China allows small manufacturers to defer tax to ease pressure of rising costs

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China’s small and medium-sized manufacturers will see their taxes deferred for three months from November to help them cope with the high price of raw materials and surging production costs, the State Council said on Wednesday.

The smallest manufacturers, referred to those with annual sales revenue less than 20 million yuan ($3.13 million), will have all of their taxes deferred for the period, while 50 per cent of taxes will be deferred for manufacturers that earn 20 million yuan to 400 million yuan a year.

Given the impact of high commodity prices and surging production costs, in particular on manufacturing companies, the authority will step up support in a market-oriented and inclusive way to help ease their difficulties, stabilize market expectations and employment and promote stable industrial operation, the State Council said after a meeting chaired by Premier Li Keqiang, according to the official Xinhua News Agency.

“Faced with the severe and complex domestic and international situation, we must promptly study the next large-scale tax-reduction policy for market entities,” it said.

It also said that Beijing was prepared to respond to the concerns of businesses, including by adjusting and fine-tuning its management of the economy “in a timely and targeted manner”.

The deferral of a range of taxes – including the corporate tax and value-added tax – will be from Monday through January, and will return a total of 200 billion yuan to the pockets of the country’s manufacturers, the State Council said.

Separately, the government will also allow coal-fired power companies and heating firms to defer their tax payments in the fourth quarter, amounting to around 17 billion yuan, which would help them with operational difficulties, the State Council said.

Downstream manufacturers in China’s private sector have been hit hard by high commodity prices, which have pushed the nation’s producer price index inflation to a 26-year high.

Productivity has also suffered amid a power crunch, which was triggered by high coal prices and low coal inventory. Coal-fired power generators, which cannot raise electricity prices without government approval, have struggled to make ends meet, leading to power rationing that has reduced the supply across the country.

According to statistics by Zhong Zhengsheng, chief economist at Ping An Securities, most of upstream and midstream raw material industries saw average two-year profit growth accelerate in the first three quarters of the year, while mid-stream manufacturing and downstream industries mostly saw profit growth slow down. Meanwhile, profit growth at state-owned enterprises was faster than the overall growth rate, he said. “That means industrial profits further moved to up- and mid-stream industries and state-owned enterprises.”

The official manufacturing purchasing manager’s index (PMI), a survey of sentiment among factory owners, was at 49.6 in September – below 50, the threshold for contraction – compared with 50.1 in August, data from the National Bureau of Statistics showed.

However, manufacturing investment is still holding up, rising to 10 per cent year on year in September from 7.1 per cent in August, in line with China’s robust export growth.

China’s growth in the third quarter was weaker than expected at 4.9 per cent, down from 7.9 per cent in the second quarter and 18.3 per cent in the first quarter. Analysts expect a further slowdown in the economy as a result of a resurgence of Covid-19 cases putting a dent on consumption, along with a significant correction in the property market.

The State Council also said that tax exemptions on bond interest for foreign investors would be extended until the end of 2025 to promote more overseas investments in China’s bond market.

“To counteract the strong growth headwinds, we expect Beijing to step up monetary and fiscal easing, but it is unlikely to ease its unprecedented tightening measures on the property sector and industries with high carbon emissions and high energy intensity,” Nomura said in a research note on Monday.