Xinhua Insight: Real impact of China's import tax cuts not yet seen

Though China's tax cuts received a warm welcome from analysts and consumers, the policy's actual impact on the retail market remains to be seen.

The government implemented tax cuts on fourteen categories of imported consumer goods on Monday, an attempt to boost domestic consumption.

The Ministry of Finance (MOF) announced China will cut import taxes on clothing, cosmetics and other goods from June 1.

They slash duty by an average 50 percent on suits, fur garments and shoes. A tariff on cosmetics will fall to 2 percent from 5 percent, while a duty on diapers will decline to 2 percent from 7.5 percent.

Following the MOF's announcement, global cosmetics giants L'Oreal and Estee Lauder both said that they would reduce the prices of imported products in the Chinese market.

But finance and taxation experts point out that the tariff cuts may not always result in price drops, as import tax only takes up a very small share of product costs.

Lin Jiang, a fiscal and taxation professor with Sun Yat-sen University, told Xinhua that imported goods in China are also subject to a 17 percent VAT as well as distribution costs, which usually overshadow the customs duty.

"Some products need to go through several layers of importers and wholesalers before they finally appear on the retail market," Lin said. "In these cases, the policy dividend is more likely to be eaten up during the process."

Travelers from the Chinese mainland have demonstrated a strong purchasing power around the world. In 2014 alone, they spent an whopping 165 billion U.S. dollars abroad.

Aside from shopping abroad, in department stores and boutiques, an increasing number of Chinese shoppers are turning to foreign e-commerce sites or purchasing agents for imported goods.

Thanks to government support of trans-border e-commerce, consumer goods purchased via websites or agents abroad for personal use are only subject to a 10 percent tax on postal articles when they enter China.

"So despite the reduction on customs tariffs, trans-border e-commerce is still the cheapest way to buy foreign products, because there's no VAT and other costs," Lin explained. "I don't think the tax cuts will have an obvious impact on the numerous purchasing agents in the short term."

Ai Li, a Chinese accountant living in Melbourne, Australia, is one of these part-time purchasing agents. She has paid little attention to the tariff adjustment.

"Basically I do all consumer goods sales here in Australia, based on customers' demand. The most popular products are baby formulas, health care products and organic food such as honey," she told Xinhua on WeChat, a popular instant messaging service she uses to contact her clients and friends in China.

"My customers and I don't need to worry about the tax problem. The industry is becoming more mature and I'm working with courier companies which can take care of the delivery and customs clearance at the same time with a reasonable service charge," she added.

Ai said price is not the only reason that people like to buy things directly via foreign sites or agents, and that "they also want more choices and reliable quality."

The policy triggered particular concerns across the mainland-Hong Kong border. Some worry that the steep cut in import tariffs may hit Hong Kong's retail sector.

Hong Kong Department Stores and Commercial Staff General Union estimated that local pharmacies and cosmetic stores will be seriously affected, though long-term influence of tax cuts remains unclear.

Another group that might be affected is the controversial parallel traders, who pay short visits to Hong Kong to snap up consumer goods and re-sell them on the mainland.

Experts said lowering customs tax was one suggested solution to challenge parallel trading, which has had negative impacts on both sides.

But a Hong Kong parallel trader surnamed Leung told Xinhua that the tax cuts would have little impact on them.

"Because the market is huge," Leung said with strong confidence. "Chinese consumers will need a great amount of imported goods until they become more confident about the quality of domestic products."

Tariff reduction is not the only challenge for Hong Kong retailers.

In the newly established Guangdong Free Trade Area (FTA), several bonded stores have been set up where people can have a look or even try on bonded samples, then place orders online and have the products delivered to their doorstep directly from abroad.

Tempus Outlet in Qianhai bonded zone in Shenzhen is packed with customers during weekends. The shopkeeper, who declined to be named, told Xinhua the most popular products are baby formula and diapers, the same as Hong Kong supermarkets and pharmacies.

"Baby products are always in rigid demand," she said.

Several shoppers agreed that it is much more convenient to go to local bonded stores than to Hong Kong. With transportation and time cost in account, price differences become almost negligible.

"Chinese consumers now have more options to buy imported goods, and intense competition will no doubt bring down prices," Lin Jiang said. "I think that's the significance of the tax reduction - it will boost competition." Endi