VZCZCXRO7306
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #0643/01 0710931
ZNR UUUUU ZZH
O 120931Z MAR 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2835
INFO RUEHGV/USMISSION GENEVA IMMEDIATE 2406
RHEHNSC/NSC WASHDC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUCPDOC/USDOC WASHDC IMMEDIATE
RUEHOO/CHINA POSTS COLLECTIVE

UNCLAS SECTION 01 OF 04 BEIJING 000643 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM SHAWN FLATT AND EEB/TPP WILLIAM 
CRAFT EEB/TPP/BTA ERIK MAGDANZ 
STATE PASS USTR FOR TIM STRATFORD 
USDOC FOR IRA KASOFF/NICOLLE MELCHER (5130) 
USDOC FOR ITA/MAC/OCEA (4420) 
TREASURY FOR OASIA/ROBERT DOHNER 
NSC FOR JIM LOI 
GENEVA PASS USTR 
 
E.O. 12958:  N/A 
TAGS: ECON ETRD EFIN WTRO CH
SUBJECT: CHINA ACTS TO BOOST EXPORTS, SUBSTITUTE FOR 
IMPORTS 
 
REFS: A.) Beijing 0433 B.) Beijing 0151 C.) Beijing 
0326 D. Beijing 0425 E.) Beijing 0443 E.) Beijing 
0515 F.) Beijing 00583 G.) Beijing 0585 H.) Beijing 
0590 
 
(U) This cable is Sensitive But Unclassified. 
Please protect accordingly. 
 
¶1. (SBU) Summary:  In the past few months, China has 
implemented an array of measures at the national 
level designed to boost exports, promote use of 
domestic products and dampen demand for imports (Ref 
A).  In some sectors (textiles, steel, light 
industry and petrochemicals, and machinery), the 
measures complement industrial restructuring 
programs that seek to expand domestic demand, 
protect employment, and revitalize industries hit 
hardest by the global financial crisis (Reftels B-G). 
The new measures include new export restrictions on 
key inputs to steel production, elimination of duty- 
free status for some imports, increases in export 
value-added tax (VAT) rebates and other measures to 
improve export competitiveness on a wide range of 
goods, and regulatory reforms to help exporters. 
These moves, while not necessarily WTO non-compliant, 
when combined with a proliferation of "buy local" 
preferences at the sub-national level (Ref H), raise 
questions as to whether China's evolving response to 
the global financial crisis adheres to the spirit 
and the letter of the its November 2008 pledge at 
the G-20 Summit to avoid new barriers to trade and 
investment.  End Summary. 
 
Keeping Input Prices Low by Restricting Exports 
 
¶2. (SBU) In recent months, MOFCOM and other State 
entities including the Tariff Commission and General 
Administration of Customs have acted to restrict key 
primary exports, especially those related to steel 
production.  Quotas or taxes on exports of these 
inputs are designed to suppress domestic prices and 
ensure supply of the inputs to producers and 
exporters of downstream products that heavily use 
these inputs.  The effect is particularly acute on 
inputs for which China is the major global supplier. 
For example, China controls roughly sixty percent of 
the global trade volume in coke and China is also a 
key exporter of phosphate ores.  Major new actions 
affecting trade in coking coal, phosphate ores, and 
certain manufactured goods (November - present) are: 
 
-- Phosphate Ores: establishment of an export quota 
of 1.5 million tons on phosphate ore and other 
measures (Ministry of Commerce, announced November 
10, 2008; effective January 1, 2009); 
 
-- Ores: levying of an export tariff on 15 products 
including barites, not chemically pure magnesium 
oxide, talc, brown fused alumina cobalt tetroxide, 
and some fluoride products.  (Notice of the Tariff 
Committee of the State Council concerning Adjustment 
of Export Tariff (Shui Wei Hui [2008] Number 36 
announced November 13, 2008; effective December 1, 
2008); 
 
-- Coke: reduction in the 2009 initial export quota 
allocation for coke to 5.78 million tons, roughly 40% 
below the comparable period in 2008 (Ministry of 
Commerce, announced December 30, 2008; effective 
January 1, 2009) [Note:  While coke quota cuts went 
beyond what was expected, they may not be filled due 
to declining world demand.  MOFCOM officials have 
indicated to Emboff that the 2009 coke quota may yet 
be revised upward when the next quota announcement 
is released mid-year.  End Note.] 
 
Cutting Exporters' Costs 
 
 
BEIJING 00000643  002 OF 004 
 
 
¶3. (SBU) China has also lifted or reduced export 
restrictions on some finished and semi-finished 
products in an effort to improve the price 
competitiveness of Chinese exports: 
 
-- Export tariff eliminations: removal of export 
tariffs on 102 products, including steel products 
(cold and hot rolled plate, strip, wire, large steel 
sections, alloy steel products and welded pipes; 
chemical products (ammonium nitrate, ammonium 
sulfate, and grain products (including corn, coarse 
cereals and their powders); (Notice of the Tariff 
Committee of the State Council concerning Adjustment 
of Export Tariff (Shui Wei Hui [2008] Number 36 
announced November 13, 2008; effective December 1, 
2008); 
 
-- Export tariff reductions: reduction in export 
tariffs on 23 other products, primarily chemical 
fertilizers and raw materials, some aluminum 
products, wheat and rice and their powder; a 
reduction in special export tariffs on nitrogenous 
fertilizer and phosphate fertilizer and some raw 
materials (total of 31 products); (Notice of the 
Tariff Committee of the State Council concerning 
Adjustment of Export Tariff (Shui Wei Hui [2008] 
Number 36 announced November 13, 2008; effective 
December 1, 2008); 
 
Eliminating Import Duty Waivers 
 
¶4.  (SBU) In December, the State Council released a 
revised "Catalogue of Products for Domestic 
Investment Projects Ineligible for Duty-Free Import" 
that adds 36 types of equipment to a list of imports 
no longer eligible for duty-free status when used in 
investment projects. (State Council, Notice of the 
Tariff Commission of the State Council Concerning 
Tariff Implementation Plan in 2009 (Shui Wei Hui 
[2008] No. 40 announced December 15, 2008; effective 
January 1, 2009 (2008 Adjustment) released jointly 
December 17, 2008 by Ministry of Finance, National 
Development and Reform Commission, General 
Administration of Customs and State Administration 
of Taxation).  The State Council notice justified 
the change by asserting that domestic products are 
sufficient to meet current demand in the following 
areas: 
 
      -- agricultural machinery 
 
      -- petrochemical equipment 
 
      -- coal mining equipment 
 
      -- power transmission equipment 
 
      -- port machinery 
 
      -- air-borne equipment 
 
      -- testing instruments 
 
      -- digitally controlled machine tools 
 
[Note: Embassy understands that the import tariffs 
on products in the revised catalog are not 
necessarily "increased."  The prevailing tariff rate 
remains the same, but domestic projects are required 
to pay the full amount instead of benefiting from an 
import tariff exemption as was the case previously. 
End Note.] 
 
VAT Rebates on Manufactured Goods Increased to Spur 
Exports 
 
¶5. (SBU) China levies a VAT on all domestic and 
imported input purchases, as well as all processing, 
 
BEIJING 00000643  003 OF 004 
 
 
repairing and replacement services at either 13% or 
17% level, and subsequently refunds a varying amount 
of that tax for goods exported.  Increases in export 
VAT rebates are intended to favor designated sectors 
and may also be used to direct and monitor economic 
activities.  As part of its ongoing VAT reforms, 
China increased VAT rebates on a variety of items at 
least three times in 2008: in August, November and 
December and twice in 2009 as well.  The Ministry of 
Finance explained one of the larger rebates hikes by 
noting that "The move will help ease the sufferings 
of Chinese exporters and boost the country's 
confidence in fighting the financial crisis."  Most 
recent increases in VAT rebates include: 
 
-- February 2009 - Textiles:  Export VAT rebates on 
textile and apparel products increased from 14 to 15 
percent, following on from three prior increases in 
¶2008.   At the time, MOFCOM stated that the purpose 
of the increase was to reduce exporters' costs and 
support the textile industry.  (Ministry of Finance 
Cai Shui [2009] Number 14, announced February 5, 
2009; effective date retroactive to January 1, 2009.) 
 
-- January 2009 - Electronics:  Export VAT rebates 
were increased on a broad range of electronic and 
high-tech goods, including 553 types of high-tech 
and high value-added products ranging from 
industrial robots to aviation navigation systems as 
well as motorcycles and sewing machines.  Rebates 
for inertial navigation instruments for airplanes, 
gyroscopes, instruments and apparatus for measuring 
or detecting ionizing radiations, nuclear reactors 
and industrial robots from 13 percent or 14 percent 
to 17 percent; motorcycles, sewing machines and 
electric conductors from 11 percent or 13 percent to 
14 percent (Ministry of Finance, Cai Shui [2008] 
Number 177 dated December 29, 2008; effective 
January 1, 2009.) 
 
-- December 2008 - Labor-Intensive Goods:  To help 
support industrial restructuring, export VAT rebates 
were increased on a diverse range of 3,770 labor- 
intensive products estimated to represent 27.9 
percent of the country's total exports.  Products 
include: rubber and forestry goods (from 5 percent 
to 9 percent); moulds and glassware (from 5 percent 
to 11 percent); certain aquatic products (from 5 
percent to 13 percent); carry bags, footwear, hats, 
umbrellas, furniture, bedding products, lights and 
clocks (from 11 percent to 13 percent); chemical 
products, stone, nonferrous metal products (from 5 
percent or 9 percent to 11 percent or 13 percent); 
some electromechanical products (from 9 percent to 
11 percent, or from 11 percent to 13 percent, or 
from 13 percent to 14 percent (Ministry of Finance, 
Cai Shui [2008] Number 144 dated November 17, 2008; 
effective December 1, 2008.) 
 
In addition, the State Council in this period 
confirmed in VAT interim regulations that there is a 
blanket presumption that "for taxpayers exporting 
goods, the tax rate shall be 0 percent, unless 
otherwise specified by the State Council."  (State 
Council Decree Number 538 "Interim Regulations of 
the People's Republic of China on Value Added Tax", 
dated November 10, 2008, effective January 1, 2009). 
 
Lifting Restrictions on Re-exports 
 
¶6. (SBU) In another move to promote exports, 
starting February 1 some 1,730 ten-digit tariff 
lines were removed from the export-restricted 
catalog of the Ministry of Commerce and General 
Administration of Customs (Notice Number 44 [2007]) 
"Catalogue of Commodities Prohibited for Processing 
Trade", lifting prior restrictions on these low- 
value-added exports by allowing them to be imported 
 
BEIJING 00000643  004 OF 004 
 
 
on a bonded basis free of customs duty and VAT if 
bound for re-export.  Products  deleted from the 
catalog and therefore eligible for processing trade 
include plastic material products, plastic products, 
wood products, and textile products.  After the 
adjustment, export-restricted commodities comprise 
500 tariff lines which include 106 commodities 
restricted for export and 394 commodities restricted 
for import.  (Ministry of Commerce and General 
Administration of Customs Notice 120 [2008] 
announced December 31, 2008; effective February 1, 
2009). 
 
¶7. (SBU) Comment: 
 
China's response to the global economic slowdown is 
comprised of three main parts:  a large (USD 600 
billion) simulus package focused primarily on 
infrastructure spending; implementation of ten 
industry support/revitalization plans to help key 
sectors affected by the slowdown; tax relief 
primarily for business and the series of measures 
described above intended to promote exports, ease 
costs of producers in the export sector and reduce 
imports.  China's economy remains a transitional one 
dominated by national and local-level state-owned 
enterprises (SOEs).  The trade-related measures 
detailed above all serve to bolster exports in the 
face of China's rapidly declining export sector. 
While none of China's policy response to the 
economic slowdown appears blatantly inconsistent 
with its WTO commitments, the moves do raise concern 
over whether China is complying with the spirit and 
letter of its November 2008 commitment at the G-20 
Summit to avoid new protectionist actions. 
 
¶8.  (U) This cable was compiled with contributions 
from Embassy economic elements including Econ, FCS, 
ITA/MAC, and USTR. 
 
PICCUTA