Economist Urges Beijing To Cut Export Tax Credits To Help Yuan

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

07 October 2003

A Chinese economist has called on the Beijing government to cut the level of export tax credits it pays to the nation's manufacturers in order to alleviate pressure from the international community to revalue the yuan.

Export tax credits have been in place in China since 1985 and under the current system, exporting firms receive a refund against a proportion of the consumption and value added taxes that they have paid in exporting their goods. In 1999, the average credit rate was raised from 6% to 15% on the back of the Asian financial crisis when many regional economies were forced to devalue their currencies.

However, speaking at a Beijing seminar sponsored by HSBC bank, economist Lin Yifu said the system has almost been too successful in boosting the country's export output, and revealed that speculation amongst some of the world's currency traders towards an appreciation in the value of the yuan was mounting. Therefore said Lin, the opportunity was right for a cut in the export tax credit in order to dampen export growth and lower the trade surplus and level of foreign exchange reserves. This would then send a signal to the speculators that the government's key priority was the yuan's stability, Lin explained.

According to reports, Chinese exports are highly sensitive to changes in the export credit, and a one percentage point cut will apparently lead to a 4.9% decrease in the level of exports.

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