China Modifies It's Rebates Policy

This piece in Bloomberg today about China's move to restructure its export rebates policy is definitely worth a look. Note: they are not removing export incentives, but simply trying to redirect them as part of a policy to move up the value chain. As such this move may well be 'neutral' on China's trade surplus situation. As I have a go at explaining here, China's problem is not so much that it has too much cash coming in, as that this cash is leading to distortions in the investment process. Basically I have less sympathy with those who simply criticise China for having the surplus per se, since it is hard to see China importing consumer products from the developed world on any substantial scale at present. As a consequence most of the purchases they make are bound to be as a contribution to the investment budget, so the new policy could be seen as simply a way of redirecting surplus investment into higher value activities. As such is a good move on China's part. Now we will see whether those who were worried about China producing too many T-shirts and sandals are any happier with being on the receiving end of their IT products.

China cut export incentives for steel and textiles and increased them for high-technology and biomedical goods, seeking to curb a record trade surplus and encourage production of higher-value goods.

Export rebates on steel and textiles were cut by as much as 3 percentage points while incentives for technology and processed agricultural products were raised by up to 8 percentage points, the government said. The rebates reduce the amount of sales tax paid on exports.

The changes may help China fend off criticism that the world's fastest-growing major economy uses an undervalued currency to boost exports of cheap goods. Group of Seven finance officials gathering in Singapore this weekend are expected to renew pressure on China to let the yuan gain more rapidly.