China's trade surplus to fall this year

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Last updated at: (Beijing Time) Tuesday, February 17, 2004

China's trade surplus to fall this year

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The nation's trade surplus is expected to scale back this year despite strong demand for Chinese products, analysts say, a trend which could quell worries of China's heavy presence in certain world markets.

While export growth in January exceeded market expectations, explained Liang Hong, chief China Economist with investment bank Goldman Sachs, the trade deficit stood at US$30 million, an increase over previous months.

A Goldman Sachs report projects that export growth this year will drop to 18 per cent from 34 per cent in 2003. HSBC figures concur.

But recovering global demand and a weak US dollar will help exports along, said Qu Hongbin, an HSBC economist.

He expects stronger demand growth in the US, the euro zone and Japan leading destinations for Chinese exports suggesting that external demand for China's products will remain strong in 2004.

"But its growth will be held back by (China's) tax rebate reductions and trade protectionist measures by the US and other countries," he said.

"We believe imports will grow faster than exports, resulting in a further reduction in the trade surplus to US$10 billion from US$25.5 billion in 2003." Qu said.

This continues 2003's downward trend which saw a drop of 16 per cent in its trade surplus.

A forecast from the State Information Centre said China's imports and exports traffic will total US$940 billion in 2004, up only 10.4 per cent, compared to the 37.1 per cent growth rate seen in 2003.

Specifically, exports are expected to reach US$472.9 billion, with the growth rate falling to some 8 per cent - different from HSBC and Goldman Sachs's more optimistic projections - and imports US$467.4 billion, with an increase of around 13.2 per cent.

That means a smaller trade surplus of US$5.5 billion.

Li Yushi, vice-director of the Chinese Academy of International Trade and Economic Co-operation, a Ministry of Commerce think tank, goes further. He predicts China's foreign trade will reverse into a small deficit in 2004.

"The growth of imports will keep its momentum this year as the country has a huge desire to feed its economy," Li said.

Imports will also be fuelled by the planned tariff reduction and easing of non-tariff controls, Li said.

China is set to drop its average tariff rate to 10.4 per cent from 14.7 per cent and eliminate licensing management regulations on products such as oil, rubber and automobiles according to its commitments to the World Trade Organization (WTO).

Although figures vary, analysts agree that the country's new rebate system is a major factor behind the export slowdown.

On 15 October 2003, a few days ahead of President Hu Jintao's meeting with US President George Bush at the Asia-Pacific Economic Co-operation (APEC) summit, China announced a reduction in export rebates by 3 percentage points.

This move shows that Beijing empathizes with foreign concerns about China's exports and that it is willing to address the issue, Li said.

High tax-rebate rates have long served as the driving force for manufacturers exporting their products. But rebate cuts, Li explained, will mean an increase in production costs and force many small exporters to close down.

But given the relatively low price of China-made products, he believes most exporters will be able to pass on the extra cost to customers.

"The impact on exporters' profit margins should be limited, but higher prices will slow the expansion in export volumes," he said.

HSBC's Qu said recent experience shows that the impact on export growth could be substantial. For instance, in July 1999, rebates were increased from 12 per cent to 15 per cent, and as a result, export growth accelerated from a negative 4.7 per cent year-on-year in the first half of 1999 to 15.8 in the second half.

In July 1995, rebates were reduced from 16 to 12 per cent, causing export growth to slow from 44 per cent in the first six months of 1995 to 9 per cent in the second half, Qu said.

Of course, external demand and comparison base effects also influenced growth fluctuations in 1999 and 1995, he added.

Considering all the factors -including global demand, manufacturing relocation and rebate cuts - Qu expects export growth to slow to around 18 per cent this year.

Liang of Goldman Sachs points out that the impact of an altered export tax rebate policy would finally be accepted by the market and dissolve.

"But in the year 2004, the impact cannot be ignored," Liang said.

Trade barriers will be another significant obstacle for China in expanding exports.

At present, China has become the number one target for anti-dumping and technical barriers in trade worldwide.

Increasing protectionist behaviour came along with China's WTO entry. In the past two years, a total of 112 anti-dumping cases and safeguard investigations targeted Chinese products, coupled with harsh inspection standards.

According to a study conducted by the Ministry of Commerce, trade barriers cut China's exports by some US$40-50 billion annually.

Zhang Hanlin, president of the China Institute for WTO Studies, expects that Chinese products will be met with growing anti-dumping investigations and technical barriers in 2004.

China is opening up its foreign trading rights and attracting new companies which will lead to a price drop, Zhang said.

At the same time, the production capacity of Chinese companies will hit records in 2004 and the world market supply will increase..

"The two factors will force foreign industries to file more anti-dumping charges to protect themselves," Zhang added.

This will not be limited to some developed countries in North America and Europe, which frequently conduct anti-dumping investigation against China, but also developing countries like Mexico and India are expected, Zhang said.

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