(China Daily)
Updated: 2008-01-12 11:09

Trade growth remained remarkably strong last year, but the easing of the expansion of the trade surplus in the fourth quarter may be a harbinger of an export-led slowdown.

For policymakers, slowing exports are welcome at the moment for the situation could help prevent the national economy from overheating. But weakening external demand also means that the government must boost domestic consumption to avoid a sharp decline in the speed of growth.

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The latest statistics show that China's trade surplus ballooned to $262 billion in 2007, up 47.7 percent from 2006, while the volume of foreign trade hit a new high of $2.17 trillion, up 23.5 percent year-on-year.

Such rapid annual growth of trade and net exports is surely impressive given the faster appreciation of the renminbi and the sometimes unfavorable international opinion of the safety of Chinese products.

The Chinese currency advanced seven percent against the US dollar last year, twice as fast as in 2006, eroding the paper-thin profit margins of some exporters. Meanwhile, a number of safety warnings and recalls of Chinese products in other countries also put a drag on export growth.

The December trade surplus was $22.7 billion, down about 14 percent from the previous month.

With the government cutting export tax rebates and raising standards relating to environmental protection, labor conditions and product quality, it is reasonable to predict that the country will see a further slowdown in the growth of exports this year.

The deceleration will not only help ease the excessive growth of liquidity by slowing the accumulation of foreign exchange reserves, but also keep the economy from overheating by depressing export-led investment.

However, the side effects of an export slowdown are also clear for a Chinese economy that has long relied on investment and exports for growth.

It is likely that an export-led slowdown will reveal the severity of the problem of overcapacity in China.

After years of over-investment, China has built up huge production capacity, which has been absorbed by ramping up exports. But if the US economy deteriorates to the point where it affects imports of Chinese goods and hits China's other export markets, exporters will have no choice but to undercut each other in the domestic market.

That will be good for taming inflation. But if domestic consumption cannot be adequately boosted, manufacturers will soon find it hard to make a profit and thus expand investment and employment.