Export Tax Rebates and Real Exchange Rate Devaluation: China's Experience in Recent Asia Financial Crisis -- A Computable General Equilibrium Analysis

This paper analyzes the relation between real exchange rate devaluation and export tax rebates based on China’s experience in recent Asian financial crisis by a 47 sector single country China CGE model which differentiates processing and normal trade explicitly. Two simulation scenarios are conducted. In the first scenario, we depreciate China’s real exchange rate exogenously in the order of 5 percent, and endogenously solve its global trade balance. Base on a study published by Institute of International Economics in 1998, such a real devaluation would be sufficient for China to re-attain its pre-crisis competitiveness in global market. In the second scenarios, we fix China’s real exchange rate in the pre-crisis level, but allow China’s export rebate rate adjust endogenously to achieve a global trade balance for China same with that in the first scenario. The simulation results indicate a 30 percent increase of export tax rebate rate or a 55 percent increase of government export tax rebate expense from the base year have a similar impact of 5 percent real exchange rate devaluation in terms of restoring China’s export competitiveness.