Talk of tax rebate cuts on textile and garment exports has cast a shadow on the ongoing 101st China Import and Export Fair (Canton Fair).

The market has been abuzz with rumor that the government is set to lower tax rebates on textile and garment exports by 2 to 4 percentage points, meaning the rebates will be reduced to about 9 percent.

Although the new tax policy has not yet been announced, domestic textile and garment manufacturers have already increased their prices by 5 to 10 percent in the ongoing expo that opened on Sunday, in preparation for the rate cut.

International buyers go on a spending spree during the Canton Fair, which provides Chinese exporters an opportunity to grab big deals for the whole year.

Exporters have factored in 4 percentage points for the possible reduction in export tax rebate, 2 percentage points for a renminbi appreciation this year and a few more percentage points for increases in labor costs, said Wang Yongli, deputy manager with Guangdong-based Silique.

He predicted the new policy will be announced "sooner or later" and said he expected the government to allow exporters a couple of months to adjust to the cost increase.

"In the first several days of this session of the Canton Fair, we have seen the number of potential buyers decline," said Zheng Fengmei, an official with Mailyard I/E Trade Co. The company in central China's Hubei Province achieved exports of US$360 million last year.

"We have to explain the conditions to every buyer before asking for higher prices, but not all of them accept the rationale," he said. At times, the company has had to share the cost increase with the buyers, he added.

The possible tax rebate cut, a move to rein in exports of labor-intensive products, is expected to further squeeze the profit margin of Chinese manufacturers, who have already suffered from the 5-percent rise of the renminbi in July 2005.

To cope with the rate cut, Zheng said, the company is trying to find "high-quality" customers from North Europe and Japan who can absorb the price rise.

It is also gradually giving up low-value-added garments and moving to products with higher profits, focusing on development of self-owned brands in the international market.

Some industry insiders argue the proposed rate cut is too steep for small textile manufacturers and may force some of them out of the market.

(China Daily April 19, 2007)