China's Latest Attempt to Cut Its Trade Surplus

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Excerpt from our One Page Annotated Wall Street Journal Summary (receive it by email every morning by signing up here):

China Revamps Taxes on Exports In Effort to Ease Trade Imbalance

  • Summary: China's trade surplus hit another monthly record in August at $18.8 billion, and its year-to-date surplus of $95.7 billion is almost as much as last year's full year surplus of $101.9 billion. China now plans to use revised export tax rebates to encourage exports in IT, biotech, pharma, and heavy machinery over the low-end products that it is most synonymous with. Economists are skeptical of the impact of the new policy on its trade surplus. China charges a 17% VAT on almost everything made in-country, regardless if it's designated for export, but it also offers rebates depending on the product and industry. From now on however, rebates will be reduced for product categories such as: steel, some nonferrous metals, plastics, furniture, lighters, textiles, ceramics, cement, and glassware. And a full rebate will be given to IT, biotech, pharma, and heavy machinery products.
  • Comment on related stocks/ETFs: China's new tax policy is a positive development for the stocks of companies involved in manufacturing and exporting higher value added products from China. China's trade surplus data was released earlier this week and coverage by the WSJ mentioned an interesting analysis by Lehman Brothers (LEH). In short, all the focus on the value of the Chinese yuan could be of lesser importance for China's exporters since fewer of its foreign-funded exporters are in price-sensitive industries. Thus, even if the yuan strengthens and China's exports become more expensive, the cost of imports (such as components for electronic devices) will decrease, and actually help exporters higher up the value chain -- the same ones that will receive a full VAT rebate. Motorola (MOT) was mentioned in a WSJ article from Monday as an example of a U.S. company set to benefit from China's surging exports to Europe.

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