China has just increased tax rebates for exporters for the seventh time since August 2008 as part of efforts to support exporters affected by the drop-off in overseas demand. Food companies, electronic and digital media product makers, as well as the ceramics and plastics industries will benefit from the new rebates, according to a statement by the Ministry of Finance. The new rebates are effective from June 1.

The China Sourcing Blog has translated the latest list of commodities, and the full list can be downloaded by clicking on this link:
 
ExportVATRebateAdjustment_16Jun09.pdf

Nearly half of the new items eligible for the tax rebate are food products, an industry not included in the previous six increases. Rebates on canned foods and fruit juices were increased to 15% from 13%. Some food products will get as much as an 8 percentage point increase. The inclusion of food items on the list is somewhat surprising, as demand in this industry is mostly inelastic and the industry itself is not directly affected by the financial crisis.

The rebate is on payments of the 17% value-added tax.

Rebates on products in labour-intensive light industries such as toys, shoes and hats, luggage and bags, and furniture have been raised to 15% from 13%. Toy exports fell 13% year-on-year in the four months to April, while bag and luggage exports fell 0.8% and shoe exports fell 0.6%, according to customs data.

Full export tax rebates, at 17%, are available for the hard-hit electronic products and digital media sectors, makers of products such as television transmitters, sewing machines, compact disks and CD-ROMs, generators, motors, and information processors. Export rebates on certain ceramic products have been lifted to 13%, while the alcohol rebate was pushed up to 5%.

The rebate on textiles and garments, which had already been raised to 16% in previous increases, was not included in the latest list.

(Source: Caijing.com.cn)

Since the advent of economic reform in China, Chinese exports as well as China's share of world exports have grown at a fast pace to surpass that of many developed economies. As a result, by the end of 2006 China had become the world's third-largest exporter after the US and Germany. In April 2008 the WTO announced that China had overtaken the US to become the world's second-biggest exporter, second only to Germany.

Yet the rise in China's exports has also been characterized by an important shift in its export structure. Where twenty years ago China was primarily an exporter of textiles, textile articles and apparel, today China is the world's largest exporter of electronics and machinery-related products, which make up 43% of China's total exports. China is rapidly moving up the technology ladder and is therefore becoming more competitive in exports of high-value capital goods - industries where traditionally Western countries such as Japan, Germany and the US have held the competitive advantage. But to what extent is China really able to compete with these countries today?

To better analyze this competitive landscape, we can make us of the industry classification of the OECD in its STAN Bilateral Trade Database, edition 2006, to compare Chinese and US high technology exports during the past few years.
 
According to the chart above, if we assume that the US' share of high-technology exports will continue the trend it has followed in the past 5 years, China's high-technology exports have already surpassed those of the US. So what does this mean? Is China the new high-technology power? Are there grounds for concern about China's threat to the competitiveness of Western industries?

I believe if these questions were posed to Laozi, the father of the yin yang concept, his answer would not be yes or no, and neither black or white, but rather a combination of both.

Yin: A sourcing opportunity rather than a threat
According to OECD sources,

some 55% of China's total exports are attributed to production and assembly-related activities, and 58% of these are driven by foreign enterprises, of which 38% are entirely foreign-owned. In fact, among the top 10 high-technology companies by revenue, not one of them is Chinese.

China's export performance, therefore, is directly linked to its specialization in assembly operations and the high value-added inputs imported from Western economies. This has facilitated a rapid diversification of its manufactured exports, from low-end manufactures to high-technology products.

Yang: A sourcing opportunity but a future threat
Although Chinese high-tech ability is still subsidized by foreign technology transfers and government support, Chinese companies are developing competitive advantages in several areas of high-value industrial and equipment manufacturing. Good examples are Huawei (a telecommunications equipment maker based in Shenzhen), whose equipment and services were considered good enough to beat Siemens in a German tender; Zhenhua Port Machinery, which had a full two-thirds of global port crane orders in 2006; and Tian Di Science & Technology, the national leader in the design and manufacturing of coal mining equipment.

To effectively make use of China's cost advantages as a high-technology assembly center, foreign companies will have to carefully consider to what extent and with which strategic framework technology transfers are implemented and imported inputs are assembled in China. At the same time, and considering China's evolving high-technology exports, trying to avoid China as a high-technology sourcing destination will likely result in an unfeasible cost structure and a loss of competitiveness. Successfully dealing with China's sourcing challenges and particularities will finally determine whether China is a threat or an opportunity.