Beijing's reduction of export tax rebate for PV products highlights latest tax rebate overhaul

China aims to curb domestic competition & build better ties with the EU, said a team of Chinese securities analysts led by Zhao Wei.

China announced on November 15 that it will change export tax rebates for a range of products, effective from Dec. 1.

The following report, analyzing the purposes and effects of such adjustments, was written by the Macroeconomic Team at Shenwan Hongyuan Research, part of Shenwan Hongyuan Securities Co., Ltd. The lead author, Zhao Wei, formerly served as the Chief Economist of Sinolink Securities and sat at Premier Li Qiang's symposium last July. He joined Shenwan Hongyuan Securities in July of this year.

The East is Read has translated the abstract of the report. The full report can be accessed on the official WeChat blog of the Macroeconomic Team at Shenwan Hongyuan Research.

出口退税下调，传递什么信号？

What Policy Signals Are Sent by the Reduction in Export Tax Rebates?

Authors:

• Zhao Wei: Chief Economist, Shenwan Hongyuan Securities

• Jia Dongxu: Senior Macroeconomic Analyst

• Hou Qiannan: Macroeconomic Analyst

After a three-year interval, China is once again reducing or canceling export tax rebates for certain goods, including photovoltaic (PV) products, one of the "new trio." [electric vehicles, lithium-ion batteries, and PV products] What message does this change convey? What are its effects? This article provides a historical perspective for reference.

What has been the purpose of adjusting export rebate rates historically? Since 2004, export rebate policies have also carried explicit industrial policy objectives.

Export rebates are designed to prevent double taxation in international trade and are recognized as a legitimate tax mechanism under WTO regulations. This system refunds the indirect taxes incurred during the domestic production and circulation of goods once they are exported. Its original goal is to ensure that exported goods enter international markets at prices that exclude domestic taxes.

China's export rebate system, established in 1983, has evolved through three distinct stages: exploratory adjustment (1983–1993), comprehensive adjustment (1994–2003), and structural adjustment (post-2004). During the comprehensive adjustment stage, due to issues like the rebate scale exceeding fiscal capacity, the export rebate rates were uniformly reduced. However, during the 1998 Asian financial crisis, rebate rates increased again across the board. Following 2004, China adopted differentiated rebate rates based on product categories.

Since 2004, adjustments to China's export rebate system have distinctly reflected industrial policy objectives. Reductions in rebate rates have primarily targeted two types of goods: those associated with high pollution and those likely to incite trade friction. During periods of stable exports, the government has focused on structural adjustments, promoting high-tech products while curbing incentives for high-pollution and trade-sensitive goods. The most recent round of rebate rate reductions and cancellations in 2024 follows this pattern, aiming to disincentivize exports of environmentally harmful products and those prone to trade disputes.

Evaluating the effects of reducing or canceling export rebates requires a comprehensive analysis of global demand conditions and the price elasticity of demand for the affected goods.

In 2007, when export rebate rates were extensively canceled or reduced, the export growth rates of high-pollution and trade friction-prone goods both increased. However, price trends varied: the export prices of high-pollution goods rose, while those of trade friction-prone goods fell. This divergence might be attributed to the differing price elasticity of demand differed between these categories.

Next, following the cancellation of export rebates for steel in 2021, export value growth of relevant goods declined. Export prices, meanwhile, rose initially but later fell. Further analysis indicates that international steel prices played a more significant role in determining export trends than the rebate adjustments themselves.

The analysis of the two cases above demonstrates that the effect of reducing or canceling export rebates on relevant products is closely linked to overall overseas demand and price elasticity. When overseas demand is robust and prices increase rapidly, external demand emerges as the dominant factor driving China's exports, and the impact of domestic export rebate changes is limited. Conversely, in periods of stable overseas demand, the effect of rebate reductions or cancellations should be evaluated more carefully, with particular attention to the price elasticity of demand for the affected products.

The current round of export rebate adjustments appears to prioritize mitigation of excessive competition and the repair of trade and economic relations over fiscal considerations.

Static calculations estimate that the current export rebate adjustments affect approximately 83 billion yuan in fiscal revenue, equivalent to 0.4% of China's 2023 budget revenue, indicating that fiscal considerations are not the primary focus.

Export rebates were originally designed to ensure tax neutrality and avoid international double taxation. A full elimination of export rebates is improbable, as it would only appear to save fiscal expenditure while, in reality, substantially increasing the tax-inclusive prices of Chinese goods in importing countries, thereby diminishing the competitiveness of China's exports.

A key difference in this round of adjustments compared to previous ones is the inclusion of the emerging PV sector.

On one hand, this adjustment aims to mitigate excessive internal competition within the industry, with the goal of addressing the issue of low capacity utilization in the mid-to-downstream sectors. Previously, the PV industry reached a consensus on the need to "strengthen industry self-discipline to prevent harmful, excessive competition." By reducing export rebates for the PV sector, the current adjustments are expected to play a crucial role in rebalancing the competitive structure, curbing destructive competition, and fostering a new supply-demand equilibrium within the industry.

On the other hand, this round of export rebate reductions appears to prioritize addressing China-Europe economic and trade relations, serving as a proactive measure to strengthen ties amid potential uncertainties in China-U.S. trade relations. The primary export destination for products like photovoltaic panels and batteries, which have seen rebate reductions, is the European Union. This adjustment will help repair China-EU economic and trade relations and, in the context of more complex future overseas economic and trade relationships, reduce the uncertainty surrounding China's exports.