China will reduce tax rebates on exports of high energy-consuming, resource-intensive and environmentally-harmful products, Chinese officials say.

The as-yet unreleased policy is scheduled to take effect around September or October despite strong protests from domestic companies and traders, according to China's Caijing magazine.

The move reflects the Chinese government's efforts to shift emphasis away from low-value-added exports. "The Chinese government wants to see a trade balance. We don't deliberately seek a rising surplus," says Chong Quan, spokesman of China's Ministry of Commerce.

Introduced in 1985, the tax rebates for exporters have made Chinese products more competitive on the international market.

It is now expected that China will cut tax rebates by an average of two percent for sectors such as textiles, metallurgy, iron and steel. Only high-tech industries avoid the knife -- their rebate is being increased.

"Export rebates for high energy-consuming, high-polluting and resource-intensive products should be stopped," says Fu Ziying, assistant to the Minister of Commerce.

Trade surplus

Booming exports have contributed significantly to the Chinese economic miracle. In recent years, the cart of the Chinese economy has been hauled by the two "strong horses" of investment and foreign trade, with the "weak donkey" of consumption tottering in the middle.

To sustain steady development of the national economy, China's policymakers aim to spur domestic consumption by increasing consumer purchasing power.

Such a strategy can help rein in over-investment, ease pressures on the Renminbi and dissuade foreign anti-dumping lawsuits resulting from the mammoth trade surplus, industry officials say.

In the five years since China's accession to the WTO, the country's foreign trade has grown at an average annual rate of over 30 percent.

Semi-manufactured goods

By increasing export tariffs and lowering export rebates in 2005, the Chinese government enjoyed some success in curbing exports of high energy-consuming, high-polluting and resource-intensive products: coal exports dropped 12.7 percent, coke exports dropped 10.7 percent, billet exports dropped 35.6 percent, and exports of non-forged aluminum dropped 20 percent year on year in the first six months of this year, according to the National Bureau of Statistics.

However, to get round such restrictions, many Chinese businesses found a new strategy: they began processing materials slightly -- not completely -- for export. Thus the bulk of Chinese exports moved from resource-intensive products to preliminary processed products and semi-finished products.

China's exports of semi-finished aluminum products, for instance, surged 57 percent year on year to more than 400,000 tons in the first five months of this year, according to Chinese Customs statistics. The new adjustment reported in Caijing therefore targets semi-finished resource-intensive products with low added value, and for good reason.

"We must not go on selling resource-intensive materials to the overseas market," said Zhang Ping, former deputy director of the National Development and Reform Commission.

Unhappy exporters

The rebate cuts have not pleased domestic firms. Chinese mills and exporters, with their narrowing profit margins, argue the reduction of export rebates will hurt key Chinese industrial sectors.

"We disagree with cutting the tax rebates because the country's steel industry is still troubled with oversupply," says Qi Xiangdong, deputy general secretary of China Iron and Steel Association. The Association has more than 60 domestic steel mill members. In May 2005 China cut tax rebates on steel product exports from 13 percent to 11 percent.

It is reported that high-value-added steel products, namely galvanized plate and silicon steel, will remain at the same 11 percent rate, but low-value-added products such as rods, reinforced bars, round steel and hot-rolled medium plate will be cut to 8 percent.

Driven by high steel product prices in the international market, China's steel product exports have shown robust growth since the beginning of the year. In the first five months, China's steel product exports hit a new high of 12.7 million tons, up 35.2 percent, while imports decreased 27.6 percent to 7.8 million tons.

"China's steel product exports continued to increase and steel product prices recovered significantly this year, although China was still seriously hampered by steel overcapacity," said Jia Liangqun, a vice general manager with Mysteel, a leading steel consulting firm.

But Jia asserts that steel prices will drop in the second half of the year: due to the new tax rebate policy and a cool off in China's fixed asset investments.

Baosteel Group, the largest of its kind in China, will see its export costs rise by RMB 150 ($18.75) per ton after the tax rebate for steel plate exports is reduced, said Wang Xishun, an official with the export department of the group.

Steel plate is Baosteel's main export, with 10 percent of its steel plates exported to foreign markets each year. Baosteel will try to counter the new policy, Wang said.

A similar situation exists with the textile and machine-building industries, and to lower export rebates rate for them may help these industries upgrade industrial structure, industry officials said. Many Chinese corporations have also considered shifting their business strategy from commodity exports to overseas investment.

Industry officials propose a transition period. "According to international practice, enterprises need a proper preparation period, lasting from three months to six months," said Long Guoqiang, deputy director-general of Foreign Economic Relations, Development Research Center of the State Council.