Market fears havoc from China’s overhaul of customs rules

By Davide Ghilotti
Published: Friday, 13 July 2018

China's customs department will introduce a much stricter system that local exporters and importers must follow to carry out international trading.

A soon-to-be-implemented overhaul of the customs system regulating exports and imports of mineral commodities in China is creating widespread concerns about large-scale disruptions to supply chains to and from the country.

China customs is imposing a new system of documentation effective from August 1, 2018. This system will require Chinese exporters to provide much more detailed information on the nature, value and route of their shipments.

Officials expect these restrictions will clamp down on widespread tax dodging that have been endemic in parts of the Chinese exports industry for many years.

"Until now, you could go about your exporting business by giving away almost no information to customs and, as a result, to the taxman," one market participant said. "This way of doing things is going away for good."

Changes coming in force

The new system will introduce several additional items of information that exporters/importers will have to declare, expanding greatly on the relatively limited details that are required today.

Among the most relevant changes is the introduction of the overseas consignee column in the export declaration form, where specific information regarding the customer, port of destination, total value of shipment will have to be added.

One source explained: "With the implementation of the new system, the information of manifest, bill of lading, customs declaration, etc, should all be consistent.

"If they [customs officials] see a discrepancy, they will know that something dodgy is going on there, and will be able to identify it."

From August 1, for sellers to be able to export, they will have to disclose to customs key information including:

  • The identity of their company (the seller’s company in China)
  • The identity of their customer
  • The notify party of the shipping document
  • The identity of the shipping company handling the cargo
  • The bank within China that is to receive the funds of the sale
  • The company’s VAT registration number
  • Names and contact details of the people involved on both sides of the transaction (seller and buyer)

The seller will be required to provide a copy of the invoice to their Chinese bank prior to the reception of the payment into China. To authorize the transaction, the bank will have to ensure that the value stated on the invoice matches the funds coming in from overseas. If it does not, the transaction will not be authorized.

Most of the above information was not needed under the existing system.

Clamping down on tax avoidance

The scale of the changes in regulation shows how quickly the Chinese central government is willing to act to single out and reduce cases of VAT and export tax avoidance by local companies.

Tax avoidance and smuggling have been often mentioned as widespread practices in the trading of minerals originating from China, including bauxite, alumina, graphite, magnesia, silicon carbide.

Historical and current trade data from China customs shows how authorities are often unable to single out the identity of a large number of exporters behind certain shipments, which appear listed only as "no company name".

Additionally, a large share of total volumes of some commodities exported is also listed in customs data simply as "Shenzhen": this means that these companies are supposedly operating from the special-status Shenzhen Special Economic Zone, and are able to hide their identity behind the zone’s preferential arrangements.

The table below shows the breakdown of exports of Chinese calcined bauxite from January to March 2018, between companies that declared their identity ("declared exports"), companies that were listed as "no company name" and those exploiting the "Shenzhen" economic zone status.

Chinese Calcined Bauxite exports (Jan-Mar 2018, tonnes)

Tonnes

% share of total

Declared exports

77,885

38.7%

No company name

71,538

38.1%

Shenzhen

43,749

23.2%

TOTAL

188,172

100%

Source: China customs/Industrial Minerals

The data shows that less than 40% of total exports is traceable to specific companies; 38% is listed under "no company name" and 23% as "Shenzhen".

In other words, as much as 115,000 tonnes were exported in the period without the volumes being linked to specific company names.

"If you look at this number, you can clearly see that more than half of the companies do not tell China customs who they are," one supplier said. "That’s over 50% of the lot exporting illegally."

Another source added: "Today you can buy Shenzhen paperwork off the internet in China. That’s how easy it is. But with these changes, that won’t be possible any longer."

Offloading stocks

Some market participants reported higher demand for refractory minerals including bauxite and alumina over the past couple of weeks, and cited the upcoming change in the customs system as a factor for this.

"Sellers don’t know what’s going to happen once the new system comes into force, so they want to move as much material as possible now," a producer said.

One trader commented: "It makes sense: with all of these changes, who knows how it’s all going to look. If I were them, I would ship stuff out now."

He added that, for material being scheduled for shipping in August, his company had to specify that it could not guarantee the price would not change in case of unforeseeable issues related to the customs system change.

Another distributor added: "No one really know what will happen after August 1. We expect chaos, certainly at the beginning.

"It is possible that customs offices may be unable to process all of the additional paperwork in one go. They would be extra careful in order to get it right and, in the end, this may lead to a clog in the whole system."

One viewpoint that was shared by multiple participants is that the scale of the change brought about will create long delays for export paperwork to be processed at customs.



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