China set to balance trade amid soaring surplus

China will strive to reduce its "excessively large" trade surplus to ensure sustained development of both the domestic economy and foreign trade this year, according to Chinese officials.

In 2006, China recorded a sizzling economic growth of just under 11 per cent, largely powered by strong exports that rose by 27 percent to 969 billion U.S. dollars. The soaring exports expanded China's trade surplus to a record 178 billion dollars, up 74 per cent from the previous record of 102 billion dollars set in 2005.

The astonishing momentum lasted until February 2007, when China chalked up a surplus of almost 24 billion U.S. dollars, a growth of nearly 50 percent month-on-month and a record for February. The trade surplus for the first two months of this year amounted to almost 40 billion dollars, around 28 billion dollars higher than the same period last year. This exceeded the surplus for the first quarter of last year and amounted to 22 percent of the 2006 total.

Since beginning its groundbreaking reforms and opening-up policy in the early 1980s, China has struck the world by the scale and pace of its economic resurgence. In recent years, China's GDP growth has averaged 9.5 percent a year, far higher than the rate of global economic growth.

Of the three main engines driving Chinese economic growth, soaring foreign trade is most robust compared with investment and consumption.

In the early 1980s, China advocated an export-oriented economy. Needing foreign exchange, advanced technology and job opportunities, China provided export tax rebates and granted preferential treatment to export-oriented companies in land use, taxation and finance, whilst also granting preferential policies in land and taxation to foreign investors.

Over the past five years, since its accession to the World Trade Organization (WTO) in 2001, China's foreign trade has surged at an average annual rate of more than 30 per cent.

"Promoting economic development and increasing employment through the growth of foreign trade is a principle China must follow for a long time to come," said Chinese Premier Wen Jiabao.

However, China has acknowledged that a large trade surplus is not necessarily good for its own sustained economic growth.

"Excessive reliance on exports makes the structure of China's newly increased demand more adjusted to that of international demand and the international division of labor.. the product structure is concentrated mainly on low-end labor intensive, land-intensive and resource-intensive fields," said Zhang Xiaoji of the State Council's Development Research Center.

Adding to this, Commerce Minister Bo Xilai told Xinhua that, "The Chinese government does not pursue an excessive trade surplus." Bo then went on to say how his department has put cutting China's massive trade surplus as their "priority task of 2007."

Trade frictions

China's growing trade surplus has become a major concern for some of its major trade partners, such as the United States and the European Union, both of which have a trade volume with China of more than 200 billion dollars.

In 2006, China's trade surplus with the United States exceeded 140 billion dollars, sparking a strong response from the U.S. Congress and media.

Some U.S. lawmakers proposed a 28 percent increase in tariffs on all Chinese goods and proposed that unless China makes major reforms and changes on foreign exchange policies, its 'most favored nation' treatment from the U.S. will be revoked.

"China resolutely opposes a tariff increase of 28 percent on Chinese goods," said Bo, "such a policy is less about protectionism and more about U.S. hegemonism."

The Chinese commerce minister said that such proposals are in breach of WTO agreements, adding that such an increase will be destructive to healthy bilateral trade.

"The U.S. traders are wise and we have no grounds for suspicion - they won't do business with China if they can't make profits," Bo remarked. Bo then went on to add that, "Actually, in bilateral trade, China has the surplus while the United States has the profits."

Besides, the Ministry of Commerce have announced that last year, 25 countries and regions launched a total of 86 anti-dumping and trade protection investigations against China, up 37 percent, and affecting a combined trade volume of over 2 billion dollars.

Pressures for Renminbi appreciation

The United States has blamed its colossal trade deficit on what it claims is a seriously undervalued Renminbi and has been pressing China to allow for a bigger revaluation of the currency.

"But the trade imbalance between China and the United States cannot be solved by relying solely on appreciation of the Chinese currency," said Morgan Stanley chief economist Stephen S. Roach.

The value of the Renminbi has risen by more than 6 percent since July 21, 2005, when the Chinese government launched the reform of the exchange rate system to allow the yuan to float against the U.S. dollar within a daily band of 0.3 percent.

On March 15, the central parity of Renminbi against the U.S. dollar was 7.74 yuan per U.S. dollar, compared with a rate of 8.28 yuan before the reform.

According to Xie Fuzhan, head of the National Bureau of Statistics, the Renminbi has appreciated gradually against the U.S. dollar since China launched the foreign exchange rate reform, but China's trade surplus with the United States has not decreased.

Moreover, China still has a trade deficit with neighboring countries including Japan and South Korea, along with Association of Southeast Asian Nations (ASEAN) member states.

"In fact," said Wu Xiaoling, deputy governor of the People's Bank of China -- the country's central bank, "a major part of China's trade surplus is created by multinationals as they eye low labor costs in the country and choose to produce their labor-intensive products in China,"

Attracted by low labor costs, multinational companies began shifting their manufacturing to China in the 1980s, opening factories to process materials and export the processed products.

"The fact is that China's trade surplus mainly comes from the manufacturing industry and that most exports by large multinationals have been included in China's trade figures. A high proportion of export profits in fact stay in the pockets of multinationals," said Mei Xinyu, a trade expert with the Ministry of Commerce.

"Meanwhile, the United States has restricted its exports of high-tech products to China, making it lose its advantage in the high-tech products trade with China," said Wu Xiaoling.

Industry officials have stated that, as over 60 percent of China's exports are in the processing trade, the appreciation of the Renminbi has lowered the import price of commodities and in turn, the cost of enterprises that engage in export processing. This only encourages export processing enterprises to make more exports and is one of key reasons behind China's rising trade surplus in 2006.

Solutions

By calculating all of the gains and losses, the Chinese government is keen to reduce its soaring trade surplus.

According to Bo Xilai, "This is an opportunity for China to upgrade its lower value-added processing trade, optimize export structure and urge companies to shoulder their social responsibilities."

To reduce the hefty trade imbalance, China has used a package of industrial and taxation policies in recent years to rein in the export of products whose manufacture is highly energy consuming or highly polluting, and to simultaneously support the export of high value-added products and products with Chinese trademarks, upgrade the processing trade and expand the export of service and agricultural products.

With regards to imports, China has bolstered its imports of energy, raw materials, advanced technologies and equipment, and key spare parts and accessories.

Government efforts have paid off and, according to figures produced by the National Bureau of Statistics, higher tariffs and other complementary measures have successfully cut China's exports of coal by almost 12 percent and crude oil by over 21 percent in 2006.

Despite the good omen, industry officials state that reducing the structural trade surplus is hard to realise in short time. China's trade surplus will continue for a long time, and the reduction of the structural surplus has a long way to go.

"The situation will probably remain largely unchanged over the next decade," said Yi Xianrong, a renowned economist with the Chinese Academy of Social Sciences.

Indeed, according to Joseph E. Stiglitz -- a Nobel Prize Laureate in Economics, "China should improve social welfare to lower its high savings, a strategy that would help base the already export-fueled economy more on domestic consumption."

Stiglitz went on to add that, although China's high rate of savings is envied by the rest of the world, it is not all that good for the economy.

High rates of saving means that China is dependent on exports to keep its economy growing, he said, adding that, "One of the reasons that people save so much is that they are worried about their future."

In recent years, Chinese residents' savings ratio has remained above 40 per cent, much higher than the average savings ratio of 20 per cent in economically more developed countries.

According to Stiglitz, in order to increase consumption and reduce saving, China should improve its retirement program, health and education.

Source: Xinhua