A visitor chooses fabrics in the China Shanghai international Textiles, Fabrics & Accessories Exhibition June 26,2007. [newsphoto]

The tax rebate of textile exports will be reduced to 11 percent from 13 percent from this month, which will mean a 25 percent profit drop to Fomo, a Beijing-based garments company.

Senior managers of this export-oriented clothing maker have held several meetings to discuss the impacts from and countermeasures to a new national policy. China decided to cut or do away with tax rebates for over 2,800 items from July 1 as an effort to reduce the mounting trade surplus and adjust the export mix.

It is the boldest move the government has ever made to rein in exports since it joined the World Trade Organization in 2001. The affected items account for 37 percent of all export products.

Industrial profits will decline by 4.6 percent when tax rebates fall one percentage point, according to 2006 statistics, said Wang Yu, vice chairman of the China Chamber of Commerce for Import and Export of Textiles.

This time the policy was announced just 10 days before it came into effect and manufacturers with full order books have little possibility of increasing production.

More than 900 young women are working on 20,000 black suits along a production line clipping, sewing and ironing inside a workshop of Fomo. The suits, to be exported to Japan in mid July, will be the company's first batch of products affected by the new policy, said Fomo's deputy general manager Liu Yuzhong, adding that the company has cut the price of the suits in order to win the contract and now it is impossible to raise the price.

Special coverage: Tariff Rebate Slash Related readings:  Textile profit shrinks on tax rebate slash  Tax rebate cut as rebalancing act Tax rebates removed, cut to curb exports  Textile to champion quality over quantity

Liu said due to the tax rebate adjustment, Fomo's aggregate export tax rebates will be reduced by no less than 5 million yuan (US$657,375) this year. Last year its export tax rebates were 2.5 million yuan.

Fomo is not alone as the policy affects the profit margins of many industries, textiles in particular.

The textile industry is a major contributor to China's big trade surplus. It saw a US$129.2 billion trade surplus last year, accounting for 71 percent of the nation's total. In the first quarter of 2007, the textile industry's trade surplus reached US$27.28 billion, accounting for nearly 60 percent of the total surplus. As a result, the textile industry will bear the brunt of the tax rebate adjustment.

1

2

(For more biz stories, please visit Industry Updates)