China is raising export tariff rebates for certain exports to help producers cope with smaller profit margins as a result of slacking market demand, the CNY’s appreciation and rising production costs.

China Ministry of Finance and State Administration of Taxation promulgated on November 19, 2008, a new Tariff Rebates Regulation which became effective as of December 1, 2008, to increase the export taxes refunding ratios concerning 3770 items of merchandises most of which are labor-dense products. This is the third time that China has raised rebates continuously in the past four months.

Actually, as one of the world largest manufacturers, China has been using export tariff rebates policy to adjust industrial orientation and balance foreign currency for many years. From April 1, 1985, China began to set up such system which resulted by 1994 in the present structure on the basis of refunding of domestic value-added taxation and consumption taxation.

The value-added taxation (the general ratio is 17% of added value) is imposed during every step of producing and trading, and the consumption taxation is imposed by the end. So if the exporters could get the rebates of abovementioned taxations, they would give a lower domestic-taxation-free price to the importer.

China’s textile industry should have the most dramatic experience concerning export rebates changing. From 1994 up to now, Chinese export rebates policies have been adjusted nine times (including the latest time in this November) most of which were fully or partly concerning textile industry. The chart 01 curve demonstrates this fact. You can see the lower ratio during 1996 to 1998, because the Chinese central government didn’t have an adequate budget to settle the outstanding payable tax debates. Then in 1999, the sharp curve increased, hinting at Southeast Asia’s financial crises (China should keep the growth speed of export and economic development to deal with these crises). From 2003 through 2007, one can see the obviously descending trend of the ratio year after year. It is understood that the Chinese government was facing the increasing trading conflict against European Union and the United States and trying to encourage and compel the domestic enterprises to improve the margin profit through applying new technology and advanced operation level.

One imagines that this curve would keep descending for a considerable period if there were no worldwide financial turbulence and further disruption of industrial entities. Although the decreasing rebates policy would gradually cut down the profit of the domestic manufacturers, but if the government didn’t do this and allowed the enterprises continue their low-cost competition, these enterprises would definitely shut down sooner or later. The reason for this is a three to eight percent profit margin won’t allow them to deal with the CNY’s appreciation and the climbing costs. Obviously the Chinese government really expected to change the lower-price-quality impression of products made in China, and to alleviate the trading conflicts between China and developed countries.

Things seemed to be going the way that China desired. In past few years, we could see not only hundreds enterprises closed, but also more enterprises started to change their business route. They were focusing on new technology, brand reputation, customers’ value and market promotion.

But the unexpected crises interrupted this. The financial turbulence has spread to industries, and the consumption kept declining. According to the data of China Customs, the growth velocity of export in October of 2008 rapidly dropped down 3.1 percentiles compared with the corresponding period last year. The magnitude and velocity of collapsed enterprises and unemployed labor were much overestimated.

China has three engines of economic development: investment, consumption and export. But the investment will be for long-term, and the consumption re-growth will depend on the customers’ confidence and enterprises’ profit. So keeping export growth is the most prompt therapy and probably rescues many industries. Actually, every one percentile change of textile products’ export rebates ratio will incur the fluctuate of profit of four billion RMB (approx USD 580 million).

But does this rescue work ultimately? I’d rather believe this is a temporary first-aid treatment. According to the present negotiation ability of Chinese enterprises, I’m afraid the exporters’ increased profit on account of more rebates will be partially transferred to the importers. Meanwhile, the government will be facing huge financial pressure as a result of rebates enhancement. That means the Chinese government will be giving the collateral allowance to overseas companies. Sometimes it’s necessary but it will never be permanent.

And more importantly, the efforts to upgrade Chinese enterprises during the period from 2003 through 2007 would possibly be wasted. Someone will come back to the old way and enjoy the easy-gain benefits from national policy. I do believe these crises will be over in the uncertain future, so what are we supposed to do facing the upcoming round of competition by then?

The governmental rescue is just for the vital period while we have no alternative. Once the situation gets better, I’m sure the Chinese policy orientation will be changed. So the Chinese government should have made more efforts to let everyone, whether a domestic or overseas enterprise, knows what they’re doing is just a rescue rather than a pampering.