Trade statistics released for last month and the first half of the year by China's Ministry of Commerce on Monday revealed the country's continuing propensity to record large surpluses with the rest of the world.
The People's Republic of China (PRC) posted a trade surplus of US$14.5 billion last month, the largest monthly surplus on record. Exports last month were US$81.3 billion, up 23.3 percent year-on-year, while imports were US$66.8 billion, up 18.9 percent. Total exports for the first half of the year were US$428.6 billion, up 25 percent year-on-year, while imports were US$367.2 billion, up 21.3 percent, resulting in a heady trade surplus of US$61.4 billion.
If this trend continues, this year's trade surplus could come in at around US$130 billion, making it the PRC's largest annual surplus to date.
Trade surpluses, as in China's case, or deficits, as in the US' case, ultimately reflect the difference between savings and investment in an economy. Where savings are larger than investment, a surplus is the result.
China saves around 47 percent of its US$2.2 trillion GDP and invests somewhat less than that. With total trade worth around 40 percent of its GDP, it is only natural that the nation exports a lot more than it imports.
While the reason for China's trade profile is simple enough, its trading partners have had a tough time adjusting to it. Its exports have been rising rapidly precisely in those areas where countries like the US face well-organized and influential producer groups. Steel is the latest problem area, while textiles is an ongoing itch. Watch the sparks fly when China becomes a major car exporter.
Indeed, in the bilateral relationship between Washington and Beijing, trade has become the single largest irritant. In this context, the question needs to be asked: What can Chinese policymakers actually do about the surplus? The short and perhaps unpalatable answer is "not much."
Members of the US Congress have been arguing for nearly two years now that an artificially weak yuan is partly to blame for China's trading behavior. Despite the exchange rate revaluation and reform instituted by the People's Bank of China last year, the dollar peg remains more or less intact and the current exchange rate of US$1 to 7.98 yuan is certainly below market expectations.
But as economists like Nicholas Lardy and Ronald McKinnon have argued, the dollar peg is first and foremost an instrument of monetary policy in the PRC -- used as a relatively consistent measure of value in an environment where domestic money growth is both high and erratic -- and for much of the period from 1994 to 2003, the yuan was overvalued rather than undervalued.
Any sizable revaluation of the yuan, while making Chinese exports more expensive and imports cheaper, would be unlikely to change the nominal value of the surplus.
Absent a speculative attack on the Chinese currency, raising the value of the yuan would increase China's interest rates, reduce investment, slow the economy and reduce both exports and imports. If associated with a determined speculative attack, a revaluation would push interest rates to zero and leave the economy languishing in a low growth liquidity trap -- think Japan in the 1990s -- once again reducing both exports and imports. Either way, a large trade surplus would remain.
So what else could Chinese policymakers feasibly do? Theoretically they could stimulate domestic demand through expansionary fiscal policy, thereby increasing imports.
There is solid negative evidence to suggest that this would work. After almost a decade of budget deficits, Beijing announced a shift to a contractionary fiscal stance at the end of 2004, and last year government revenue exceeded expenditure by US$28.5 billion. Over the same period, imports dropped dramatically: they grew by just 17.6 percent last year, compared with an annual average increase of 32 percent in the three years prior to that.
But PRC policymakers have good reason to put the brake on local spending. Even with the budget in surplus, the Chinese economy grew 9.9 percent last year and, according to a recent People's Bank forecast, is set to grow at more than 10 percent this year. While consumer and wholesale price growth are still low -- inflation is forecast to rise only 1.7 percent this year -- M2 was up a worrying 19.1 percent in May.
With reasonable expectations that energy prices are going to rise sooner rather than later, it would be the height of imprudence to commence a fiscal expansion at this point in time.
Finally, there's trade policy. Would further trade liberalization reduce the surplus?
Encouraging China to be more open in its trade relations is certainly a worthy policy goal. But while China has come some distance since entering the WTO in 2001, doing business with the PRC is still difficult for most outsiders. A new China office of the US trade representative set up last month reflects growing impatience in the US with China' slow pace in correcting business practices that are perceived as unfair or illegal.
But the importance of tariffs and other barriers is almost certainly overplayed. New research by Stephen Green of Standard Chartered Bank suggests that China's trade regime leaks like a sieve. The trade statistics of China and its leading partners differ by as much as 80 percent -- last year the Chinese put their trade surplus with the US at US$114 billion while the US said it was US$202 billion -- a fact in large measure attributable to big, unreported capital inflows and widespread avoidance of customs procedures.
And while reducing tariffs and other barriers may increase the absolute level of China's trade, it will do little to change the relative proportions of its imports and exports. That will require a major change in China's macroeconomic balances, and barring a major external shock, that's not about to happen any time soon.
China's trade surplus has become a source of frustration for many of the country's trading partners. Insofar as the PRC sees the downside of placing the world trade system under undue stress, there is good reason to believe that these feelings are shared by the nation's policymakers.
Craig Meer is a business writer based in Taipei.
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