Tax rebate cut stings electronics exports
By Zi Mu (China Business Weekly)
Updated: 2004-03-08 15:08

A reduction in the export tax rebate rate is weighing on China's electronics exports, highlighting a flaw in the country's export promotion strategy.

The Ministry of Information Industry (MII) projected exports of electronics information products will stand at US$140 billion this year, deputy MII chief Lou Qinjian said last week.

That would be a slight decrease from last year's US$142 billion.

The MII attributed the projected decrease, in a large part, to a reduction in the export tax rebate rate.

The government cut the export tax rebate rate by an average of 3 percentage points from 15.51 per cent at the beginning of this year.

Visitors to a telecom show in Beijing walk past the Motorola booth. The Chinese Government's reduction of the export tax rebate rate is expected to seriously impact the country's electronics exports, including those from multinationals which have manufacturing facilities in China.[newsphoto]

The move is designed to ease the renminbi revaluation pressure and the government's financial burden.

The projected decrease would be the first in recent years.

Between 1998 and 2002, electronics exports enjoyed an average growth of 24.7 per cent. Last year, the growth year-on-year stood at 53 per cent.

Electronics account for about one third of the country's total exports.

The immediate negative effect on electronics exports brought on by the rebate reduction is an indication that the export promotion strategy is largely ill-devised, industry observers said.

"The country's electronics exports have long been relying too much on the rebates, which does not bode well for the long-term development of the industry," said an industry professional, who asked not be named.

The rebate is intended to help export-oriented companies reduce costs, but some firms have used it to cut prices to squeeze out rivals, he said.

Under the rebate scheme, the government simply gives tax money back to exporters after the goods are sold.

Currently the government offers uniform rebates to export-oriented companies.

That is obviously flawed, the professional said.

"The rebates should be offered to specifically targeted areas, especially those companies which really promised to be globally competitive," he said.

The rebates put the government under high financial pressure: by the end of 2002, the government owed export-oriented companies 247.7 billion yuan (US$29.9 billion) in rebates.

"The government always formulates promotion strategies with very good intentions, but many have proved not feasible," the anonymous industry professional said.

"The result is, companies do not enjoy much of the preferential policies, and those policies become an easy target of foreign criticism."

For example, China rebates value-added tax (VAT) on semiconductors to domestic firms.

But few domestic chip makers enjoyed the rebates and the scheme has drawn much criticism from US firms and feeding a simmering trade dispute.

The government owed Nokia, Motorola, Siemens and AOC hundreds of millions of US dollars in tax rebates, said Dong Yunting, a senior expert with China Centre for Information Industry Development (CCID) under the MII.

Those companies have several joint ventures with local partners and manufacturing facilities in China.

The government owed Nokia alone more than 700 million yuan (US$84 million) by the end of 2002, Dong said. Last year, the figure more than doubled.

Nokia in 2003 saw a 28.6 per cent decrease of exports.

The company attributed the decrease to the dollar devaluation and SARS outbreak.

A company official said the rebate rate cut, together with the owed rebates, would put Nokia under increasing pressure as that would increase its costs.

Insiders said the cut would put a dent on many firms' profitability and even close down some which are relying heavily on exports.

Xu Xiaotian, a MII official overseeing the semiconductor industry, said the government should reduce its support to some industries with a low added value but increase support to the software and semiconductor industries which are critical to the long-term development of the country's electronics sector.

The rebate rate cut may create more negative than positive effects to the country's ambitions to become a semiconductor manufacturing centre both in the short and long term, he said.

Some industry observers, however, said the rebate cut will benefit the domestic industry in the long run though it would hurt it in a short term.

The rebate cut should help China's exporters focus on some large overseas markets and make them more competitive, they said.

But they urged the government to seek other incentives, especially feasible ones, to boost the domestic electronics industry.

Those incentives should include a special fund used to finance research and development of key projects, they suggested.

And the fund should also be channeled to overseas marketing campaigns of those big names as well as very promising start-ups.

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