China's reform programme to cut tax rebates for exports seems to have temporarily hit an impasse partially due to stronger-than-expected performance of the export sector - which entails higher payouts from the government.

Since reforms are contingent on the government paying off outstanding rebates before they are introduced, officials and economic researchers admitted that the reform plan has been affected by the surprisingly fast growth of exports.

The central government's 2003 budget for export-tax rebates was based on a 7-per-cent growth for exports forecast by the former Ministry of Foreign Trade and Economic Co-operation.

Even according to more aggressive estimates by some government thinktanks, China's exports were projected to grow by 15 per cent at most.

But the country's exports soared by 32.5 per cent to US$265.79 billion in the first eight months of this year; and are expected to turn in at least a 30-per-cent rise for the full year.

"Because of the heavily-underestimated growth for exports, the Ministry of Finance has drafted a too-low budget for this year's tax rebates," said an official with the State Development and Reform Commission.

The official, who did not want to be identified, suggested that the timetable for the tax rebate reform may be determined by how soon the central government pays off unpaid export tax rebates.

As a result of the robust export growth, unpaid export tax rebates may top 300 billion yuan (US$36.28 billion) by the end of this year, according to statistics from the Development Research Centre of the State Council.

Guangzhou-based 21st Century Business Herald, however, reported yesterday that the Ministry of Commerce is soon to unveil the long-awaited reform plan.

In line with the new policy expected to be in force early next year, the average tax rebate rate will be slashed to 12.11 per cent from the present average of 15 per cent.

The proposed reduction is one percentage point lower than the four-percentage-point cut earlier predicted by trade experts.

Meanwhile, the central and local governments are required to, respectively, pay 75 per cent and 25 per cent of export tax rebates from January 1, 2004.

Currently, the central-government coffers are solely responsible for paying export tax rebates, which totalled 158.9 billion yuan (US$19.21 billion) last year.

The export-tax rebate policy was introduced in 1986 as a major effort to spur exports and played an important role in keeping the yuan stable in 1997 amid the Asian financial crisis.

Although trade experts believe the rebate reform may greatly help ease mounting pressure for a yuan revaluation, they have strongly warned against potential threats posed by the policy change to the export industry.

They fear the proposed policy will damage the competitive edge of Chinese exporters and finally lead to the loss of market share.

Despite the impact from the US-led war against Iraq and outbreak of SARS (severe acute respiratory syndrome), China's exports have maintained a quick expansion.

In August, China's exports recorded a year-on-year increase of 27.2 per cent to reach US$37.4 billion.

Zhang Yansheng, director of the Institute of Foreign Economic Studies under the State Development and Reform Commission, attributed the export surge mainly to the huge influx of foreign investment.

"Overseas investment has played a positive role in spurring export growth," he said.

During the first eight months of this year, actual and pledged foreign direct investment soared by 18.4 per cent and 34.33 per cent respectively to US$36.67 billion and US$67.53 billion.

Government data show that exports by foreign-funded enterprises contributed to over 60 per cent of the country's total export growth between January and August.

(HK Edition 09/23/2003 page7)