China will reduce tax rebates on exports of high energy-consuming, resource-intensive and environmentally-harmful products, Chinese officials say.
The as-yet unreleased policy is scheduled to take effect around September or October despite strong protests from domestic companies and traders, according to China's Caijing magazine.
The move reflects the Chinese government's efforts to shift emphasis away from low-value-added exports. "The Chinese government wants to see a trade balance. We don't deliberately seek a rising surplus," says Chong Quan, spokesman of China's Ministry of Commerce.
Introduced in 1985, the tax rebates for exporters have made Chinese products more competitive on the international market.
It is now expected that China will cut tax rebates by an average of two percent for sectors such as textiles, metallurgy, iron and steel. Only high-tech industries avoid the knife -- their rebate is being increased.
"Export rebates for high energy-consuming, high-polluting and resource-intensive products should be stopped," says Fu Ziying, assistant to the Minister of Commerce. Trade surplus
Booming exports have contributed significantly to the Chinese economic miracle. In recent years, the cart of the Chinese economy has been hauled by the two "strong horses" of investment and foreign trade, with the "weak donkey" of consumption tottering in the middle.
To sustain steady development of the national economy, China's policymakers aim to spur domestic consumption by increasing consumer purchasing power.
Such a strategy can help rein in over-investment, ease pressures on the Renminbi and dissuade foreign anti-dumping lawsuits resulting from the mammoth trade surplus, industry officials say.
In the five years since China's accession to the WTO, the country's foreign trade has grown at an average annual rate of over 30 percent.
In the first six months of 2006, China's foreign trade reached 795.7 billion U.S. dollars, up 23.4 percent year on year. China chalked up a trade surplus of 61.5 billion U.S. dollars in the first half of this year, up 54.9 percent year on year, according to statistics from the General Administration of Customs. On this basis, China's trade surplus is set to exceed 100 billion U.S. dollars for this year, industry officials say.
"China's foreign trade imbalance is driven by brisk global demand for China-made products and the ongoing migration of industries from developed to developing nations," said Mei Xinyu of the Trade Research Institute of the Ministry of Commerce.
In the 1980s and 1990s, attracted by cheap labor costs, multinational companies began shifting their manufacturing to China, opening factories in East China to process materials and export the processed products.
"The fact is most exports by these multinationals have been included in China's trade figures, and China's trade surplus mainly comes from processing trade. A high proportion of export profits in fact stay in the pockets of multinationals," said Mei Xinyu.
In the first half of this year, foreign-invested, export-oriented processing firms generated total foreign trade of 465.3 billion U.S. dollars, up 25.8 percent on the same period last year, accounting for 58.5 percent of China's total.
In comparison, state-owned companies posted 195.3 billion U.S. dollars in foreign trade, up 11.7 percent, while private firms' imports and exports rose 34.9 percent to 135.1 billion U.S. dollars. Adjustment
To fend off the ill effects of the 1998 Asian financial crisis, in 1999 China raised its average export rebate from 6 to 15 percent. The export growth rate promptly doubled and China became the third-largest commodity trader in the world, in terms of gross value, after the United States and Germany.
However, annual export rebates have now become a burden on central finances. Between 2001 and 2005, aggregate export tax rebates reached 1.19 trillion yuan, nearly 3.8 times as much as for the period from 1996 to 2000, according to official statistics.
In addition to this financial burden, the rebate system conflicts with China's new determination to attack pollution and conserve energy.
The structural problem of an oversupply of low-end products and undersupply of high-end products haunts many Chinese industrial sectors at present. Lower export rebates will deal a blow to low-end products.
"Reducing export rebates for energy-consuming and resource-intensive products shows the government's resolve to discourage exports of such products," said Professor Liu Xiaochuan of Shanghai University of Finance and Economics.
Moreover, reducing export rebates may help ease pressures to revalue the Renminbi, the Chinese official currency.
Experts calculate that comprehensive rebates for the export of one U.S. dollar worth of commodities amounted to 0.4429 yuan in 2005. Abolishing export rebates would be equivalent to a revaluation of the RMB yuan by 0.4420 yuan against the U.S. dollar. On this basis, the exchange rate would have been 7.7 yuan for one U.S. dollar at the end of 2005. In theory, then, abolishing export rebates will help ease pressures to revalue the RMB yuan.
In October 2003, China lowered the export rebate rate by an average 3 percent and required local governments to pay 25 percent of all rebates. In 2004, China cut export rebate rates for certain products --high energy consuming, low value added products or products from sectors with low technical content, and abolished rebates for crude oil, refined oil and unsawn timber. Export taxes were also raised on phosphor, ferrosilicon and copper products.
In January 2005, China officially removed the 8 percent export rebates on 17 categories of energy-consuming and resource-intensive products including non-forged or non-rolled aluminum, ferromanganese and ferrosilicon. China nullified a 13 percent export tax rebate on steel billet on April 1, 2005.
In April 2006, China further raised export taxes on refined copper and copper alloy from 5 percent to 10 percent, and interim export taxes for copper materials from zero to 10 percent. China also put a stop to rebates on electrolytic aluminum exports and banned the processing of alumina for export.
"All these new deals have helped alleviate pressure on the central government's finances and ensure steady and sustained growth in Chinese foreign trade," says Liu Xiaochuan.
By increasing export tariffs and lowering export rebates in 2005, the Chinese government enjoyed some success in curbing exports of high energy-consuming, high-polluting and resource-intensive products: coal exports dropped 12.7 percent, coke exports dropped 10.7 percent, billet exports dropped 35.6 percent, and exports of non-forged aluminum dropped 20 percent year on year in the first six months of this year, according to the National Bureau of Statistics.
However, to get round such restrictions, many Chinese businesses found a new strategy: they began processing materials slightly -- not completely -- for export. Thus the bulk of Chinese exports moved from resource-intensive products to preliminary processed products and semi-finished products.
China's exports of semi-finished aluminum products, for instance, surged 57 percent year on year to more than 400,000 tons in the first five months of this year, according to Chinese Customs statistics. The new adjustment reported in Caijing therefore targets semi-finished resource-intensive products with low added value, and for good reason.
"We must not go on selling resource-intensive materials to the overseas market," said Zhang Ping, former deputy director of the National Development and Reform Commission.
The rebate cuts have not pleased domestic firms. Chinese mills and exporters, with their narrowing profit margins, argue the reduction of export rebates will hurt key Chinese industrial sectors.
"We disagree with cutting the tax rebates because the country's steel industry is still troubled with oversupply," says Qi Xiangdong, deputy general secretary of China Iron and Steel Association. The Association has more than 60 domestic steel mill members. In May 2005 China cut tax rebates on steel product exports from 13 percent to 11 percent.
It is reported that high-value-added steel products, namely galvanized plate and silicon steel, will remain at the same 11 percent rate, but low-value-added products such as rods, reinforced bars, round steel and hot-rolled medium plate will be cut to 8 percent.
Driven by high steel product prices in the international market, China's steel product exports have shown robust growth since the beginning of the year. In the first five months, China's steel product exports hit a new high of 12.7 million tons, up 35.2 percent, while imports decreased 27.6 percent to 7.8 million tons.
"China's steel product exports continued to increase and steel product prices recovered significantly this year, although China was still seriously hampered by steel overcapacity," said Jia Liangqun, a vice general manager with Mysteel, a leading steel consulting firm.
But Jia asserts that steel prices will drop in the second half of the year: due to the new tax rebate policy and a cool off in China's fixed asset investments.
Baosteel Group, the largest of its kind in China, will see its export costs rise by RMB 150 ($18.75) per ton after the tax rebate for steel plate exports is reduced, said Wang Xishun, an official with the export department of the group.
Steel plate is Baosteel's main export, with 10 percent of its steel plates exported to foreign markets each year. Baosteel will try to counter the new policy, Wang said.
A similar situation exists with the textile and machine-building industries, and to lower export rebates rate for them may help these industries upgrade industrial structure, industry officials said. Many Chinese corporations have also considered shifting their business strategy from commodity exports to overseas investment.
Industry officials propose a transition period. "According to international practice, enterprises need a proper preparation period, lasting from three months to six months," said Long Guoqiang, deputy director-general of Foreign Economic Relations, Development Research Center of the State Council.
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