Abolishing or cutting tax rebates to Chinese exporters would help relieve the pressure for appreciation of the Chinese currency, said Chinese economist Lin Yifu.

Lin said recently in Beijing at a seminar sponsored by the Hongkong and Shanghai Banking Corporation Limited (HSBC) that for export-oriented Chinese enterprises, lowering the tax rebate rates means an effective appreciation of yuan.

Since 1985, China has adopted tax rebates for exporting enterprises. The central government paid back a certain proportion of the consumption taxes and value added tax (VAT) to the enterprises after they paid taxes for exported goods. The tax rebates were allowed by rules of the World Trade Organization and widely adopted in many WTO members.

In 1999, the currencies of Southeast Asian countries were devaluated against the yuan as a result of the Asian financial crisis, posing great challenges to China's exports. In order to increase exports and reverse the trend of deflation, the Chinese government raised the average tax rebate rates from six percent ofexport value to 15 percent.

Lin said China had lately seen a strong growth momentum in exports, which resulted in trade surpluses and relatively fast growth of foreign exchange reserve. He said these factors had raised the international expectation for an appreciation of the yuan. The speculative activities of some international investors also added upward pressure on the Chinese currency, he said.

Lin pointed out that it is now the right time for China to change the export rebate policy. A slash of tax rebates to exporters would immediately lower the growth rate of China's exports, thus shrinking the trade surplus and throwing a brake on the increase of foreign exchange reserves.

Past experience proved that Chinese enterprises are highly sensitive to changes in the cost of tax payment. It is estimated if the tax rebate rates were lowered by one percentage point, the growth of China's exports would slow down by 4.9 percentage points.

Li said if the Chinese government decided to cut export tax rebate rates, it would, by doing so, sent a clear signal to international speculators that the stability of yuan would remain intact. China would use other policy options to vent the appreciation pressure on its currency.

The possible reduction of tax rebates might affect 23 percent of Chinese enterprises that are export-oriented. However, appreciation of the yuan will have significant impact on all aspects of China's economy.

Li said readjustment of export tax rebate policy would be a more sensible choice for the Chinese government than revaluating the yuan.

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