Data released by the National Bureau of Statistics on August 1 shows that China's manufacturing PMI for July was 50.3%, a slight increase of 0.2 percentage points from the previous month. Although the accuracy of this data has been questioned to some extent, the introduction of multiple policies recently seems to be gradually restoring the confidence of manufacturing enterprises. For construction machinery enterprises, the replacement of business tax with value-added tax (VAT), increased urban infrastructure construction, and the surge in railway planning in the second half of the year will become three of the most noteworthy positive factors recently.
VAT Reform: Promoting the Separation of Main and Auxiliary Businesses in Construction Machinery Enterprises
Starting from August 1, the pilot program of replacing business tax with value-added tax (VAT), known as the "highlight" of China's tax reform, was officially rolled out nationwide. The pilot scope of VAT reform in the transportation industry and some modern service industries will be expanded from the current 12 provinces and municipalities to the whole country. This marks the gradual deepening of the VAT reform, achieving a "double expansion" in regions and industries, and further intensifying the reform.
The main purpose of the VAT reform is to avoid double taxation and reduce the burden on enterprises. This reform will have a profound impact on economic development. Taking Shanghai, which took the lead in implementing the VAT reform in the transportation industry and six major modern service industries in 2012, as an example, as of the end of February 2013, a total of 164,000 enterprises in Shanghai had been included in the pilot scope of the VAT reform. Since the pilot program began, the total tax reduction in the Shanghai region has amounted to approximately 20 billion yuan. The VAT reform boosted Shanghai's GDP growth by about 0.6 percentage points in 2012, and the proportion of the added value of the tertiary industry in the city's total GDP increased by 2 percentage points, bringing obvious effects to the optimization of Shanghai's industrial structure.
Although at present, the main beneficiaries of the VAT reform are the tertiary industry, it will also have major strategic significance in promoting scientific development, promoting economic structural adjustment, and transforming the economic development mode.
In order to reduce operating costs, many construction machinery enterprises have to bundle auxiliary businesses such as logistics and information while doing a good job in their main business, which increases the operational pressure on enterprises. For the construction machinery industry, the VAT reform will bring huge "spillover effects." After the reform, the original auxiliary businesses of construction machinery enterprises can be set up as separate companies for logistics, informatization, etc., which can not only continue to serve the main business but may also generate greater vitality after the auxiliary businesses become self-financing. The "VAT reform" accelerates the separation of main and auxiliary businesses in construction machinery enterprises by promoting the development of the service industry, especially modern service industries, transforming the existing "olive-shaped" enterprise structure of construction machinery enterprises into a "dumbbell-shaped" one. By connecting the VAT deduction chain between the secondary and tertiary industries, it promotes the specialized division of labor in construction machinery enterprises, makes R&D and marketing bigger and stronger, and moves the industry from the low end to the mid-to-high end.
For construction machinery enterprises, in addition to the direct impact of enterprise structural adjustment, the signal of a new round of comprehensive reform released by the VAT reform seems more noteworthy.
Accelerating Urban Infrastructure Construction: The Industry Ushers in New Development Opportunities
Premier Li Keqiang chaired an executive meeting of the State Council on July 31 to study the promotion of government purchases of public services from social forces and deploy the strengthening of urban infrastructure construction. The meeting identified the following key tasks: First, strengthen the construction and renovation of municipal underground pipe networks. Improve urban water supply facilities and enhance urban waterlogging prevention capabilities. Second, strengthen the construction of sewage and domestic waste treatment and recycling facilities. By the end of the "12th Five-Year Plan," the harmless treatment rates of urban sewage and domestic waste should reach about 85% and 90%, respectively. Third, strengthen the renovation of old gas and heating pipe networks. By 2015, complete the renovation of 80,000 kilometers of urban gas pipelines and nearly 100,000 kilometers of old centralized heating pipe networks in northern heating areas. Fourth, strengthen the construction of large-capacity public transportation systems such as subways and light rails, and enhance the connectivity, accessibility, and convenience of urban road networks. Accelerate the construction of pedestrian and bicycle "greenways" in cities across the country. Do a good job in safety inspection and reinforcement of urban bridges to ensure traffic safety. Fifth, strengthen the construction of urban distribution networks and promote grid intelligence. Sixth, strengthen ecological environment construction and enhance the functions of urban green spaces in flood storage, drainage, and groundwater replenishment.
Infrastructure construction has always been one of the most important factors driving the development of the construction machinery market. In 2008, the 4 trillion yuan economic stimulus plan launched by the State Council almost brought qualitative changes to China's construction machinery market, with the vast majority of projects focusing on transportation infrastructure as the main investment direction. It is almost certain that China's construction machinery market will usher in a new period of rapid development, but after experiencing the pains of the "4 trillion" stimulus, the construction machinery industry will embrace more rational development.
Restarting Railway Construction: Construction Machinery Accelerates Forward
The impact of railway construction on the construction machinery industry is obvious. Although rumors about accelerating railway construction have been circulating, it was not until the executive meeting of the State Council held on July 24 that the plan for large-scale restart of railway construction was finalized. The meeting studied and deployed the reform of the railway investment and financing system and further accelerated railway construction in the central and western regions. According to the State Council's plan, fixed asset investment in railways this year has been raised from the initial plan of 650 billion yuan to 690 billion yuan, and a total of 1.4 trillion yuan will be invested in the next two years. At the same time, the number of new projects started in 2013 has been adjusted from 37 to 47.
The executive meeting of the State Council also clearly pointed out that it is necessary to "raise construction funds through multiple methods and channels, guided by central government fiscal funds, attract social capital investment, establish a railway development fund, and innovate the varieties and methods of railway bond issuance. Open the ownership and operating rights of intercity railways, suburban railways, and resource-development railways to local and social capital." It is reported that the railway investment and financing system reform plan will be submitted to the State Council by the end of September and is expected to be introduced by the end of this year.
Source: China Construction Machinery Business Network
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