy is expected to have on affected companies.

The new VAT refund rate policy, announced by the Chinese government on June 19th, will reduce the amount of VAT refund Chinese exporters will receive. The scope of the new policy's impact will depend on the exporter's corporate structure and the type of product it exports, but this survey shows that this policy change will have a direct impact on the competitiveness of Chinese exports. Foreign and Chinese companies exporting from China, as well as Western companies using China as an export source for foreign market consumption, will be affected.

Some key findings from the survey:

--  Approximately 70 percent of respondents were not fully clear on the
    potential impact from the new VAT policy. Most anticipate some negative
    fallout, but only 25 percent would expect "very negative" economic
    consequences.
--  Virtually all respondents expect their current suppliers to raise
    prices. More than 60 percent of respondents expect prices to go up by 3
    percent to 5 percent or more.
--  60 percent of respondents believe the VAT change will have greater
    consequences than the appreciation of the RMB, China's currency, this year.
--  Only 10 percent intend to shift supply sources to other countries,
    though roughly 40 percent are still uncertain and few who intend to
    establish manufacturing in China will alter their strategy as a result of
    the VAT refund change.
--  A number of different countermeasures will be used to offset the
    impact of the VAT policy. More than half intend to "share the burden" with
    existing suppliers. Some respondents even see potential advantage over
    competition as a result of policy change, notably over low-end Chinese
    exporters.
    

"This policy change is a major step by the Chinese government to level the playing field, and it will clearly affect the weaker suppliers," said Steve Ganster, managing director of Technomic Asia. "But in the Western markets where Chinese suppliers enjoy a dominant market share, those suppliers will have the power to pass on the higher costs to their customers."

These findings reflect a survey of 82 Western companies currently sourcing products or materials from China. A summary of survey results is available by contacting Technomic Asia at info@technomicasia.com.

About Technomic Asia

Technomic Asia is a strategic consultancy with more than 20 years of experience helping clients plan and execute Asian growth strategies. Technomic Asia helps companies enter the Asian market or expand their business by providing critical market insight, an understanding of business potential and assistance in designing the optimum strategy for success. Technomic Asia's Steven Ganster and Kent Kedl are co-authors of "The China Ready Company," a book that details the formation of a successful China strategy. (www.technomicasia.com) (www.chinareadycompany.com)

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