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20. June 2007

China Moves To Restrain Exports

HONG KONG - Reluctant to allow the faster appreciation of its currency that the West is clamoring for, China has reached for a less powerful weapon, eliminating and reducing tax rebates on about 37% of its export products to tame its runaway trade surplus.

The changes to the export rebates, announced by the state news agency Xinhua on Tuesday, will take effect July 1. A a similar, smaller pilot scheme last year came with a transitional three-month period, which gave unscrupulous exporters time to forge fake contracts and bypass the rules.

The Ministry of Finance is hoping the move will help curb the country’s rapid export growth and reduce the ensuing trade friction.

China’s trade surplus was up 73% year-on-year to $22.5 billion in the month of May, taking the cumulative surplus for the year to $85.7 billion, up 83.1% from a year ago.

By scrapping all the tax rebates on the export of many pollution-generating products, accounting for 553 items out of the total 2,831 products listed, Beijing also aims to slow the growth of polluting industries such as petrochemicals, cement, leather manufacturing and dying.

But the majority of products — 2,268 — will face a reduction in their tax rebates. These are in industries that are classified as sensitive to trade frictions with the U.S., mainly clothing, shoes, hats, toys, paper products, vegetable oils, raw material for plastics, certain steel products, furniture, and low value-added machinery such as motorcycles.

Tax rebates are commonly extended to exporters in countries such as China and the European Union that levy value-added taxes. The rebates narrow cross-border price differences, and are matched with value-added taxes on imports.

Beijing’s export tax adjustments do not come with changes to value-added tax rates on imports, which Goldman Sachs said lessens its power.

“We believe a unilateral cut in the export tax rebate without a cut in the import tax is equivalent to a currency appreciation plus an increase in the import duty, and therefore does not support import demand growth,” the investment bank said in a research note. It said that the end effects would be “less efficient and less effective compared with currency appreciation in reducing China’s external imbalances.”

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