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BEIJING -- China's latest record trade surplus is fueling concerns over
whether its government has the tools to reduce the imbalance.
China's customs administration said exports of goods in July exceeded imports
by $14.6 billion, edging out the previous record monthly surplus of $14.5
billion in June. The July surplus, the third consecutive record in as many
months, was driven by a 23% jump in exports from a year earlier. That outpaced
the 20% rise in China's purchase of products from abroad.
The trade surplus -- now on track to reach an unprecedented $150 billion or
so in 2006 -- has become a focal point for international concerns over China's
rise, with the U.S. and European Union contending that they can't sustain such a
huge imbalance in their trade with Beijing. The surplus also is aggravating
domestic jitters that China's economy could spin out of control, as the
surpluses cause cash to accumulate in the banking system and stimulate
investment despite official attempts to rein it in.
Yet while there is a growing consensus the trade surplus is a problem, it is
still far from clear what should be done to fix it. Many U.S. politicians and
economists argue that a sharp strengthening of China's currency against the
dollar would make its exports more expensive, thereby cutting sales and reducing
the surplus.
However, the effects of such an appreciation might not be so easy to predict,
in part because of the unique nature of China's trade. The majority of its
exports actually come from companies backed by foreign investors. Having decided
to do their manufacturing in China, they might not respond quickly to
shorter-term policy changes.
"China's trade surplus is more a reflection of the continued reallocation of
global manufacturing to China, rather than an intention of policy," says Qu
Hongbin, an economist with HSBC. While foreign investment is off its peak, Mr.
Qu says that unless there is a major decline, "the reality is that China is
going to have to learn to live with this trade surplus for the foreseeable
future. To use government policy to influence this is very difficult."
An appreciation of the yuan would mean not only that more dollars or euros
would be needed to buy the same amount of Chinese currency, but also that each
yuan could buy more foreign currency. Since many Chinese exports are made up
largely of imported components and raw materials, a rise in the currency could
actually lower exporters' costs. Some economists argue that exporters would be
able to pass on much or all of those lower costs to customers, offsetting the
effect that a stronger yuan would otherwise have on the final foreign-currency
price of their goods.
The latest string of record surpluses have come despite a slight appreciation
of the yuan. The Chinese currency has risen nearly 4% against the dollar since
the de-facto dollar peg was scrapped in July 2005.
Chinese authorities, rather than focusing solely on the level of the yuan,
are looking at broader imbalances in the economy that they believe contribute to
the trade surplus.
"As part of a batch of policies, the exchange rate can play a certain role in
adjusting the imbalance in the international balance of payments," the central
bank said in its quarterly monetary-policy report, issued Wednesday. However, it
emphasized that "the most fundamental way to solve the problem of a large
balance-of-payments surplus is still to expand domestic demand, particularly
consumption, and lower the savings rate."
Those aren't changes that can happen overnight. Authorities have been saying
for some time that they want to encourage consumption and promote more imports.
But the government hasn't made much progress so far in improving the social
safety net and public services like education, which most observers believe
would free Chinese households to spend more and save less.
Meanwhile, recent economic trends signal that China's trade surplus might
even widen further. For instance, Beijing has rolled out a series of measures to
slow bank lending and curb investment in infrastructure and new factories. If
those efforts succeed, as some economists expect, imports of capital equipment
and raw materials likely would fall -- increasing the gap with exports.
Moreover, many analysts are predicting the dollar will start to decline now
that the U.S. Federal Reserve has paused in its campaign of interest-rate
increases. Since the yuan still tends to track the dollar more than any other
currency, a decline in the dollar could pull down the yuan against currencies
like the euro and yen. "This will cause even larger trade surpluses," economists
from J.P. Morgan Chase said in a research report Thursday.
