The Chinese government is slated to trim or remove export tax rebates on a part of export commodities from July 1, in order to rein in its booming exports. They hope this will ease conflicts reignited by the large trade surplus and reduce trade friction, said the source of Ministry of Finance.

The new policy will affect 2,832 items of export products, or 37 percent of the total, an unprecedented number of export commodities compared with the recent years. Reducing or cutting export rebates targeting at narrowing the trade surplus indicates that the Chinese government is adopting practical step to resolve the unbalanced foreign trade. Started in April 1985, export tax rebates became the most changeable tax revenue policy in China. In the beginning, the policy was to encourage exports in order to earn foreign currency and improve China's competitive edge. Tax rebates during this period played the role as assisting foreign trade.

In 2003, the government began to reform export rebates. The aim was to maintain a balance between the increase in exports and the government’s ability to bear the heavy rebates.

The government later adjusted the export rebate strategy and put forward a policy to restrain exports of products that are high-energy consumers and cause heavy pollution.

Since 2006, the unbalanced trade has aggravated, accompanying constant trade frictions and pressure on renminbi appreciation. Foreign exchanges reserves were increasing. As a result, reducing trade surplus was gradually put into the realm of export tax rebates.

Statistics from the Customs showed that exports in the first five months hit $443.5 billion, rising 27.8 percent year on year; imports stood at $357.8 billion, or 19.1 percent increase compared with that of last year. Export surplus, 8.7 percentage points higher than imports, rocketed to 83.1 percent to a total of $857.8 billion. The fast growing trade surplus prompted the government slashed the tax rebates in three areas so as to balance the trade.

First, export tax rebates for 553 “highly energy consuming and resource-intensive products” will be cancelled. They include endangered animals and plants and their products, salt and cement, as well as non-ferrous metals products; second, export rebates for 2268, that will be easy to trigger trade frictions, such as garments, furniture, and mechanical and electrical products, are to be cut from 8-17 percent to 5-11 percent; and third, 10 products like paintings, stamps, and peanuts are tax-free when being exported.

Export tax rebates refer to return tax contained on commodities to enterprises, so that exports goods enter international market with zero tax rate, thus they enjoy equal competitive power with goods of international markets. The zero tax rate policy is considered a common international practice.

The policy is only the part of package policies the government is using to strengthening and improve its macro regulation on the economy, said the financial ministry. All these measures are designed to resolve problems in the country’s economy including its increasing trade surplus, its fast growing investments and excessive liquidity.

The ministry said the export rebate adjustment, focused on structure regulation, is moderate and not expected to produce negative affect on foreign trade exports. The policy will restrain the huge trade surplus by adding cost on the related products. It will help enterprises reduce exports of highly energy consuming products, increase exports of high value-added and high-tech products, thus encouraging enterprises to avoid blind investments and excessive production.

The ministry predicts that the policy, in the long run, will contribute to China’s transformation and sustain its development economy.

However, some experts argued that the new policy would impose important affects to the foreign trade. To narrow the trade gap or even to become unfavorable balance will not be solved in a short period, for many developed countries have experienced long-term surplus.

In addition, the policy, in a short period, will have a huge impact for both low-end products that earn low profits and small and medium-sized enterprises that depend on exports. Employment in textile industry will receive the worse impact.

Lin Yifu, director of the China Center for Economic Research at Peking University supports this new tax rebate policy. He said the move would help to slow down export growth and the trade surplus. Furthermore, international expectation for remminbi appreciation will be eased. The effect of a tax rebate decrease equals a renminbi appreciation for China’s export enterprises.

(Source: mof.gov.cn, caijing.com.cn Xinhua.net,. Translated and edited by Li Yuzhu)