The Ministry of Finance, State Administration of Taxation, National Development and Reform Commission, Ministry of Commerce and General Administration of Customs jointly released the Circular of the Ministry of Finance and State Administration of Taxation on the Lowering of Export Rebate Rates for Some Commodities with the approval of the State Council on 18 June 2007, stating that effective from 1 July China would adjust its export tax rebate policy. The following are answers given by the Ministry of Finance to questions of public concern:

Q: What are the main considerations for the present adjustment?

A: China's economy continues its steady, rapid growth this year. Meanwhile, agricultural production is basically stable, the industrial structure has improved, fiscal revenue shows sustained growth, market sales are brisk, reform and opening up are proceeding in an orderly manner, employment is growing, the income of urban and rural residents increases markedly, and social undertakings are also developing in a fast pace. However, there are also problems in the development of the economy, such as huge trade surplus, continued investment growth at high levels and excessive liquidity.

According to customs statistics, China's total volume of imports and exports between January and May 2007 was US$801.3 billion, up 23.7% year-on-year. Of this, total exports amounted to US$443.5 billion, up 27.8% year-on-year, while total imports amounted to US$357.8 billion, up 19.1% year-on-year. Export growth exceeded import growth by 8.7%. Cumulative trade surplus amounted to US$85.7 billion, an increase of 83.1% year-on-year.

Excessive trade surplus not only aggravates trade friction but fuels excessive liquidity at home and increases pressure for exchange rate appreciation. In order to ease the country's trade surplus and promote trade balance, the government has to resort to a package of policies and measures and make continued efforts to strengthen macro control. The latest export tax rebate adjustment is an integral part of this package. The main purpose of this adjustment is to further curb excessive export growth and mitigate problems arising from excessive trade surplus. Through this adjustment, the government hopes to further implement the scientific development concept, optimise the export mix, restrict the export of high energy consumption, high pollution and resource consumption products, bring about a change in the mode of foreign trade growth, strike a balance between imports and exports, reduce trade friction, expedite the change in the mode of economic growth, and promote sustainable economic and social development.

Q: What are the main points of this policy adjustment?

A: The latest adjustment affects 2,831 products, or 37% of the total items listed in China's customs nomenclature. They mainly cover three areas:

First, it eliminates export tax rebates on 533 high energy consumption, high pollution and resource consumption products. These products include: endangered animals, plants and their products; salt, solvent oil, cement, liquefied propane, liquefied butane, LPG and other mineral products; fertilisers, chlorine, dyes and other chemical products (except fine chemical products); metal carbides and activated carbon products; leather; certain wooden boards and disposable wooden products; general plain carbon welded pipes (except petroleum casing pipes); non-aluminum alloy rods and other simple non-ferrous metal processing products; and ship blocks and non-motorised vessels.

Second, it lowers export tax rebate rates on 2,268 products that easily trigger trade friction. These products include: vegetable oil; some chemicals; plastics, rubber and their products; luggage and other leather and fur products; paper products; garments; shoes and hats, umbrellas, feather products; some stones, ceramics, glass, pearl, gemstones, precious metals and their products; some iron and steel products; other base metals and their products; planers, gears, cutting machines, broachers, diesel engines, pumps, fans, exhaust valves and spare parts, rotary furnaces, coking furnaces, sewing machines, stitching machines, golf carts, snow vehicles, motorcycles, bicycles, trailers, lifts and parts, leads and brazing machines; furniture; watches and clocks, toys and other miscellaneous products; some wood products; and viscose fibre.

Third, it replaces export tax rebates on 10 products with export duty-free treatment. These products include: peanuts and nuts, oil paintings, carving boards, stamps and tax stamps.

Details regarding specific policy content and adjustment of export tax rebate rates for different commodities can be found in the Circular of the Ministry of Finance and State Administration of Taxation on the Lowering of Export Tax Rebate Rates for Some Commodities. Please visit the website of the Ministry of Finance at http://www.mof.gov.cn

Q: Will there be a grace period for contracts signed before the policy change as in last year?

A: In September 2006, the Ministry of Finance issued the Circular Concerning Adjustment to Tax Rebate Rates for Certain Exports and Additions to the Catalogue of Prohibited Products for Processing Trade in a move to adjust the export tax rebate policy for certain products. Taking into consideration that the adjustment covered a large number of commodities and involved many sectors, and that it was difficult to alter the prices of export contracts already concluded, a three-month grace period was offered to minimise enterprises' losses and ensure a smooth transition. In other words, the original export tax rebate rate still applied to affected items if they complied with certain conditions and export contracts were filed before a stipulated date. However, many spurious contracts were found in the course of implementation and these affected the effects of macro control and resulted in unfair competition. Since the latest export tax rebate adjustment is mainly intended to ease excessive trade surplus, and considering the problems arising from the grace period for last year's adjustment, no grace period is offered this time. In order to give enterprises more time to prepare themselves, details of the adjustment were announced before the adjustment took effect. However, in view of the fact that most shipbuilding contracts and overseas engineering contracts have a long contract period and that it is difficult to make price changes, the original export tax rebate rates still apply to export equipment and building materials used in export shipbuilding contracts and long-term overseas engineering contracts for which bids have been won and the prices have been agreed upon and cannot be changed if these contracts were filed with the tax authorities in charge of export tax rebates before 20 July 2007.

Q: What impact will this policy change have on China¡¦s foreign trade?

A: After the adjustment, the original five-tier export tax rebate rate structure of 17%, 13%, 11%, 8% and 5% is replaced by the new five-tier structure of 17%, 13% 11%, 9% and 5%.

The elimination and lowering of export tax rebates on some commodities will increase the cost of export goods, thereby slowing down excessive export growth. The adoption of a policy of treating different products differently, "increasing rebates on some while lowering the rates on others," sends out a clear message of the government's intention to adjust its industrial structure and export mix. This will give enterprises incentive to reduce their export of high energy consumption, high pollution and resource consumption products and products with low value-added and technology content, increase their export of products of high value-added and technology content, and adjust their investment direction, thereby avoiding random investment and excessive production capacity. In the long run, this is conducive to changing the mode of economic growth and achieving sustainable economic and social development, which is in the long-term interests of the country and the people. On the whole, the latest adjustment is a moderate one, with emphasis on the industrial structure and should not have an obvious negative effect on exports.

Policy Adjustment Will Have Great Impact on Exports

Although the Ministry of Finance has pointed out that this policy will not have a negative impact in the long run, experts in the field believe that the policy change will have a great impact on China's exports. On the one hand, China's trade surplus cannot be reduced or reversed within a short time as in the case of many developed countries which have gone through a long period of trade surplus in their foreign trade development. On the other hand, this policy will have a considerable impact on low-end industries and export-oriented small and medium-sized enterprises.

According to some foreign trade experts, China's textile industry will bear the brunt of this change and the scope of employment affected will be great. It is pointed out that if China voluntarily gives up its share in the international market in some sectors, it will be very difficult for these sectors to regain their market share in the future. Other developing countries, such as Vietnam and India, are already eyeing the international market for textiles and electrical appliances.

Iron and Steel: Lowering of Export Tax Rebates has Limited Effect

In the latest export tax rebate adjustment, the rebate rate for some iron and steel products (except petroleum casing pipes) is lowered to 5%. The industry believes that this round of adjustment will have little impact on China's iron and steel market as a whole because it only affects a small scope of products and the percentage is small compared with the previous two rounds of adjustments.

The industry also believes that six consecutive rounds of downward adjustment may suggest that the end is in sight for rebate rate adjustments for iron and steel exports.

Non-ferrous Metals: Export Rebate Adjustment a "Double-edged Sword"

According to Yang Hongjie, an analyst with Haitong Securities, the adjustment of export tax rebates on non-ferrous metals suggests that China obviously does not encourage the export of semi-processed non-ferrous metals, primary non-ferrous metals and general non-ferrous metal products. China is also gradually lowering the rebate rates on the export of medium grade non-ferrous metal products. However, aluminum foil is not included in the latest round of adjustment.

Impact on Stock Market Limited in Short-term

As far as the stock market is concerned, the adjustment of export duties touches on the two cornerstones of the stock market, namely profit growth and liquidity abundance. Thus, the adjustment is bound to have an inhibiting effect on the trend of rising asset prices. However, whether or not the effect will be significant will mainly depend on the scope and intensity of the adjustment.