Export Rebates and Real Estate Policies Add to Economic Cooling Measures

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With the economy continuing to heat, and with more new records for foreign currency reserves and the trade surplus, Beijing is making renewed efforts to bring the economy under control. Perhaps they are aiming for the “bumpy landing” referred to in a recent post. New measures include the end to tax rebates on exports and restrictions on foreign investment in real estate projects. More on these below:

The decision to reduce export rebates (probably in September or October, with the possibility of a short notice period) for some low-end products is aimed at “low-value-added, high-energy-consuming, resource-intensive and environmentally harmful products”, according to a report from Asia Times. The move follows similar actions in 2003, 2004 and 2005 (so one might question just how effective it will be this time round). The intention is to help reduce the trade surplus, but it also reflects a continuing desire to move exports up the value chain – as previously mentioned here. Already some businesses are increasing the amount of value-added processing they do prior to export.

The report notes:

    “It is now expected that China will cut tax rebates by an average of 2% for sectors such as textiles, metallurgy, iron and steel. Only high-tech industries avoid the knife while their rebates are being increased.”

On the currency issue, Asia Times says that:

    ”Experts calculate that comprehensive rebates for the export of $1 worth of commodities amounted to 0.4429 yuan in 2005. Abolishing export rebates would be equivalent to a revaluation of the yuan by 0.4420 yuan against the greenback. On this basis, the exchange rate would have been 7.7 yuan for $1 at the end of 2005. In theory, abolishing export rebates will help ease pressures to revalue the yuan.”

In addition to the reduction in export tax rebates, new curbs on foreign investment in property – and other overheating sector – have been issued. These follow a recent ban on luxury villa developments (see here). People’s Daily reports that:

    “The new policy requires overseas investors to have a commercial presence in China and seek the approval of Chinese authorities before entering the property market, and that their business activities must observe rules in capitalization, foreign exchange controls and other fields. …The new policy also restricts overseas businesses and individuals to only buying properties for self-use after a presence of at least one year in the country.”

While slowing up the entry of speculators to the market, the policy is also aimed at calming fears that locals are missing out due to rapid increases in property prices.

Of course, as with IPR and other problems, China is not alone in restricting certain forms of investment. A China Daily piece includes a note that:

    “China Securities Journal quoted a report by the International Monetary Fund as saying that 137 of the IMF’s 187 members had restrictions on the acquisition of real estate by foreigners.”

…Just in case anyone thought China was being especially mean. In any event, like other property booms, if you are only now reading about it, you have already missed it anyway – though the prospects for mid and long-term investment in Chinese property still looks pretty interesting. More calming measures for the economy can be expected to follow. Another look at interest rates may also be on the cards.

See news sources:

    China hits exporters where it hurts
    Asia Times Online – Kowloon,Hong Kong
    BEIJING – In an effort to curb its ever growing trade surplus to help ease increasing pressure to revalue the yuan, China will cut tax rebates on exports of low …

    China set to restrict foreign property investment
    China Daily – China
    Chinese authorities have drawn up a policy to restrict foreign investment in the country’s property market, the China Business News reported Monday. …

    Overseas investors see past China’s real estate controls
    People’s Daily Online – Beijing,China
    China’s prospering property market will remain attractive to overseas investors in the medium to long term, despite the tightening of government controls over …

4 Responses to “Export Rebates and Real Estate Policies Add to Economic Cooling Measures”

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