Policy Change for Export Rebates Troubles Chemical Sectors

The Ministry of Finance, the National Bureau of Taxation and the
National Development and Reform Commission recently jointly
issued the "Circular concerning the Downward Readjustment of
Export Rebate Rates for Partial Commodities," stipulating that
export rebate rates for 2 831 commodities will be reduced from
July 1st, 2007. Chemical products are the first on the list to
be affected. The export rebate is eliminated for 300 chemical
product codes (based on the eight-digit HS codes). In addition,
the export rebate rate for more than 850 chemical product codes
is reduced to 5% or 9% from previous rates of 13% or 17%. Sectors
such as organic chemicals, inorganic chemicals, pesticides,
dyestuffs, pigments, rubbers, tires and chemical fertilizers
are all affected. On the other hand, the new policy does not
affect rebates for export of benzene, vitamins, antibiotics and
other pharmaceuticals, menthol, pentachlorophenol, vanillic
anhydride, photographic films, natural rubbers and chemical
fibers.


Intent of the government   

Senior officials from the Ministry of Finance are
straightforward in saying that "the main aim of reducing export
rebate rates policy is to ease the unfavorably high surplus
(exports exceeding imports) in foreign trade". According to
experts, the deeper implication of the policy is that China has
chosen this point in time to take down-to-earth measures to
change the mode of export-oriented economic growth toward a more
domestic demand-led growth.
    The rapid growth of the surplus in foreign trade has not only
aggravated trade friction and triggered official objections to
dumping, but also increased the pressure of currency flowing
surplus and the appreciation of RMB with respect to the USD.
     In addition, this move will also further curb the export
of good produced with high energy consumption, high pollution
and high resource consumption; promote the shift of foreign
trade growth modes, and balance between imports and exports; and
reduce trade friction.
    Liu Shangxi, Deputy Director of the Financial Research
Institute of the Ministry of Finance, says that the increasing
trade surplus has already produced considerable pressure on the
macro-economy of China. Besides, export problems have become
more and more prominent, such as exporting great quantities of
resource-intensive products and rebate fraud based on idle
production "runs" reported as producing exports.
    According to customs statistics, the export value grew 8.7
percentage points more than the import value from January to May
this year. China’s total import and export value was US$801.3
billion in those five months, an increase of 23.7% over the same
period of last year. The total export value was US$443.5 billion,
an increase of 27.8% and the total import value was US$357.8
billion, an increase of 19.1%. The total surplus was US$85.7
billion, an increase of 83.1% over the same period of 2006.
   According to Liu Shangxi, the wide-ranging reduction of
export rebates will have tangible negative effects on
enterprises in the affected sectors. In the long term, however,
the cost increase of export commodities will, on one hand, urge
export-oriented enterprises to adjust their operating concepts
and turn to the domestic market. On the other hand higher costs
will accelerate the withdrawal of those enterprises that make
profits due only to export rebates, therefore helping
high-quality, strong enterprises absorb a greater market share
and benefit from improved foreign trade.
   Senior officials from the Ministry of Finance say that after
the elimination and reduction of export rebates for some
commodities, the cost of producing those commodities in China
for export will increase and the unfavorably rapid export growth
will be curbed. As differential policies are adopted in the
policy design this time, a clear-cut sign of governmental
adjustment of the industrial profile (structure or distribution)
and the mix of export commodities is implied. In this way
domestic enterprises are guided to reduce the export of products
with energy-intensive, resource-intensive, and
pollution-generating as well as those with low added value and
low technical level. In balance, the intent is clearly to
increase the export of products with high added value and a
high-tech basis, and to readjust investors’ orientation,
avoiding blind investment that leads to surplus capacity in low
value-add sectors.


Analysis from securities investors  

Chen Dong, Yang Fan
Guojin Securities

Looking back at the adjustments of export tax policies over the
past three years, one can see that export rebates have been
readjusted again and again because the magnitude of the foreign
trade surplus was considered unfavorable. Much greater efforts
have been made however, since 2007. Another dimension is the
appreciation pressure of RMB and high storage of foreign
currencies. In the second quarter of this year, in particular,
new readjustment policies were made public each month.
    Analysis of commodity groups shows that rapid export growth
this year is concentrated mainly in sectors with surplus
capacity such as paper preparations, chemical fertilizers,
plastics, iron/steel and nonferrous metals.
　　The large-scale export of raw material commodities with low
added value does not conform to China's goal of improving the
mix of exports. It is rather a regression. Using the
international market to utilize surplus capacity ultimately
hinders the improvement of China's industrial profile. What is
more, it is detrimental to progress in energy conservation and
emission reduction. In addition, the dramatic growth of exports
with low added value is producing an array of negative
macro-effects such as aggravating the trade imbalance,
increasing the pressure of the RMB exchange rate and adding to
the complexity of monetary policies in China.
　　
Date
Commodity
    Policy adjustment
December 22nd, 2004
    electrolytic aluminum and ferrous alloys
    eliminating export rebate
December 30th, 2005
    coal tar and others
    reducing the export rebate rate
March 21st, 2006
    gasoline and naphtha
    temporally discontinuing export rebate
September 15th, 2006
    petroleum, wax, asphalt, silicon materials some pesticides
    eliminating export rebate

       cement, glass, textiles, plastics etc.
    reducing rebate rates from 13% to 11% or 8%

    Bio-based pharmaceuticals
     increasing rebate rates from 13% to 17%
March 20th, 2007
    chromic salts, turpentine and crude products
    eliminating export rebate
Source: the Ministry of Finance
　　
    It can be discovered from reviewing the previous tariff
adjustment policies that the aim has always been clear and firm
but progress was flat. We can see that the government did not
want to place too much pressure on export-oriented enterprises
and that policy makers still favored deve