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Ever-widening Trade Surplus Cuts Both Ways
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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 labor 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 coordinated 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 have 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.


(China Daily February 15, 2006)


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