China needs tax curbs to aid real growth

• Source: Global Times
• [21:42 July 06 2009]
• Comments

GT: On June 4, China’s National Development and Reform Commission and other ministries emphasized that projects invested in by the government are part of government procurement and domestic products should be bought preferentially. Will this benefit China?

Chen: The “Buy Chinese Goods” clause introduced by government agencies pleases the naïve people, but the overall results for China are not good. At this point, China should be most worried about the rise of protectionism in other countries because China depends so much on export markets. So, it is important for China to not give protectionists in other countries an excuse to raise barriers for imported Chinese goods.

I understand that the US Congress has done something similar, but China should not follow the practice of some American politicians.

GT: To promote exports, China recently raised the export tax rebate again, up to 17 percent. In your opinion, will this adjustment achieve the expected results and raise China’s export volume in the long term?

Chen: I don’t think this will change the export volume growth prospects for China. Chinese exports are facing difficulty to grow, not because Chinese goods are too expensive, but because consumers are not willing to spend beyond necessities. In this sense, even if prices go lower or stay at already-low levels, the demand for Chinese goods is unlikely to be much different.

In fact, perhaps the government should try to discourage low-value added exports by imposing a resources- and environment-related export tax, which would favor domestic market-oriented businesses and induce a gradual transition from export orientation to domestic consumption orientation.

In a major sense, restoring tax rebates for exporters is a way to make China’s over-dependence on exports worse than it already is. It is the wrong direction to go.

GT: How can China ultimately change its economic development model?

Chen: The only long-term viable solution to the export over-dependence problem for China is to limit the abusive and excessive taxation power by both central and local government agencies and return State-owned assets and wealth to the people. The average household cannot share the effects of economic growth. These facts explain why Chinese private consumption has not been growing as fast as one would expect given the past 30 years of economic growth.

Reforms are necessary in order to reduce China’s dependence on exports and increase its future growth dependence on domestic consumption.