China relaxes new cash curbs on processing trade

The Ministry of Commerce in July ordered companies involved in the processing trade to pay a cash deposit equivalent to at least 50 percent of the cost of their imported raw materials.

The money would be reimbursed when the finished goods were exported, but companies, many of them in southern China and owned by Hong Kong executives, said the requirement would hit their cash flow and force some of them out of business.

Modifying its rule, the ministry said firms would be permitted to cover the deposit by presenting a letter of guarantee from a bank.

The ministry's brief announcement, posted on its Web site, did not give a reason for the change of policy.

The deposit rule applies to 1,853 products in sectors such as metals, plastics and furniture and accounting for about 15 percent of China's total exports.

The aim is to weed out low value-added, labor-intensive industries that use a lot of energy and cause a lot of pollution.

Processed goods -- made using imported raw materials and components -- accounted for 45 percent of China's trade surplus in the first half of the year.

Pansy Yau, deputy chief economist at the Hong Kong Trade Development Council, said the relaxation was good news.

The restrictions announced in July would have put a lot of pressure on Hong Kong companies' cashflow, she said.

Some companies might not have been able to tie up the required cash and would have had to halt production, Yau said.

Now that they can use a guarantee they don't need to find that cash and put it in the bank, so that will at least help them resolve the cashflow problem, she added.

In an HKTDC survey in July of 1,700 mostly small, Hong Kong companies that engage in processing trade in China, 55 percent said the restrictions would pose a heavy burden on their cash flow and affect their operations.