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China to Cut Tax Rebate on Some Exports

China will cut its generous tax rebates on more than 2,800 export items in a move designed to curb the country's growing trade surplus and appease critics of its economic policies. But, as Joseph Popiolkowski reports from Hong Kong, the measure may not have a meaningful impact.

The cuts announced Tuesday by China's Finance Ministry target exports that use a lot of energy to produce, such as cement and fertilizer, and low value-added goods, such as steel, textile, and paper.

The tax rebate system is a legacy from the 1980s, when China tried to encourage foreign investment in its export sector by offering to refund a percentage of taxes paid by exporting businesses.

But today, China has a monthly trade surplus of about $20 billion. In comparison, Japan's monthly trade surplus with its partners is only $6 - 7 billion.

Critics in the United States and Europe complain of cheap Chinese products flooding their markets. And China's trade surplus has fueled accusations by U.S. politicians that China is intentionally undervaluing its currency to tip the trade scales in its favor.

Chief China economist for JP Morgan, Frank Gong, says Tuesday's move should help alleviate some of those concerns.

"I think it is helpful, and people will regard it as the right decision because China's major trading partners, including U.S and Europe, has been complaining China's heavy tax rebate program is kind of a subsidy for its exporters," said Gong. "So, by reducing the subsidy, definitely, I think it will help to cool off some of the critics of China's widening trade surplus."

Gong says companies that produce goods that result in a lot of pollution will suffer profit loss. But, he says, the overall effect on China's export competitiveness will be minimal.

"They just do not believe it is a good deal for China exporting all the steel - resource-intensive, energy-intensive stuff - and to leave all the pollution behind. So I think the policy move announced yesterday will constrain somewhat China's export surplus, but just somewhat. I think its impact will be quite limited."

The move announced this week, which goes into effect July 1, is the second in a two-step approach to deal with the trade surplus problem. The government is also working on increasing export taxes and cutting import tariffs. But Gong says allowing China's currency, the yuan, to appreciate faster would have a bigger impact.