A change in China’s tax policy is affecting Asia’s petroleum product trade

In June of this year, China implemented a new consumption tax policy that affects imports of two fuels: mixed aromatics, which were blended into gasoline, and light cycle oil, which was blended into diesel. These components were previously exempt from China’s consumption tax. This new policy has reduced China’s imports of these products and its exports of petroleum products.

China increased its imports of light cycle oil and mixed aromatics in 2020 and the first half of 2021, before these products were subject to the consumption tax. Once the tax took effect, China’s imports of light cycle oil decreased from an average of 390,000 barrels per day (b/d) in the first six months of 2021 to 20,000 b/d in July and 30,000 b/d in August, the first two full months after the change in policy. Similarly, China’s imports of mixed aromatics fell from an average of 170,000 b/d in the first six months of 2021 to 70,000 b/d in July and 30,000 b/d in August.

Light cycle oil and mixed aromatics may not be economical for gasoline and diesel blending under the new tax policy, but China’s policy provides a tax rebate on these fuels when they are used for petrochemical production, which likely explains why these fuels are still imported, albeit at lower levels.

These tax policy changes are also affecting China’s petroleum product exports. China exported relatively large quantities of distillate and gasoline in the first half of 2021 because of higher refining output and a high export quota at the beginning of the year. However, under the new tax policy, domestic refiners have reduced exports, likely to make up for the decrease in the supply of light cycle oil and mixed aromatics.

Principal contributor: Jimmy Troderman