CFO skepticism about the cuts filtering through the economy to all consumers and boosting demand.
China’s effort to spark economic growth by cutting value-added tax (VAT) rates may fail to significantly boost demand for goods sold through dealerships or distributor networks, limiting the effectiveness of the stimulus measure. That view surfaced at a recent meeting of NeuGroup’s Asia CFOs’ Peer Group in Shanghai.
VAT cuts. China implemented the cuts in early April, reducing the VAT rate in manufacturing from 16% to 13% and from 10% to 9% in the construction and transportation sectors. And VAT deductions for input costs were raised for some service industries.
Apple cuts. Industries and companies that sell directly to consumers are most likely to benefit from increased demand in the wake of the VAT rate cuts, according to some of the participants at the meeting. After the government announced the cuts, Apple and luxury brands including Gucci lowered prices. Apple CEO Tim Cook called the three-percentage point cut in the manufacturing VAT rate “a very aggressive move” by the Chinese government.
Cars and planes. But some members of the AsiaCFO group said the effectiveness of the cuts in boosting demand growth may be muted or even non-existent in industries like autos, where dealerships have the discretion to determine what, if any, cost reduction is passed on to consumers. And purchasing incentives typically given by dealers to consumers may be reduced, meaning the net price to car buyers might not budge, one member said.
That view came as car manufacturers including Mercedes-Benz, BMW, Audi, Lincoln and Volvo reportedly cut the suggested retail prices of cars as much as 80,000 yuan after China announced the VAT rate cut.
Beyond autos, one member gave the example of an aircraft manufacturer that sells to airlines, which will enjoy the benefit of the reduced VAT on their purchase of airplanes. But the airlines may choose not to reduce the ticket price for travellers by the same amount, thereby limiting demand growth for air travel.
The bottom line. Members agreed that VAT reform will cut costs for all industries, making it a welcome development for corporates. The question is how well the move alleviates downward economic pressure and whether it filters down through the entire Chinese economy.