China halts VAT refund: a blow to small producers

The decision of the Chinese authorities to reduce or completely stop VAT refunds for certain export categories was one of the most painful blows to the traditional export model. Under the restrictions were dual-use goods, batteries and batteries - It is precisely those segments where mass small and medium-sized exports used to be concentrated.

Formally, this is a tax adjustment. In fact, - on deliberate dismantling of the modelIt has been used by Chinese manufacturers for decades.

How the export model with VAT refund worked

VAT refunds in China have never been a "pleasant bonus." It has been built into the export economy as a must.

The manufacturer paid VAT when purchasing raw materials and components, then exported the goods and received tax back. This is where the real return came from. Operating activities were often conducted with minimal or zero margins.

Why this is critical:
In most export industries, without VAT refund, the cost of production immediately became higher than the market price. Manufacturing was meaningless even before shipments began.

For this reason, more than 90% of small and medium-sized producers actually earned not from the sale of goods, but from the tax mechanism.

What products were affected and why

Dual-use goods

This category includes products that can be used not only in the civilian sector, but also in energy, infrastructure or defense chains. It is these products that are under the increased attention of the state.

Cancellation of VAT refund here - It's a control tool. China reduces the risks of secondary sanctions, restricts uncontrolled exports and concentrates production in the hands of large, managed companies.

Batteries and batteries

In the battery segment, the situation is even tougher. China is facing a massive overproduction: factories have produced and continue to produce more than the global market can consume.

VAT refunds in this industry have long supported overcapacity and small players. Now the state is deliberately removing that support, leaving the market to "clean up" on its own.

The result - Small producers are the first to leave the game.

Why this is fatal for small and medium-sized businesses

The abolition of VAT refunds immediately breaks the financial model of small factories. Costs rise by 10-15%, the export price becomes uncompetitive, and buyers quickly move to larger suppliers.

Small businesses do not have a safety margin:

• No cheap lending
• No administrative support
• There is no way to work in the negative for a long time.

Even a brief halt in VAT refunds leads to cash gaps, wage delays and production lines shutting down. This is why many factories are closing quietly and quickly. - No major bankruptcies.

Why is China doing this consciously?

It is important to understand the logic of the state.

1. Cleaning the economy from small exports

China is no longer interested in millions of low-margin exporters. Priority has shifted from volume to manageability, manufacturability and capital concentration.

2. Control of strategic industries

Energy, batteries, storage - These are not just products, but elements of future infrastructure. The state is not ready to leave them in the hands of weak and uncontrollable players.

3. Preparing for Trade Pressure

Reducing VAT refunds reduces formal charges of dumping and subsidy. China is removing direct support, leaving only those who can survive without it in the market.

What this changes for the global market

In the short term, the market faces rising prices and supply instability. Many foreign partners suddenly find that their supplier can no longer meet the old conditions.

In the medium term, the market is becoming tighter: fewer sellers, less flexibility, more large corporations with a strong bargaining position.

Long-term - The illusion of a cheap and endless China is disappearing. Exports are becoming more expensive, more centralized and more politicized.

What this means for importers and foreign trade

Working with China requires a rethink of the approach. VAT refund prices no longer reflect reality. Non-flexible contracts are a source of loss, and cooperation with small factories is a source of loss. - A high-risk area.

Now it matters:

• producer's stability
• real scale
• Understanding the role of the state in the industry

Abolition of VAT refund - This is neither a temporary measure nor a liquidity crisis. It's structural shift. China is deliberately cutting back on small export businesses, making room for big, strategic players.

Exports become:

• more
• hard
• less mass

Those who do not take this into account will pay for the old thinking with money.