China’s move to scrap export rebates will hurt exporters

23 June 2010 09:12  [Source: ICIS news]

SHANGHAI (ICIS news)--China's move to cancel tax rebates on 406 products, including some chemicals, from 15 July could squeeze exporters’ margins but will help to shift the focus of the economy to domestic consumption from heavy reliance on exports, analysts said on Wednesday.

On 22 June China’s Ministry of Finance announced that some types of steel, non-ferrous metal, pharmaceutical, chemical, plastics, pesticides rubber and glass products would no longer enjoy the export rebate which ranged from 5-17%.

“Obviously, it is a double blow for exporters after China’s move to make the yuan more flexible on 19 June. Exporters will see their margins squeezed further,” Xiong Jie, an analyst at Jiangsu-based brokerage house Huatai Securities said.

“However, China’s exports are recovering robustly this year, which gave confidence to Beijing policy-makers to make the bold decision,” Xiong added.

China was pushing ahead with an economic policy that would enable it to sustain growth through environmentally-friendly domestic consumption rather than relying heavily on exports, analysts said.

In addition to focusing on domestic consumption, China would also phase out industries with high energy consumption and pollution levels, said Liao Zhenhua, an analyst at Shenzhen-based brokerage house China Merchants Securities said.

"I assume China will put more products on the export rebate scrap list in the future. In the long run, it is good news for the country’s development despite the short-term pain for exporters," Liao added.

Some chemicals such as ethanol, trisodium phosphate, glyphosate, waste, parings and scrap of polymers of ethylene were also included in the list.

For instance, butadiene rubber (BR) and acrylonitrile-butadiene rubber (NBR) which enjoyed a 5% export tax rebate would now be taxed, according to the ministry’s announcement.

While ethanol exports too would no longer enjoy tax rebate cuts, domestic producers were unfazed by the ruling as there were hardly any exports of the material, sources said.

"They probably reduced rebates to stem ethanol exports, because it [ethanol] is extracted from agricultural sources such as corn and tapioca. The government has a protection policy [concerning] land use for food," said a trader.

Another concern was that once the export rebates were removed, there would be excess material available in the local markets, thereby weighing down domestic prices of these goods, analysts said.

This is the first time China has ended export rebates on some items. It had increased tax rebates for exports seven times since August 2008 in the wake of the global financial turmoil.

Additional reporting by Dolly Wu and Heng Hui

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By: Judith Wang
+65 6780 4359



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