China’s new plan to slash import taxes on a wide range of consumer goods promises to boost the prospects of multinationals in the Chinese market, with everything from Procter and Gamble’s baby nappies to Diageo’s whiskey becoming more affordable to local consumers.
Tariffs for 187 product categories will drop from an average 17.3 per cent to 7.7 per cent after the cut on December 1st, the Ministry of Finance said in a statement on Friday, citing the need to help consumers access quality and speciality products which aren’t widely produced locally.
The new policy follows president Xi Jinping's call at the October Communist Party conclave to meet citizens' demands for improved living standards and better quality products in the world's largest consumer market.
Foreign multinationals stand to benefit as a growing base of middle-class consumers seek out goods stamped with foreign brands, while the cuts also encourage consumers to spend at home rather than on trips overseas.
"It's aimed at three things: helping boost consumption in China, reforming the Chinese economy by continuing to open it up, and sending a signal to the world and particularly to the US that it is committed to advancing global trade," said Shane Oliver, head of investment strategy at AMP Capital Investors in Sydney. Robust consumption is an increasingly important stabilizer for the world's second largest economy, as it shifts away from an investment- and export-led growth model.
Domestic consumption contributed 64.5 per cent of GDP in the first three quarters of 2017, according to the National Bureau of Statistics. Items in Friday's list of tariff cuts are part of broader categories of consumer goods which made up around 30 percent of China's total imports in 2016, according to Bloomberg calculations.
China's retail sales totalled more than $5 trillion last year. The CSI 300 Consumer Staples Index fell as much as 2.6 per cent on Friday, led by Inner Mongolia Yili Industrial Group Co. and food companies Henan Shuanghui Investment and Development Co. and Muyuan Foodstuff. The gauge has plunged 6.1 per cent this week, the most since January 2016. "China is trying to encourage more foreign companies to sell locally and wants to give consumers more choice,"said Matthew Crabbe, Mintel International Group's director of Asia-Pacific research. "What it will do is help foreign products already within the market get more competitive."
Among the foreign companies poised to benefit is Procter and Gamble, which gets 8 per cent of its sales from Greater China. PandG, the owner of brands such as Crest, Gillette and Tide, may get a lift from cuts to items including nappies, personal care products and dental products.
For instance, the tariff on electric toothbrushes will fall from 30 per cent to 10 per cent. Tariffs for some types of baby formula were cut to zero, triggering losses in Chinese dairy stocks. Inner Mongolia Yili retreated as much as 5.8 per cent, while China Modern Dairy Holdings Ltd. lost as much as 2.6 per cent in Hong Kong.
The government's plan to eliminate tariffs on some types of milk powder will help companies such as Danone and Nestle that compete with local brands in the large market for infant formula. The country's infant formula market will increase about 15 per cent to 123 billion yuan ($18.7 billion) by 2020, according to a Goldman Sachs Group Inc. report in October. Chinese parents worried about a series of food-safety scandals often favor foreign brands.