China favors jobs at home over freer trade
Beijing restores tax breaks and other perks for Chinese exporters. It's worried that declining exports mean more social unrest.
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Xie says there's a "disconnect" between high-level policy talks between the US and China, and the situation in places like Ningbo or Dongguan, a center of light manufacturing in southern China. There, exporters are in dire straits. He says labor costs have roughly doubled in the last five years for such firms. Many factories have closed (100,000 in 2008, by one estimate) – a massive shakeout.Skip to next paragraph
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The Chinese government has bigger concerns than just belly-up exporters. Failed factories means a huge unemployment problem, which in turn could fuel widespread social unrest. An estimated 10 million of China's 200 million migrant workers have been laid off and gone home, according to Chinese government statistics cited by the China Daily.
In that context, the tax rebates are a type of emergency first aid.
"I think the government is trying to lower bankruptcy rates, not to boost exports," says Xie. "The government needs to show some concern for exporters, and the [tax] rebates help relieve cash pressure."
When it did away with such rebates, notably in the summer of 2007, China hoped to reduce its dependence on the export model. It wanted to end perks for foreign firms using China as an export platform, help domestic firms better compete, and force low-end manufacturing industries up the value chain.
But its timing couldn't have been much worse.
Chinese exports fell 2.2 percent in November, the first fall in seven years – and a striking statistic in an era of steady, double-digit growth. Analysts expect exports may continue to fall in 2009 as foreign consumers keep their wallets closed.
"This kind of policy should be regarded as a short-term action," says Mr. Zhuang. "The government is concerned about how to deal with laid-off workers.... Right now, their policies are aimed at keeping exporters in operation in the coming years, rather than just letting them go bankrupt."
Some economists worry that China may also reverse course on its currency. It could devalue the yuan to give its exporters an edge, after letting it climb 20 percent since 2005 in response to foreign pressure. Zhuang says China is unlikely to do that, or to fiddle with tax policy on firms' earnings. That leaves adjusting tax rebates for exporters as one of the few policy tools at Beijing's disposal to help address exporters' woes.
Still, he and others agree that such measures are only of short-term utility. In the long term, they say China needs to boost demand at home, especially by increasing private wealth and consumption.
"The case for stimulating domestic demand is stronger than the case for trying to stimulate exports by depreciating the exchange rate or giving tax incentives to exporters," the World Bank wrote in a China report in December.