Zone tax breaks to be phased out

CHINA will gradually abolish preferential tax treatment for development zones starting this year, Finance Minister Xiang Huaicheng said yesterday.

The proportion of value-added and consumption taxes refunded to enterprises in these zones will be progressively decreased to zero over a number of years, he told a press conference in Beijing.

The move is aimed at standardizing the fiscal system while creating a sound environment for fair competition among firms, he said.

A legion of development zones of various categories were set up in the early 1990s to serve as a home for foreign-funded companies.

Enterprises in the 44 approved national development zones have enjoyed the privilege of seeing taxes submitted to the central government refunded.

The tax break was initially set at five years and was later extended to 10 years for some zones.

Preferential treatment whose term has expired will be automatically terminated and the proportion of tax refunded will be reduced incrementally in other zones, Xiang said.

But the preferential tax policies for the special economic zones of Shenzhen, Zhuhai, Shantou and Xiamen will be not changed for the time being, he added.

Xiang also announced China has slashed tariff rates for 1,014 toys and textile and forestry products, effective from January 1.

The extent of the cuts ranges from 7 per cent to 78 per cent.

Deficit and debts

China will continue to pursue an active fiscal policy in 1999 to stimulate the economy, as prospects for export growth and private investment and consumption are not encouraging, Xiang said.

An "active fiscal policy" is the official expression for expanded government spending coupled with a swelling deficit.

The State budget deficit for the year has been set at 105.3 billion yuan (US$12.7 billion), slightly up from 96 billion yuan (US$11.6 billion) in 1998, he said.

However, the economic situation during the year may result in a bigger deficit, he added, without elaborating further.

Analysts said this means China is likely to launch a new special treasury bond issue to step up its pump-priming measures if export growth and private spending remain sluggish.

China issued 100 billion yuan (US$12 billion) in special treasury bonds last autumn to finance a huge government investment plan for infrastructure construction.

The volume of treasury bonds to be issued this year is currently set at 316.5 billion yuan (US$38.1 billion) to cover the budget deficit and redeem mature bonds, Xiang said.

But the volume would be expanded if it was decided to increase the deficit, analysts said.

Xiang said his ministry will continue to float sovereign bonds on the international market.

"Our major aim is to bolster our position in the markets, maintain ties with investors and promote economic development," he said.

The ministry issued US$1 billion in global bonds last month after a one-year absence from international markets due to the unfavourable climate.

Xiang extended his congratulations on the successful launch of the euro. But he did not say if China would issue bonds in the currency, which could create a huge market for bond issuers.

China Daily