New restrictions on processing trade come into effect

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China announced a new policy 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 on July 23.

The new policy, which took effect August 23, restricts the processing trade of 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 labor-intensive industries.

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

The new policy targets high polluting and energy consuming industries in China’s developed eastern regions, including Shanghai, Jiangsu, Zhejiang, Beijing, Tianjin, Liaoning, Hebei, Shandong, Fujian and Guangdong. Enterprises in these regions which did not gain export rights as of July 23, 2007 are not allowed to engage in processing trade of products under the restricted category.

The booming Chinese 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. More than 90,000 processing trade firms operate on the mainland, nearly 70,000 of them in Guangdong province according to the National Bureau of Statistics.

In its continued efforts to develop the 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.

Companies may also consider the following measures:

  • split one contract into two contracts (one is for restricted category, another one is for un-restricted category) with smaller amounts to reduce the deposit
  • Notice 44 is not applicable to the companies located in special custom zones, such as an Export Processing Zone (EPZ) and a Free Trade Zone (FTZ). Enterprises may consider relocating to these special custom zones

China is looking to optimize their export commodity structure, and the new restrictions, combined with the recent reductions in VAT rates is an attempt to tighten the controls on the export of high polluting, high energy and resource consuming products, as well as ease trade frictions and outside pressure due to the country’s trade surplus.

Beijing will likely continue to adjust the catalogue of processing-trade products subjected to restrictions and bans as it seeks to reign in its trade surplus.

For business advisory services, assistance establishing, structuring or operating a business and contract drafting in South China, please contact Alberto Vettoretti in the Shenzhen office of Dezan Shira & Associates, tel. [755] 2583 6180 or Rosario Di Maggio in the Guangzhou office of Dezan Shira & Associates, tel. [20] 3825 1725.