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Getting the trade balance right
(China Business Weekly)
Updated: 2004-12-26 11:08

China should no longer focus on the size of trade growth on its way to becoming a strong trading power.

The international balance of payments, rather than blind pursuit of a trade surplus, should become the primary goal.

China's foreign trade growth rate is expected to slow down next year. The trade surplus will reach US$15 billion next year. That compares with this year's surplus, which is expected to be around US$25.53 billion -- almost the same as 2003.

The nation's trade balance will face greater pressure next year, due to short-term factors such as price rises in oil and raw materials and long-term reasons including China's fast economic growth, rising domestic demand and the huge size of processing trade.


China will continue to experience fast export growth next year, but the export growth rate will drop to 21 per cent next year, down 14 percentage points from this year.

That is due to the high base set by the stunning export growth of the past three years.

Some negative factors will challenge China's export growth next year.

Rising energy and raw materials prices affect the international competitiveness of products made in China. Coal, electricity and oil supply shortages, as well as limited transportation, hamper some export-oriented enterprises' production and the fulfilment of their contracts.

A growing number of anti-dumping and anti-subsidy charges and safeguard measures launched by other countries also pose a challenge to China's export growth.

Local governments will face greater financial pressures when paying the rebate on exports next year, despite the tax rebate system reform proving to be a major driving force of this year's fast export growth. New problems are set to emerge.

Despite a relatively slower growth rate compared with previous years, China will continue to witness fast export growth next year.

The global economy's growth rate will drop 0.3-0.7 percentage point next year and the growth in world trade will decrease 1.5-3 percentage points, according to a number of major international organizations, including the United Nations, International Monetary Fund and the World Bank.

That is due to the lagging effect of high oil prices and a global interest rate rise cycle.

However, a global economic growth rate of 4 per cent remains expected, which will create strong demand for products made in China.

China's gross domestic product (GDP) is expected to grow more than 8 per cent next year. Stable macroeconomic growth is conducive to export growth.

Since China joined the World Trade Organization at the end of 2001, the nation's export environment has greatly improved.

Foreign direct investment in China will continue to increase steadily next year. The sound development of foreign enterprises and the processing trade provides a solid foundation for export growth.

China's export mix will continue to improve next year. Exports of machinery and electronic and other high-tech products will play a greater role in China's exports.

On the one hand, the Chinese Government's strategy of rejuvenating trade by encouraging the export of high-tech products has started to reap dividends.

Exports of high-tech products have been rising at more than 40 per cent per month since April 2002.

On the other hand, many transnational corporations have moved their research and development (R&D) centres to China, and are starting to invest more in the nation's high-tech sector. Rising exports from foreign enterprises will result in the fast growth in the exports of high-tech products.

Meanwhile, exports from China's labour-intensive textile and clothing sectors will also increase next year.


China's imports experienced fast growth this year due to strong domestic demand for imported equipment, energy and raw materials, further tariff drops and increased import quotas.

Imports this year are expected to grow 37 per cent, down 3 percentage points year-on-year.

Next year's import growth rate is forecast to fall to 24 per cent. But that remains faster than China's export growth rate.

As China's economy enters a new round of growth, the demand for advanced technologies, equipment, raw materials and energy will remain robust. But fixed asset investment next year will drop as a result of the central government's macroeconomic adjustment, which means that demand will drop for imported raw materials and equipment.

Meanwhile, foreign enterprises' imports and processing imports, accounting for more than 50 per cent of China's total imports, will ensure a steady growth in imports next year.

Reduced tariffs will continue to increase import volumes.

China's tariffs will be reduced to an average of 10.1 per cent next year, in accordance with the nation's WTO commitments.

Trading partners

China's trade surplus with the United States and the European Union (EU) will continue to grow next year, while the deficit with Japan and South Korea will expand.

Labour-intensive products remain the bulk of China's exports.

Demand will remain strong for Chinese products in the United States and EU where labour-intensive industries are "sunset sectors.''

But Chinese products only take a small share of the market in ASEAN (Association of Southeast Asian Nations) member states.

China's growing appetite for raw materials, chemical products, and machinery and electronic products produced with advanced technologies is the main reason for the growing trade deficit with other Asian countries.

Due to the shortages of natural resources in China, imports from the Gulf states, South America and Australia will increase and this trend will continue in the near future.

But China will have to cope with more trade disputes with its major trading partners due to the centralization of export markets and import sources. These exacerbated disputes will present Chinese enterprises with a major obstacle as they expand into international markets.

Type of trade

The processing trade will continue to play an important role in the growth of China's trade. The nation's comparative advantage in labour-intensive industries will also push forward the growth of general trade.

China's processing trade has recorded a growing surplus since 1989.

The stable growth of processing trade in the first 10 months of this year has provided a sound base for China's trade balance this year.

China's processing export volume reached US$258 billion in the first 10 months of this year, a year-on-year increase of 34.7 per cent. The growth rate was 2.2 percentage points faster than last year's.

The nation posted processing imports of US$179.16 billion during the period, rising 37.6 per cent year-on-year. The growth rate was 6.4 percentage points faster than last year.

China's general trade has witnessed fast growth since last year.

The general export volume reached US$193.97 billion in the year's first 10 months, up 33 per cent year-on-year. The growth rate was 0.1 percentage point faster than last year.

But the growth rate of general imports was 14.8 percentage points slower.

The general import volume reached US$204.2 billion, rising 33.2 per cent year-on-year.

China started to see a general trade surplus since May, an important factor which swung China's annual trade into a surplus.

After posting a trade deficit for four consecutive months this year, China has recorded a monthly surplus since May.

The nation posted a trade surplus of US$10.97 billion during the first 10 months of 2004.

By Zhang Feng, senior economist at the National Bureau of Statistics.

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