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Ever-widening trade surplus cuts both ways
(China Daily)
Updated: 2006-02-15 13:44
A stronger currency presupposes competitive trade. But at the moment, a
soaring trade surplus is frustrating China's efforts to make its foreign
exchange regime more flexible and international payments more balanced.
China's trade sector beat most domestic predictions with a surplus of US$9.49
billion in January, rocketing up 46.7 per cent year-on-year.
Such remarkable growth should persuade many Chinese economists to have a
second look into their crystal balls.
No matter that the January growth in the trade surplus comes as the finale of
last year's strong performance and the curtain-raiser for what will certainly be
another super year, it represents a striking contrast to widespread forecasts of
a narrowing trade surplus.
Though China's trade surplus tripled in 2005, many claimed the country would
record less net exports this year.
Some believe exports have already reached their peak. Others may simply find
this view parrots the authorities' decision to refocus on boosting domestic
demand.
The message for the policy-makers is that they should examine very carefully
and comprehensively all factors concerning the adjustment of trade policies.
Not that a trade surplus in itself is unwelcome a huge trade surplus
contributes significantly to the growth of any economy. It is also a natural
result of China's comparative advantage of low labour costs in an era of
accelerating globalization.
The prime reason China currently needs to rein in a rapid increase in trade
surplus does not lie in the trade sector. Instead, it is the national economy
that requires co-ordinated policy adjustments in various aspects to reduce
imbalances looming at home and abroad.
In recent years, China's long-term growth story has attracted huge amounts of
foreign investment, which has helped model the country as a global manufacturing
centre.
Because of the unprecedented inflow of foreign direct investment and
ballooning trade surplus, the country's foreign exchange reserves surged to
US$818.9 billion by the end of last year, second only to Japan.
Domestically, such a large foreign exchange reserve, which is forecast to
expand further, has exerted great pressure on the country's monetary policy. The
liquidity additional foreign exchange reserves has allowed was very undesirable
as the government was trying to slow investment growth.
Internationally, China's soaring trade surplus has made the country a target
for overseas protectionists that insisted the yuan was undervalued to support
domestic exporters.
By allowing its currency to float gradually since last July, China has set
out to pursue a foreign exchange regime of greater flexibility. But one imminent
concern is the impact on the trade sector. It was said that, banking on
aggressive price cuts, Chinese exporters that have only a razor-thin profit
margin were extremely vulnerable to revaluation.
The unexpected growth of the trade surplus in January indicates that some
factors behind Chinese exporters' competitiveness may have been overlooked by
domestic observers.
To rely excessively on trade is not an option for China's sustainable growth.
Nevertheless, when shifting the focus from stimulating exports to boosting
domestic demand, it is important to identify the real strength of Chinese
exporters before making policy adjustments.
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