China's Export Tax Rebate Hike a Sign of Policy Loosening

Long-term rumors and lobbying have now become reality. A tax rebate for some exported textiles and clothing was lifted from 11% to 13% yesterday, meaning the tax rebate ratio has returned to the level in 2006. The government reduced the tax rebate ratio for textiles and clothing to 13% then 11% in 2006 and 2007, respectively. Is this increase a slight adjustment to the textile and export industry, or the beginning of a bigger policy adjustment?

The export increase in the textiles and clothing industry during the first half of the year has apparently slowed down. The total export amount of the industry was $49.96 billion, increasing by 3.4% over the same period last year, much lower than China’s overall export increase in the first six months, which stood at 21.9%. Many labor-intensive textile companies are struggling to break even. According to the statistics of the China National Textile and Apparel Council, the average actual profit for two thirds of the companies in the whole industry is only 0.62%.

The RMB has appreciated 6.5% in the first six months of the year, so if we convert the export amount into RMB, the actual growth rate will be much lower, and the actual export growth of the clothing industry may be zero or negative if we take the inflation into consideration. The 2% tax rebate increase will bring about 17.7 billion yuan of income to the industry.

Some analysts believe the tax rebate increase represents the government’s recent policy to "secure steady and rapid economic development". This is only the first step in launching favorable financial policies, and may be followed by a series of other policies. 

After the National Bureau of Statistics released economic figures for the first half of this year, a microeconomic slide has been regarded as China’s top risk. Meanwhile, the bankruptcy of many manufacturing enterprises has also been reported by the media, and has drawn the attention of the central government. Since the beginning of July, quite a few top leaders have carried out investigations in China’s coastal areas with intensive manufacturing enterprises.

After the investigations, the Financial and Economic Affairs Committee of the National People’s Congress listened to the reports of five related departments about the economic situation in the first half of the year. In the report about this meeting, which was released on July 24, the Financial and Economic Affairs Committee said that the first half of the year had seen an apparent economic slide, and the economic growth in the second half of the year will slow down steadily.

The Financial and Economic Affairs Committee raised a series of suggestions, including granting favorable policies to some industries such as clothing, textiles, and toy manufacturing, lifting the threshold for personal income tax, and promoting value-added tax reform throughout the country, so as to avoid the economic slide.

Some economists believe these suggestions may become a blue print for future policies. Other possible policies include granting tax rebates to small and medium sized enterprises that are in trouble, granting subsidies to enterprises to promote industrial upgrading, encouraging consumption in rural areas.

However, An Tifu, vice chairman of the Chinese Taxation Institute said the current situation is still not clear. On the one hand, China still enjoys high economic growth; on the other hand, some enterprises, especially small and medium sized ones, are really in trouble.

Macroeconomic Control Needs Flexibility and Foresight

This increase in the tax rebate comes only 13 months after the last tax rebate decrease. "This means that to cope with the change of the domestic and international environment, the government has become more flexible in policy adjustment," said Zhuang Jian, chief economic with the Asian Development Bank.

On July 1, 2007, the Ministry of Finance reduced and canceled the export tax rebate for 2,831 goods, accounting for 37% of the total exported goods. An Tifu said it aimed to cope with a great deal of trade conflicts led by exported goods with high energy consumption and high pollution, and China’s booming foreign exchange reserves.

However, against the expectations of decision makers, the deepening of the US sub-prime crisis, some negative factors such as large RMB appreciation, commodity price increases, and credit shrinking, all occurred at the same time. An Tifu said that due to the risk of an economic slide, and troubles disturbing private and small and medium sized enterprises, proper adjustments to the current policies are very necessary.

"The adjustment in the policies towards processing trade in the last two years is completely correct. However, these policies were released at an improper time point, without taking the change in the domestic and international economy, especially the influence of the economic downturn in the US and European countries, into account," says the Financial and Economic Affairs Committee in its report.

The Financial and Economic Affairs Committee also suggests suspending new adjustments to the current processing trade policy, and maintaining the stability of the current policy, so that the export industry won’t be seriously affected.

This time the government aims to support enterprises that still have strong competitiveness, but has not canceled limits on industries with high energy consumption and heavy pollution.

"This fully shows the important role of financial policies in adjusting economic structure," said Bai Jingming, an expert at the Ministry of Finance.