Export rebates cut in bid to ease yuan row In an effort to ease international pressure to revalue the renminbi, the central government will reduce tax rebates for exporters. The rebate on value-added tax would on average fall from 17 per cent to 13 per cent, tax experts said, and should mean that products made in China would be more expensive. 'This is in effect a 4 per cent revaluation of the renminbi,' said Dong Tao, chief economist for Credit Suisse First Boston in Hong Kong. Lawrence Sussman, a tax lawyer with a US law firm in Beijing, said the concession 'may get some mileage for China'. 'The Americans will be happy to see this,' he said. Chairing a special meeting in Beijing, Premier Wen Jiabao said the rebate system, introduced in the early 1980s to attract foreign manufacturers to the mainland, had played a part in boosting exports. But it had also created 'hidden danger'. 'While exports have grown rapidly in recent years, problems created by export rebates have become increasingly conspicuous,' Mr Wen said. '[Export rebates] have affected the normal operation of export companies, especially foreign trade firms, and brought hidden danger to the running of the country's finance and economy.' Mr Wen said that rebates had grown so much that the central government could no longer afford them. He laid down 'five principles' in reforming the rebate system, including setting up a mechanism under which the central and local governments will share future payments of the subsidies. Also, new tax revenue generated from imports and consumption taxes would be used primarily for such payments. The premier pledged the central government would pay rebates it now owed exporters, who have long complained the government is too slow in making payments. The Ministry of Finance has given export manufacturers rebates of up to 17 per cent on foreign sales. This incentive helped launch Guangdong into an export powerhouse and helped bring a slew of foreign manufacturers to coastal areas. In recent months, the United States has complained the yuan is undervalued by as much as 40 per cent and the peg at 8.27 yuan to the dollar has given Chinese exports an unfair advantage. President Hu Jintao and Premier Wen have refused to revalue the yuan, fearing such action would lead to economic volatility. But by cutting export subsidies such as the VAT rebate, they are in effect making a concession to the US and other trade partners. Mr Sussman said the central government had been considering cutting VAT rebates for some time because the Finance Ministry had found it difficult to pay the subsidy. But the government was politicising the timing of the tax reform by using it as a trade concession with the US. But Mr Sussman said the US Congress probably would still continue the pressure by pushing through some form of extra tariffs on Chinese-made goods. 'I don't see Congress backing off on the issue, but this concession from China goes a long way to alleviate the pressure,' he said.