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Foreign Firms Are Driving Our Surplus
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Mou Xinsheng


China's ever-increasing trade surplus has been a hot topic in international media in recent years.


But in fact much of the overseas trade is generated by foreign companies using the nation's vast manpower reserves.


A quick glance at customs statistics gives a fuller picture of the part trade has played in economic growth since the opening up in the late 1970s and China's joining the World Trade Organization in 2001.


The total trade volume exceeded US$1 trillion in 2004, making China the third biggest trade power in the world. The figure reached US$1.76 trillion in 2006, while foreign exchange reserves rose to US$1.06 trillion.


Chinese trade focuses on processing and most imports and exports are funded by foreign firms. Under such a unique trade pattern, a trade surplus is a natural result.


China's processing trade surplus was US$188.9 billion in 2006, with the surplus from imports and exports in general trade reaching US$83.1 billion. The deficit from the import of equipment by foreign invested enterprises was US$27.8 billion and the deficit from imports and exports in bonded warehouses and bonded areas was US$60 billion.


These figures show how processing has become the primary source of China's trade surplus.


China witnesses a continual rise in its foreign direct investment (FDI). The FDI in 2006 was US$63 billion, the third consecutive year it was higher than US$60 billion. Nearly 70 percent of the FDI in 2006 was injected into manufacturing.


Foreign invested enterprises take a remarkable share of the Chinese market, boosting the supply of many commodities and reducing the thirst for imports. Such commodities include iron and steel, automobiles and their parts, and consumer electronics.


Of course they also sell their products outside China. Exports from foreign invested enterprises account for about 60 percent of China's total exports, with the share increasing.


The central government has made major changes to the export tax rebate system in recent years. Products whose manufacture uses a lot of energy and creates pollution are having their rebate slashed and exporters hit by the change have adjusted their plans to sell as much stock as possible before the rate cut comes into force.


This has particularly affected iron and steel and textile exports.


The businesses have also seen their exports boosted by the pressure of the appreciating renminbi. By the end of January 2007, the yuan had appreciated 6 percent against the dollar before the government reformed the exchange mechanism.


In the long run, an appreciating yuan will have a negative influence on the profit margins of exporters.


Industries are therefore trying to cover themselves from the risk of renminbi appreciation by increasing exports and suspending imports, particularly of electronics and textiles.


The surplus is also growing thanks to the higher price of export commodities, which, in turn, is caused by the rising costs. The prices of land, raw materials and labor have all risen remarkably in recent years and businesses have raised export prices to compensate. The average export price in 2006 was 4.2 percent higher than in 2005, while the average price for imports was only 3 percent up.


Another important factor pushing the trade surplus up is the block imposed by several countries on selling high-tech products to China. Besides contributing to the trade surplus, the block also denies China access to technologies and equipment it badly needs for economic development.


Since the trade surplus originates from China's trade policy and trade pattern, it is unlikely to disappear in the near future.


There is a globally accepted standard to judge the soundness of trade: the proportion of a trade surplus or deficit versus the total trade volume of the year. Normally you would expect the surplus to be less than 10 percent.


The trade surplus in 2006 was US$177.5 billion about 10.1 percent of China's trade volume. Germany, the biggest exporter, had a trade surplus every year between 1952 and 2005, and in 12 of those 54 years the proportion was higher than 10 percent with the highest standing at 12.7 percent. So China's surplus is pretty close to the normal level.


Admittedly, the trade surplus is the root of many problems for China, including worsening trade conflicts with major trading partners, more trade barriers against Chinese exporters, increasing international pressure to change the foreign exchange management mechanism, and looming inflation within the country.


The government needs to keep a close eye on the trade surplus, and ensure it does not grow out of control.


In my opinion, the trade system itself should be changed so that exports grow in a sustainable way. The processing trade should be encouraged to upgrade by revising the limits on commodities processed in China, and continuing to control the export of resources and commodities whose production consumes excessive amounts of energy and causes pollution.


The exchange rate management mechanism should be improved and it is also important to stimulate domestic demand and boost imports by establishing a social security system.


Decision-makers should also try to break the blocks some countries have set up to prevent advanced technology and equipment being sold to China, so that the surplus is checked by a growth of spending on imports.


The author is director of the General Administration of Customs


(China Daily March 12, 2007)


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