Export Tax Rebates: China's Approach to Reforming the System

By Shen Xiangman, & Maarten Roos, Wang Jing & Co. Law Firm, Guangzhou

China's growing role in the international economy has led to pressure from its main trading partners for China to play by "international rules". Accession to the World Trade Organization (WTO) in December 2001 created an international forum to address issues such as the opening of different industrial sectors to foreign investment and the better enforcement of intellectual property rights, but discussions on the international stage are not limited to fulfilment of WTO commitments.

China's foreign exchange mechanism has received particular attention over the past year. The renminbi has been virtually fixed at 8.28 to the US dollar since 1994, and is not freely convertible. The dollar's recent fall against the euro and other major currencies and a lacklustre US economy have led the United States and Japan to increase pressure on China to revalue its currency or let the renminbi appreciate. They argue that China's currency is kept artificially weak through the dollar peg and convertibility restrictions, and that this has a negative impact on growth and employment in their respective economies. China continues to firmly resist such pressure, arguing that a stable currency is still the best policy. The government is wary of any economic destabilization that would jeopardize future growth and development. Although full convertibility was set as an official goal in 1993, the recent establishment of a joint panel to study the obstacles to floating the renminbi is generally seen as only the first step in a process that may take five to ten years.