China announced it is slashing import tariffs on 187 consumer products starting next month.
The Finance Ministry pointed to the cuts being concentrated in products in short supply domestically which, it believes, will prompt local producers to improve quality. The items in the list which, includes baby formula, diapers, electric toothbrushes, medicines, cosmetics, coffee machines and whisky, are part of the broader category of consumer goods which account for roughly 30% of total Chinese imports. Of all 187 tariff reductions, the biggest was on vermouth and similar alcohols, like Martini, which were cut from 65% to 14%. The strangest was the cutting tariffs on electronic toilet seats, where domestic production must be truly appalling from a quality perspective, or markedly insufficient.
Notwithstanding the Finance Ministry’s comments, it raises the question whether China is responding to loud and frequently repeated complaints from Donald Trump about the Middle Kingdom’s unfair trade practices. In 2016, the US trade deficit with China was $347 billion and is expected to rise to around $370 billion in the current year. In October 2017, the US accounted for 70% of China’s total trade surplus. More from Bloomberg:
China’s new plan to slash import taxes on a wide range of consumer goods promises to boost the prospects of multinationals in the Chinese market, with everything from Procter & Gamble Co.’s baby diapers to Diageo Plc’s whiskey becoming more affordable to local consumers. Tariffs for 187 product categories will drop from an average 17.3 percent to 7.7 percent after the cut on Dec. 1, the Ministry of Finance said in a statement Friday, citing the need to help consumers access quality and specialty products which aren’t widely produced locally.
The new policy follows President Xi Jinping’s call at the October Communist Party conclave to meet citizens’ demands for improved living standards and better quality products in the world’s largest consumer market. Foreign multinationals stand to benefit as middle-class consumers seek out goods stamped with foreign brands, while the cuts also encourage consumers to spend at home rather than on trips overseas.
This latest move might also reflect, in part, China’s need to rebalance the main driver of economic growth from investment to consumption. Bloomberg noted the consumer angle:
“It’s aimed at three things: helping boost consumption in China, reforming the Chinese economy by continuing to open it up, and sending a signal to the world and particularly to the U.S. that it is committed to advancing global trade,” said Shane Oliver, head of investment strategy at AMP Capital Investors Ltd. in Sydney.
Robust consumption is an increasingly important stabilizer for the world’s second largest economy, as it shifts away from an investment- and export-led growth model. Domestic consumption contributed 64.5 percent of GDP in the first three quarters of 2017, according to the National Bureau of Statistics.
China is trying to encourage more foreign companies to sell locally and wants to give consumers more choice,” said Matthew Crabbe, Mintel International Group Ltd.’s director of Asia-Pacific research. “What it will do is help foreign products already within the market get more competitive.”
The South China Morning Post (SCMP) notes the growing preference among some Chinese consumers for foreign goods which they perceive to be of higher quality. This is likely to be an issue for the Chinese authorities.
The death of young children in a contaminated milk scandal in 2008 in China led to a huge increase in mainland Chinese buying baby milk powder overseas and particularly in Hong Kong. Meanwhile, 42 million Chinese bought foreign products online last year, spending about 1.2 trillion yuan (US$182 billion) , according to the Hangzhou-based China Electronic Commerce Research Centre. The number of shoppers is expected to reach 59 million this year and the value of purchases to rise to 1.85 trillion yuan, the industry consultancy said.
With tariffs on some types of baby formula cut to zero, there were sharp losses in Chinese dairy stocks. Inner Mongolia Yili retreated as much as 5.85 before closing 2.0% lower, China Modern Dairy Holdings also closed 2.0% down after losing as much as 2.6%. Chinese food stocks, such as Henan Shuanghui Investment & Development and Muyuan Foodstuff were sharply lower on the news but recovered later in the day, helped by the broader Chinese equity market.
Europe, a big exporter to China, saw its main consumer stocks respond favourably to the announcement on the open of trading. The Stoxx 600 Food and Beverage index rose by 0.7% and was the biggest gainer in sector terms - with Danone +1.4%, Pernod Ricard +1%, Diageo +0.9% and Nestle +0.6%. While taxes for some medicines, such as antibiotic and insulin products, were reduced from 6%to 2%, major European pharmaceuticals stocks, like Novartis and Glaxo SmithKline ere marked lower in the morning session. As Bloomberg notes, some of the biggest overseas beneficiaries are expected to be P&G, Danone and Nestle.
Among the foreign companies poised to benefit is Procter & Gamble, which gets 8 percent of its sales from Greater China. P&G, the owner of brands such as Crest, Gillette and Tide, may get a lift from cuts to items including diapers, personal care products and dental products. For instance, the tariff on electric toothbrushes will fall from 30 percent to 10 percent.
The government’s plan to eliminate tariffs on some types of milk powder will help companies like Danone and Nestle SA that compete with local brands in the large market for infant formula. The country’s infant formula market will increase about 15 percent to 123 billion yuan ($18.7 billion) by 2020, according to a Goldman Sachs Group Inc. report in October. Chinese parents worried about a series of food-safety scandals often favor foreign brands.
While a welcome move, some commentators think that the impact on China’s trade balance will be fairly muted. Speaking to Bloomberg, Christopher Balding of the Peking University in Shenzhen said “it is unlikely to move the needle much on the trade balance but it is still a small, solid step forward. China is moving to a consumption economy and with so much cross-border commerce streaming in across these product segments, they are under pressure to lower tariffs.
The SCMP quoted Zhao Yang, chief China economist at the Japanese financial services group Nomura, who said the latest tariff cuts were largely symbolic and its boost to imports would be fairly limited. “Despite import tariffs being greatly slashed over the past several years, 17 per cent value added tax remains intact,” he said. Beijing, however, is keen to increase imports as it wants to reduce trade friction with other countries, said Zhao. China is due to hold its first import fair in Shanghai in November 2018.