China's latest plan to curb its ballooning trade surplus and nudge manufacturers away from cheap labor operations seems likely to raise costs for plastics companies and, according to Hong Kong business groups, could push some vulnerable factories out of business.
The policy, introduced July 23, marks the second time in two months Beijing has introduced administrative measures designed to clamp down on low-value exports, including those with plastics, raising concerns in the foreign manufacturing community and among Hong Kong groups.
The new plan will require firms engaged in the ``processing trade,'' such as those that make plastics products, furniture, ceramics and metal goods, to pay an additional deposit of 50 percent of their duties for imported raw materials.
``Definitely it will do some damage to manufacturers from Hong Kong,'' said Danny Lau, chairman of the Hong Kong Small and Medium Enterprise Association, a 1,000-member group that includes plastics firms.
The move comes after China said in June that it was reducing rebates on value-added taxes for a range of exports in a crackdown on energy-intensive and polluting industries.
Both measures are designed to encourage companies to move into more sophisticated manufacturing operations, in part to slow the growth of China's trade surplus, which Chinese government figures show rose 300 percent from 2004-06.
While many manufacturers still are digesting the details, an analysis by tax firm KPMG International suggests plastics will be among industries facing a ``more significant'' impact from both policies.
``[China] will probably make it more difficult for companies because they will want companies to do higher-value-added exports,'' said Peter Kung, senior partner and head of China tax in KPMG's office in Shenzhen.
Kung said the chemicals sector will be among the hardest hit, with the VAT rebate changes alone cutting into profit by as much as 10 percent.
Chemicals and plastics get a prominent place in those policies in part because China is trying to reduce polluting industries, he said. However, as a sign of perhaps-conflicting goals of the new processing trade policy, it grants an exemption to companies that move those operations to China's poorer interior provinces.
The trade policy, which takes effect Aug. 23, does refund the deposit to companies if they export the finished product within a specified period of time, suggesting that for some firms it may be more of a cash-flow challenge than an additional cost.
But one American business official in China said that compromise ignores potential problems.
``We have all had experiences with rebates or VAT where delays can take a year or more,'' said Harley Seyedin, president of the American Chamber of Commerce in South China, in Guangzhou.
That group still is determining its position, but the turnout of 200-plus people for an Aug. 2 forum the group sponsored indicates a lot of interest and potential concern, he said.
One U.S. manufacturer with plastics operations in the region, Mattel Diecast China, still is investigating but believes the processing trade changes won't have a big impact, said Sandy Shea, Guangzhou-based finance director for the company.
But HKSMEA's Lau said his group estimates 1,500-2,000 of the roughly 30,000 Hong Kong-owned processing trade factories in China could close within 12 months.
The new policies could tie up cash flow significantly. In addition, rising wages in South China and the appreciation of the yuan have pushed up costs more than 20 percent in the past 18 months, he said.
``Some manufacturers, they don't see a future,'' he added.
Hong Kong's government has formed a task force to examine ways to help companies raise their competitiveness, such as letting them use bonds instead of cash deposits and streamlining administrative procedures, said Angela Yip, spokeswoman for the Hong Kong Commerce and Economic Development Bureau.
But she said Hong Kong, a semi-autonomous region in China, recognizes that national policy is to encourage manufacturers to move up the value chain and away from polluting operations.
``We understand this is national policy and [manufacturers need] to move along,'' she said. Otherwise, ``the impact could be quite severe.''
As for whether the plans will help balance trade, one U.S. government official said it isn't clear.
``We haven't seen measures in the past that have really had that significant of an impact,'' said Robert Goldberg, U.S. counsel general in Guangzhou.
