A government decision to lower tax rebate rates by an average of 3 percentage points was a wise move to alleviate the heavy burden on State finances and ease the upward pressure on the yuan, according to a senior economist.

Yuan Gangming, with the Chinese Academy of Social Sciences, said the adjustment was the right direction to take to rationalize the country's tax rebate system.

The cuts, which take effect on January 1, will also push up the costs of exports and weaken their competitiveness on international markets, Yuan said.

"This will help ease the increasing pressure for renminbi appreciation, which is a result of the strong trade surplus," he said.

According to a report by the Ministry of Finance, the cuts are in line with State policies to support exports of certain goods and restrict others.

Rebates for export commodities the State supports will not be cut or will only be reduced marginally, the report said.

Rebates will increase for exporters of some goods such as wheat and corn powder. Goods subject to cuts include petrol, zinc and coke, the report said.

Experts and government officials have been calling for reform of the existing tax rebate system for some time, because it has begun to have a negative impact on the nation's social and economic framework.

The government has failed to pay tax rebates to export companies on time, which has been occurring at the same time as rapid export growth, said Ni Hongri, a senior researcher with the State Council's Development Research Center.

The delay in tax rebate repayments has had a significant impact on the normal business of export companies, Ni said.

The issue has also become a hidden problem for the country's fiscal system and the sound operation of the economy, she said.

By the end of last year, the delayed payment of tax rebates had reached more than 247 billion yuan (US$29.8 billion).

Almost all tax refunds for 2002-03 were unpaid to export companies in several major provinces and municipalities, Ni said.

At the end of last week, Premier Wen Jiabao said the time is ripe for the country to reform the tax rebate system, given the country's rapid economic growth, strong export momentum and abundant foreign exchange reserves.

However, some experts still worry that the tax rebate rate cut will weaken the central government's ability to sustain the export sector's growth.

"Lowering the rate will inevitably affect China's exports and the country's economic development in the end," said Niu Li, a senior economist with the State Information Center.

But economist Yuan said there is no need for concern as internal demand is playing an increasingly important role in the economic development.

According to the reform plan, the government will firstly use the increased value-added tax and consumption tax collected from imports to pay the tax rebates.

(China Daily October 15, 2003)