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A controversial proposal to reduce or eliminate tax rebates paid by the central government to encourage exports has been jointly submitted to the State Council by the Ministry of Finance, the Ministry of Commerce and the State Administration of Taxation.

The new policies are expected to be implemented next year if approved.

However, the State Council is still pondering how to balance the savings in reduced rebates with a diminished export performance, a source close to the State Council said.

The suggestions, including cutting the rebate rate; abolishing rebates on exports of selected products; and sharing the multi-billion-yuan burden with local governments, are regarded as a great shift in the export policy and are expected to have a significant impact on foreign trade, the source said.

According to the Ministry of Finance, the rebates having been rising at an annual rate of 36.3 per cent in recent years, more than twice the growth rate of fiscal revenue.

The central government, which shoulders all the burden, has had to delay payments for up to two years for not having budgeted sufficient funds; and is in arrears of up to 247.7 billion yuan (US$29.9 billion).

Unpaid rebates have been snowballing since last year due to rocketing export growth and increasing difficulty in allocating enough money for payment, according to the Ministry of Finance.

The new proposals call on the government to cut the average rebate rate from 15 per cent to 11 per cent, according to insiders, which would help the central government save an estimated 40 to 50 billion yuan (US$4.82 billion to US$5.44 billion) every year.

The government has also been asked to abolish rebates on exports of natural resources, such as crude oil, log, copper and other raw materials, which the country lacks; and on exports of products including goat fur, lanthanide ore and tungsten, which are strongly competitive in the global market, according to the source. This may save another 10 billion yuan (US$1.209 billion).

In addition to the reduced spending, the central government's burden could be eased with local governments sharing 25 per cent of the incentive payment.

However, some experts such as Long Guoqiang of the Development and Research Centre of the State Council, say the policy would curb export growth, one of the steaming engines of national GDP.

"If the new rebate policies hurt the enthusiasm of exporters, the country's fiscal revenue will decrease along with the exports," Long said.

Export companies, predictably, are unhappy, too.

"It will harm the competitiveness of Chinese products in the international market and increase export costs, which have already been raised by the government's delay on rebate payments," said an official with a textile export company in Beijing, who did not want to be named.

The new policy is also regarded as an indirect response to the rising chorus, led by Japan and the United States, calling for the appreciation of the Chinese currency - renminbi, analysts said.

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