insights@lehmanbrown

  21st Aug 2006                                           Aug 2006 - Issues 2

                           Gov't to slash export tax rebates


The government is likely to reduce tax rebates on exports of high-polluting, energy-consuming and resource-intensive products  by an average 2 percentage points in a bid to protect natural resources and steer the country away from low value-added  exports.

"The tax rebate adjustment policy has been fixed and is likely to be announced within one month, the Guangzhou-based  Information Times reported yesterday, citing an unidentified source. .

The adjustment will involve the textile, steel, metallurgy, machinery and light industries.

The export tax rebate rate for garments will be reduced from 13 per cent to 11 per cent, and the rate for steel will be lowered  to 8 per cent from the current 11 per cent, the newspaper said.

Government agencies have considered reducing tax rebates for a long period, and they must be enforced for sustainable  growth, said Li Yushi, a trade researcher with the Chinese Academy of International Trade and Economic Co-operation, a  think-tank under the Ministry of Commerce.

"This possible policy change is part of government efforts to adjust the structure of China 's export products," Li said, adding  that lower tax rebates will spur domestic enterprises to increase the value of their products and upgrade technologies to remain  competitive.

According to him, the cut to the tax rebate will not have a big impact on the country's total trade volume, as exports of energy  consuming and resource-intensive products account for a small proportion of the total.

But industries like aluminium and textiles will be affected, Li said.

"In the short term, the adjustment will further squeeze the already slim profits of textile companies," said Cao Xinyu, vice  chairman of the China Chamber of Commerce for Import & Export of Textiles.

The textile industry is facing cost pressures due to the increasing prices of raw materials and energy and the appreciation of the   renminbi.

The move could force textile businesses to improve, but it won't happen overnight, Cao said. The chamber advised the rebate  rate for the textile industry be left unchanged for the moment.

"If the government decides to cut the tax rebates we would expect a three-month cushioning period so that enterprises have  time to adjust prices and avoid unnecessary losses," Cao said.

(Quoted from China Daily)

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