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Politics

China embarks on $72bn tax cuts to counter Trump trade woes

Beijing moves to shield ZTE and other tech companies from US penalties

A ZTE employee works on a production line in a factory in Shenzhen, Guangdong Province.   © Reuters

BEIJING -- China is implementing more than 460 billion yuan ($72.2 billion) in tax cuts annually, potentially to ease the impact of U.S. trade restrictions on Chinese businesses, particularly in manufacturing and technology.

Value-added taxes were lowered this month to 16% from 17% for the sale of goods, and to 10% from 11% for transportation, logistics and construction services. The 6% VAT for financial and consumer services remains unchanged.

The new rates will save manufacturers alone more than 100 billion yuan, with much of the benefits going to the automotive and electronics sectors, according to calculations by Zhongtai Securities.

The government also decided in late April to broaden qualification criteria for the preferential 3% VAT rate applied to smaller businesses and startups.

Tech companies, in particular, are enjoying an even bigger boost. They will be paid back for any excess taxes they have paid, which could be spent on research and development and capital investment. Moreover, high-tech businesses and tech-based small and midsize enterprises can now carry over capital losses for 10 years instead of the previous five, giving them more breathing room.

"These are not specially tailored measures," said a State Council source who stressed that the tax cuts are not in reaction to recent moves by the U.S. But their strong focus on tech suggests otherwise.

Washington last month barred American technology exports to Chinese telecommunications equipment maker ZTE for seven years over what it said were violations of American sanctions on North Korea and Iran. Production at ZTE is believed to have come to a halt. China's new 10-year limit for carrying over capital losses would help the company survive the ban.

In a two-day meeting with an American delegation last week, China specifically demanded that the U.S. lift the restrictions on ZTE. Beijing worries that Washington could penalize such other giants as Huawei Technologies, now under investigation by the Justice Department.

Once unrivaled as the "factory of the world," China is facing growing competition in manufacturing not only from cheaper countries but even developed countries like the U.S.   © Reuters

The Chinese government is also concerned by American tax cuts. At the Boao Forum for Asia last month, Fuyao Glass Industry Group Chairman Cho Tak Wong went against the grain by praising U.S. President Donald Trump rather than criticizing his protectionism.

Cho had announced in December 2016 that Fuyao would spend $1 billion on production facilities in the U.S. He had explained that while the federal and state corporate tax rate in the U.S. was 40% against China's 25%, the final tax bill would be more than 30% higher in China after other taxes. Electricity, gas, transportation, financing and land all cost more here as well.

Chinese wages and land prices have risen in the last several years, while Trump recently lowered the federal corporate tax rate to 21% from 35%. It may now be cheaper to set up a factory in America, by some estimates. Twenty-three percent of U.S. companies in China had moved operations elsewhere in the last three years, or were planning to, in an American Chamber of Commerce in China member survey last fall. The U.S. was a destination for 22% of this subset.

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