Experts suggest China should further adjust its tax rebate system, whose new version was just implemented in January this year.

All of the overdue export rebates have been paid but the processing of the rebates happening this year has been slow.

Only one third of the total budget of 210.8 billion yuan (US$25.47 billion) has been paid so far this year.

Long Guoqiang, an expert from the Development and Research Center under the State Council, said some local governments in coastal areas have already felt the pressure since they have to share the rebate with the central government since January 1 this year.

The rebate reform announced in October states the central government is responsible for rebates occurring before the end of 2003. But for the refunds payable since the change in policy, the central and local governments now have to split the burden by a proportion of 75 to 25 percent.

Some cities complain they have to pay rebates on all local exports, although the goods are not necessarily manufactured by local firms.

"The big export ports in Shanghai, Jiangsu and Guangdong say they can not afford the bill," said Long.

Many products processed in other regions often assemble and export through these major ports.

"These cities in coastal areas are complaining and unwilling to pay the money," Long said.

Long proposes the government should change its tax collection methods to avoid the problem.

"The central government could collect all of the value-added tax (VAT) and pay all of the tax rebate, rather than share with local government," Long said.

Currently, the central and local governments share the VAT by a proportion of 75 to 25 percent - the same as with the tax rebate.

If the current system continues, Long fears some local governments will move to protect locally-manufactured goods by paying less rebate on exports originating from other regions.

He says this could lead to local protectionism.

Long's view is echoed by some local officials. Peng Yifeng, an official in Ningbo of Zhejiang Province, said local protectionism could be prevented by the introduction of a system in which those who levy the tax pay the rebate.

The central government has started to more closely monitor the behavior of regional government and receive complaints from companies. They require the local government to submit fortnightly reports in a bid to check if anything needs improving or changing.

Officials from the Ministry of Commerce said the government is studying measures to solve the problem.

Tax rebates are common in international trade. Governments usually return value-added and consumption taxes to export-oriented companies for their products sold abroad.

The government announced in October it would cut the tax rebate rate by an average of 3 percentage points beginning from January 1 this year. At the same time, it also promised to pay off all the owed rebates before the change came into effect because the government finances were not well prepared for unexpected soaring exports in past years.

(China Daily September 1, 2004)