At the beginning of the year, the Chinese Finance Ministry announced plans to boost fiscal expenditure in 2019, focusing on further cuts in taxes and fees for small firms and manufacturers.
On March 5, the Chinese Prime Minister announced, during the annual meeting of parliament, that China would reduce the current VAT rate of 16% in manufacturing and other industries to 13%, and lower the rate in the transportation, construction, and other industries from 10% to 9%.
VAT accounts for one-third of China’s tax revenue, therefore the VAT cut is expected to be very significant to the market. From a consumer perspective, the VAT cut would help to push consumer prices downwards.
Tax cuts could be the first weapon in China’s defence against slowing economic growth. In January, China announced its official economic growth for 2018 came in at 6.6%, which was the slowest GDP growth since 1990. The trade friction between China and the US has also affected China’s economy.
The 3% VAT reduction is good news for manufacturers who can expect a reduction in operating costs. Due to the intense competition in the automotive industry, automakers will most likely choose to carry over their production cost savings into reduced prices for the consumer. Following the 1% VAT cut last May, both domestic production and imports of cars reacted positively. Consumers became the ultimate beneficiary of price reductions across a wide selection of auto brands, including BMW, Mercedes-Benz, Jaguar Land Rover, Audi, and JMC. In particular, Mercedes-Benz passed on a very large price cut of RMB 32k for some of its models. This year’s 3% cut is likely to push the maximum price reduction to as much as RMB 100k in the auto market.
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