China To Rebalance Trade Surplus With Export Tax Rebate Cuts

by Mary Swire, Tax-News.com, Hong Kong

25 July 2006

China is planning to cut export tax rebates for environmentally unfriendly heavy industries as part of a policy to rebalance its international trade position.

Reports in the Chinese media have quoted government sources as stating that export tax rebates for low value-added industries such as iron, steel and textiles, will be cut on average by 2%. Meanwhile, export rebates for high value-added industries will be increased to encourage production in these areas.

"Export rebates for high energy-consuming, polluting and resource-intensive products should be stopped," stated Fu Ziying, assistant to the Minister of Commerce, according to state media source Xinhua.

The system of export tax rebates was first put in place by Beijing in 1985, and has allowed Chinese products to become competitive in the world's markets. However, since China increased the average export rebate to 15% from 6% in the wake of the Asian financial crisis of the late 1990s, China's exports have grown exponentially; in the five years since China's accession to the WTO, the country's foreign trade has grown at an average annual rate of more than 30%. China's trade surplus reached US$61.5 billion in the first half of 2006, up 55% year-on-year.

"The government wants to see a trade balance. We're not deliberately seeking rising surpluses," Ministry of Commerce spokesman Chong Quan was quoted by Xinhua as explaining.

The rebates are also becoming a drain on the government's resources, costing US$148 million between 2001 and 2005, nearly 4 times as much as for the period from 1996 to 2000.

It is anticipated that the new policy will go into effect in September or October 2006.

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