At a time when the country's trade sector has just weathered the withering impact of SARS (severe acute respiratory syndrome), new reform measures in relation to the export rebate system are called for better cushioning domestic exporters against future adverse conditions at home and abroad.

Shanghai Port [newsphoto.com.cn]

A recent proposal to adjust the mechanism for refunding export tax, drafted by three key economic arms of the government, instead, forecasts a critical change in the country's long-term policy of stressing the expansion of exports.

Following the common practice to avoid double taxation in international trade, China adopted tax rebates to encourage export growth. The rebate rate has been fixed at 15 per cent since 1999.

In the proposal jointly submitted to the State Council, the Ministry of Finance, the Ministry of Commerce and the State Administration of Taxation suggested a cut in the rebate rate, limits on export goods qualified for duty reimbursement and establishment of a responsibility-sharing mechanism for the central and local governments.

These suggestions, put forward based on extensive investigations of exporting businesses in the country, offer possible solutions to many of the knotty problems the government faces in dealing with snowballing unpaid rebates.

The central government, which solely bears the burden of refunding export tax, has long felt the pinch of not having sufficient budget funds to match the pace of export growth.

It is reported that the central government was in arrears up to 247.7 billion yuan (US$29.9 billion) in this area.

Now, according to the new proposal, the average rebate rate will be slashed from 15 per cent to 11 per cent, saving billions of yuan for the government every year.

By abolishing rebates on certain exports, the government can exert a subtle influence on improving the country's export mix, which, in theory, will enhance the competitiveness of Chinese exports in the future.

And a responsibility-sharing mechanism will not only ease the central government's burden by 25 per cent but also goad local governments to strengthen supervision to plug loopholes in taxing the trade sector.

Local protectionism was once a shield for export rebate fraud, a main target of the central government's crack-down efforts. With their own fiscal coffers involved, local governments will likely pursue aggressive taxation.

Moreover, as international pressure on revaluation of the renminbi mounts, such a policy change, if implemented, can cut the country's robust export growth momentum, a momentum some other countries mistakenly attribute to the exchange rate level of the Chinese currency.

In a sense, the proposal aims to kill more than two birds with one stone.

In addition to all these remedies, the drafters also hope that the export rebate reform, which is considered long overdue, would also be welcomed by domestic exporters.

In fact, many domestic exporters have suffered a bitter shortage of funds since the government has delayed payments of export rebates for up to two years.

So, reduced but timely paid new export rebates appears to be an acceptable, if not good, bargain for trading firms.

However, such a critical policy change requires more deliberations as any such changes, if not well handled, could still turn good intentions into unfavourable results.

Export growth is and will remain a vital driver of the Chinese economy as the country's efforts over recent years to boost domestic demand have yet to bear fruit as expected.

The country's exports rose by 22.3 per cent year-on-year in 2002, pushing the year-long trade surplus to US$30.35 billion, about 2.5 per cent of the country's GDP.

Tax rebates have served as an effective incentive to boost export growth in recent years.

Top Chinese financial officials vowed in May that extra fiscal revenue savings would be channeled to accelerate refunding taxes on exports.

According to the Ministry of Finance, the rebates have been rising at an annual rate of 36.3 per cent in recent years, more than twice the growth rate of fiscal revenue of the central government.

Admittedly, worries about the growing rebate arrears are justified. It would not be easy for the central government to preside over a ballooning deficit while paying outstanding export rebates.

Nevertheless, domestic exporters' current difficulties have to be taken into consideration.

More important, the emerging impact of SARS and the worsening international market conditions all require urgent endeavours to stoke the furnace of rapid export growth.

A cut in the export rebate rate as proposed may cause the country in several years of slowed export growth.

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