Four Major Measures to Boost Domestic Demand and Reduce Burden, Adjustment of PV Export Tax Rebates to Address International Challenges [SMM Analysis]

China's New Policies to Reduce Domestic Demand Burden: Four Measures to Drive Economic Growth

Recently, China introduced four measures to reduce the burden on domestic demand, targeting fiscal debt, consumption stimulation, real estate market promotion, and tax policy optimization.

1. Refinancing Special Bonds: Local governments in China are accelerating debt reduction measures, planning to issue nearly 500 billion yuan in refinancing special bonds to replace existing hidden debt. This measure aims to lower local government debt risks and optimize fiscal conditions.

2. Trade-In and Subsidy Policies: Through national subsidy policies and promotional activities, consumers are encouraged to purchase household appliances, boosting the consumer market. This year, the government allocated 300 billion yuan in special treasury bonds to support large-scale equipment upgrades and trade-in measures for consumer goods. This strategy stimulates consumer demand and promotes economic growth.

3. Real Estate Deed Tax Adjustment: The new policy raises the preferential area standard for deed tax and lowers the deed tax rate to promote healthy development in the real estate market. This measure aims to reduce the burden on homebuyers, support rigid and improved housing demand, and revitalize the real estate market.

4. Shenzhen Tax Policy Reform: Adjustments to VAT and personal income tax policies, simplification of housing transaction taxes, and the removal of the classification between ordinary and non-ordinary housing are implemented. These measures help reduce real estate transaction costs, stimulate market activity, and attract homebuyers.

In summary, these measures aim to reduce local government debt risks, stimulate consumption, revitalize the real estate market, and optimize tax policies, with the overall goal of promoting stable economic development and market vitality while expanding domestic demand.

Tax Rebate Reduction to Address Foreign Trade Challenges

When adjusting export tax rebate policies, it is essential to adhere to WTO taxation principles to avoid shifting domestic tax burdens onto foreign consumers. Typically, tax rebates are provided for exports, and taxes are increased for imports, with the taxable amount for enterprises being the output tax minus the input tax. Exempting output tax and refunding input tax are common practices. When formulating export strategies, enterprises calculate marketing expenses as costs to maintain price competitiveness. However, for some export goods, the actual tax burden is lower than the nominal tax rate, leading to excessive tax rebates, effectively subsidizing foreign consumers with national funds.

From a fiscal perspective, VAT and consumption tax on imported goods amounted to 1,948.5 billion yuan, down 2.6% YoY. Customs duties totaled 259.1 billion yuan, down 9.4% YoY. Export tax rebates reached 1,712.2 billion yuan, up 5.3% YoY. While tax revenue declined, the rapid growth in tax rebates increased the burden on central finances.

Adjustment of PV Module Export Tax Rebates: Challenges and Opportunities

In 2023, the export value of PV modules and solar cells reached 305.5 billion yuan, with tax rebates amounting to 39.7 billion yuan. If tax rebates are reduced, it would decrease by 12.22 billion yuan. Does a reduction in tax rebates necessarily mean a decline in exports? The answer is no.

The Ministry of Finance and the State Administration of Taxation issued the "Announcement on Canceling Export Tax Rebates for Certain Steel Products," stating that from May 1, 2021, export tax rebates for certain steel products would be canceled. However, in 2022, the export growth rate of steel increased by nearly 2 percentage points YoY. Similarly, China's technology and production of PV modules and cells are far ahead globally. The demand elasticity of these products is less than 1, meaning demand is less sensitive to price changes. Therefore, even without tax rebate subsidies, product competitiveness would not be lost.

Looking back at this year, from January to October 2024, PV module export volume reached 214.14 GW, accounting for 47.76% of China's PV module production. China's PV module exports accounted for 80.35% of global PV module consumption, with high foreign dependence due to product quality and incomplete local industry chains. However, domestic PV enterprises include tax rebate subsidies in costs to engage in price wars abroad. On one hand, foreign tariffs are continuously increasing, and the loss from export tax rebates is borne by central finances; on the other hand, the US still accuses China of dumping.

Tariff Increases and Tax Rebate Reductions: Multiple Impacts on the US-China PV Industry and Inflation

The Biden administration announced an increase in tariffs on key materials for solar cells. Specifically, import tariffs on Chinese solar wafers and polysilicon will double to 50%, and tungsten product tariffs will rise to 25%. These new rates will take effect on January 1, 2025.

To counter the US tariff hikes, China reduced its tax rebate rate, which will inevitably lead to price increases for related foreign products. First, the rising prices of imported solar cells will increase local module production costs. To maintain profit margins, companies will have to raise product prices. Additionally, workers will demand higher wages to maintain their living standards, potentially leading to a vicious cycle. If rising import prices cause foreign companies to reduce imports, consumer demand will shift to local producers. With the rapid increase in industry labor, wage levels may also rise accordingly. All these factors will undoubtedly accelerate the worsening of local inflation.

At the Fortune Global Forum held in New York on November 11, Fortune magazine editor Geoff Colvin had a half-hour live conversation with Boris Johnson, the 55th Prime Minister of the UK. "The West should not decouple from China. If you try to make everything in the US that could be made in China, 'Adam Smith would not agree, and David Ricardo would oppose it as well.'"