China's elimination of tax rebates on gasoline and diesel exports is expected to force exporters to sell part of the products in the home market but the impact will be limited as the rapid increase of domestic demand would be able to accommodate the supply rise, traders and company officials said.

The government currently imposes a 17 per cent value-added tax on crude and most oil product exports, but exporters receive a 13 per cent rebate from the government.

Under the new rules, China is expected to eliminate export rebates on crude, kerosene and diesel from 2004, while the rebate on gasoline would be cut to 11 per cent from 13 per cent.

The cuts are the result of reform of the entire rebate system; they affect millions of export products, and are partly aimed at deflecting international concerns about China's growing trade surplus and increasing calls for the appreciation of its currency.

Traders said the export of crude would remain almost intact in the rebate reform because most of the exports are under government-to-government deals with the central government deciding the volume.

China, which is expected to import more than 80 million tons of crude this year, exports several million tons to Japan, North Korea, Singapore, Indonesia, South Korea, and the United States.

For gasoline and diesel, traders said, the rebate will sap the oil companies' interest in exports; and divert their attention to the domestic market.

The pressure of an export drop is less on gasoline than on diesel because the rebate on gasoline exports will be lowered by a mere 2 percentage points.

"The cut is not steep enough to trigger a large decrease in export volumes of gasoline," said the manager.

He said that domestic gasoline demand will continue to surge in coming months due to the robust auto sales and economic growth.

An official with Sinopec, the nation's largest gasoline and diesel producer and exporter, said that its export strategy would remain stable even though profits from exports would be lower.

"The impact of the rebate elimination will be limited as gasoline and diesel are exported only to balance the domestic market. And the exports themselves do not contribute much cash flow to the oil companies," said the official.

Due to the refinery configurations, China has to produce more gasoline than it consumes so as to make enough diesel to meet market demand. It has to sell the excessive gasoline abroad, albeit at a low profit.

Due to the price hikes in the international market, China exported 5.9 million tons of gasoline in the first nine months, a jump of 32 per cent year on year. Exports of diesel surged by more than 200 per cent year-on-year to 1.9 million tons.

(HK Edition 11/04/2003 page1)