SUN
WUKONG Another Chinese sop to US
pressure By Wu Zhong, China
Editor
HONG KONG - China's sharp cut in
export-tax rebates effective from July 1 is the
11th and the largest in scale since 2004, but it
is unlikely to discourage exports enough to reduce
its trade surplus significantly, as intended by
the policymakers in Beijing.
Rather, the
move should be seen as Beijing's sop to mounting
US pressure on the appreciation of the yuan. By
making the move, Beijing delivers a clear message
that it is willing to take measures
to
please Washington by attaining a more balanced
trade but that it stops short of a radical
liberalization of the yuan.
It may not be
a coincidence that China announced the rebate cuts
shortly after some US lawmakers introduced
legislation in Congress that would punish
countries that manipulate their currency for
unfair trade advantage. China is apparently the
major target of this legislation.
At the
same time, Premier Wen Jiabao reiterated to
cabinet members his concern over excessive
liquidity and "too much trade surplus". Wen
pledged to increase imports and contain exports by
scrapping tax rebates for exports enjoyed by
pollution-causing and resource-heavy goods,
according to an Asia Times Online report of June
16 (A currency to fight for).
Wen appeared to be trying any and every policy
instrument to tackle the problem except a dramatic
appreciation of the yuan.
So a few days
later, on June 19, the Ministry of Finance (MOF)
said that, starting from July 1, China would cut
or scrap export-tax rebates for 2,831 commodities,
accounting for 37% of the total number of taxable
export items listed on customs regulations.
Announcing the new policy, an MOF spokesman made
it clear the move was one of a basket of measures
to curb overheated export growth and ease friction
between China and its trade partners.
According the new policy, China has
abolished export-tax rebates on 553 "highly
polluting products that consume heavy amounts of
energy and resources" such as salt, cement, and
liquefied petroleum gas.
Export-tax
rebates on 2,268 commodities that "tend to cause
trade friction" have also been reduced, including
garments, footwear, toys, paper products,
vegetable oil, motorcycles, furniture and some
steel products. And the export tax for 10
commodities is scrapped, including shelled
peanuts, canvas, and wood for carving.
The
MOF spokesman said the cost of producing the 2,831
commodities would increase as a result of the
changes to the tax-rebate regime. He said this
would incite capital investment to move to other
"high-value-added and high-tech" industries.
Thus it appears Beijing hopes the new
measure will kill two birds with one stone: it may
ease the expansion of the country's ever growing
trade surplus while at the same time help cool
down the overheated economy, which is largely
driven by exports.
Indeed, the
fast-growing trade surplus, which in turn is the
major source of excessive liquidity, has become a
major concern of policymakers as China's exports
continued to outgrow its imports in the first
months of this year. China's exports totaled
US$443.5 billion by value in the first five months
of this year, up 27.8% from a year before. And the
country's imports totaled $357.8 billion, up
19.1%. As a result, China earned $85.7 billion
during the period.
It is now a common
knowledge that the soaring trade surplus has
increased liquidity in the domestic market and
added to pressures on the yuan. But it is highly
doubtful that the latest cut in the export-tax
rebate will be so effective in curbing the
country's exports and hence reducing its trade
surplus.
For one thing, despite the fact
that these goods make up nearly 40% of taxable
items for exports, they account for less than 10%
of China's total exports in terms of value.
Therefore, the total value of exports will not be
significantly affected by any slowdown in exports
of such goods.
Moreover, there may not be
significant slowdown in exports of these goods
after the cut of their rebates.
"China has
cut rebates 10 times in past couple of years, but
it seems exports have gained more strength after
each cut. This time, exports may slow down for a
short while but then will soon pick up again," a
financial analyst in Shenzhen said.
He
said some industries such as textiles, which have
narrow profit margins and thus rely heavily on
rebates for profits, will likely be affected. "But
only small and medium-sized enterprises in such
industries would be hurt. They will be forced to
undertake a restructuring - or be taken over by
the big guys, go out of business or change their
core businesses." But this will not affect China's
overall exports.
Zhu Jianfang, chief
economist of CITICS, a major securities brokerage
house based in Beijing, told Beijing Business News
that he did not expect the new policy would have
any significant impact on China's trade surplus.
"On the whole, China will continue to record huge
trade surplus."
Analysts say that unless
China's economy undergoes a profound restructuring
to boost domestic consumption and reduce its
reliance on exports, such measures as cuts in
export-tax rebates can hardly reduce exports at
all. If manufactured goods cannot be consumed at
home, manufacturers have to sell them overseas one
way or another.
But a recent survey by the
People's Bank of China, the country's central
bank, shows that Chinese consumers' desire to
spend continues to decrease given the current
bullish securities markets. According to the
survey in the second quarter of this year, more
than 40% of respondents said it was more
worthwhile to invest in stocks and funds than to
put their money in banks. Only 26.3% of them said
they preferred bank savings. This is the first
time the number of people preferring investment in
securities exceeds the number preferring bank
savings.
In the first quarter, only some
30% of correspondents said they preferred
investing in securities. Moreover, only 19.5% of
the respondents in the second-quarter survey said
they wanted to spend more on consumption. The
percentage is down 0.8 of a point compared with
the first-quarter figure, and down 8.7 points from
the third quarter of last year.
To help
divert funds from domestic markets to overseas,
China's securities watchdog on June 20 expanded
the "qualified domestic institutional investor"
(QDII) program to allow securities-brokerage and
fund-management companies, as well as banks, to
invest in overseas securities on behalf of their
customers. The new measure takes effect on
Thursday. This will attract more funds from
potential consumers to the securities markets at
home and abroad.
China's market for
manufactured goods is already dictated by
oversupply. The situation will become worse as
more and more potential consumers refrain from
buying. So what can manufactures do but try to
sell more of their products in overseas markets?
Hence the export rebate cut may hurt their profits
a bit but could hardly hamper their enthusiasm for
exporting their goods.
(Copyright 2007
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