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Buffer the export fall

(China Daily)
Updated: 2008-10-23 07:43

By raising tax rebates for a quarter of its export portfolio from the beginning of next month, the Chinese government ostensibly intends to provide some breathing space for domestic exporters.

The move came as the government announced a slew of stimulating measures to maintain economic growth, which declined to 9 percent year-on-year in the third quarter, the slowest pace over the past five years.

Such a move is necessary to prevent a drastic slump in the export sector. But it should not be interpreted as a signal that China will continue to rely heavily on export for economic growth. Nor should Chinese exporters expect more government aid to ride them out the looming global slowdown.

Higher refund rates can certainly help a lot at a moment when weakening external demand has made profit margins of many Chinese exporters paper thin. Increased rebates will not only ease pressure on their operations but also provide some fund for their industrial upgrades.

Latest statistics show that the country's exports grew 22.3 percent year-on-year in the first three quarters. Though such a growth rate remains quite impressive given its huge base, it is 4.8 percentage points lower than in the same period last year. And worse than the average is the performance of labor-intensive industries such as textile, garment and toy.

The export-oriented textile industry has been suffering from low profit margins amid the rise of the Chinese currency, domestic labor cost and raw material prices even before the global financial crisis worsened recently. An early survey by China National Textile and Apparel Council showed that profit margins averaged at only 3.9 percent for textile companies last year, with two-thirds of them reporting average profit margins of 0.62 percent.

Since economic growth of China's major trade partners like the United States and the European Union have considerably slowed so far this year and probably will not recover soon, things can only get worse before turning good for Chinese exporters. In other words, they have to adapt themselves to shrinking foreign demand and squeezed profit margins in coming quarters, if not years.

Meanwhile, the large number of workers that the export sector hires make it compelling for the government to take measures to prevent massive lay-offs as the global slowdown hit Chinese exporters hard.

The hike of tax rebates for exporters clearly underscored a sense of urgency that Chinese policymakers felt about the country's export growth.

Yet, as the country moves decisively to boost domestic demand as the prime mover of economic growth, the latest move should only be deemed as a stopgap measure to buffer the impact of weaker overseas demand. Chinese exporters must double their own efforts to climb up the value chain to weather the hard time and succeed in future.

(China Daily 10/23/2008 page9)