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Policy Action Needed to Control Trade Imbalance

The World Bank said in a recent report that China's rising trade surplus was the main macroeconomic issue for the country and it needs to take more policy actions to contain its growth.

The viewpoint coincided with the decision of the Ministry of Commerce, which treated the reduction of trade imbalance as its top priority.

However, even the government paid tremendous attention to the sector. China's trade surplus hit a record high of US$27.05 billion last month, accelerating 13.5 percent from a year earlier. The combined figure through October increased 59 percent to US$212.3 billion, according to China's Customs.

"The soaring trade surplus, which so far seems little affected by measures to contain export growth, constitutes the bulk of the rising balance of payment surplus," said the World Bank report issued on November 15.

"This surplus is adding to domestic liquidity and contributing to steady asset price increases, share prices in particular."

China's trade surplus has flooded the economy with cash and triggered more pressure from the United States and European countries for the yuan to appreciate further.

The European Union remained China's biggest trade partner through October with bilateral trade sales of up to US$287.5 billion, followed by the United States with US$248.1 billion and Japan with US$191.8 billion.

Their resolute urges to balance the trade has led in part to a stronger yuan, which has gained more than 10 percent against the US dollar since the peg was scrapped in July 2005.

Meanwhile, M2, the broadest measure of money supply, rose 18.47 percent last month from a year earlier to 39.42 trillion yuan (US$5.33 trillion), exceeding the central bank's annual target for a ninth straight month.

However, if people break the trade value into smaller components, they may discover something encouraging.

In October, despite of a record high trade surplus, the export growth rate slipped slightly.

Exports last month increased 22.3 percent from a year earlier to US$107.7 billion. The speed of growth decreased 0.5 percentage points compared with that of September.

The slower pace may come out of the break for the National Day holiday. Also, it may hardly be a signal for sustainable slower growth rate, as many economists said.

But it indicated that the government policy to tame the runaway trade surplus had taken some effect.

From July 1, the Ministry of Finance cut tax rebates on 2,831 types of commodity products, including steel, non-ferrous metals and several other raw materials, to curb overseas sales of high energy-consuming and polluting products.

China has also cut taxes, raised minimum wages and improved education, welfare and health care to boost consumer spending and relieve the reliance on export and investment.

Meanwhile, China's exports have been experiencing a structural adjustment in its subcategories.

According to the Ministry of Commerce, the sector of mechanical and electrical equipment saw its overseas sales expanding 28 percent from a year earlier to US$497.23 billion through the third quarter.

It was followed by export of high-tech products, which increased 24.8 percent to US$244.28 billion through September, securing the second knot on the list of fastest growing categories.

Affected by the new rules, coal export dropped 20.9 percent in the first nine months while that of crude oil tumbled 43 percent.

"The structure of export is on the way to optimize. But given the robust global demand, China's fast growing economy and more competitive China-made products, it remained a hard battle to take the trade surplus under control," said a report issued by the Ministry of Commerce earlier this month.

China's export may be affected by some variations such as a dim outlook of the US economy suffering from the subprime mortgage crisis and more trade barriers set up by a few countries to protect their economies.

Under these circumstances, the ministry estimated that China may post a US$1.2-trillion export this year against a US$950-billion import.

In 2008, the country may see its trade expand 15 percent in terms of scale, with the total trade volume surpassing US$2.4 trillion. But the growth pace will be slower than that of this year.

In order to rein in trade surplus, the World Bank has listed a package of policies for China, including more exchange-rate flexibility, tightened liquidity, increased interest rates, increased reform in the financial sector and a change in fiscal spending, with more emphasis on health and education.

However, China's trade surplus is not created by China alone. To adjust it, it requires efforts from both China and its trade partners.

Mei Xinyu, a researcher with the Chinese Academy of International Trade and Economic Cooperation, said: "It is not fair for China to bear the cost of reducing trade surplus alone and its trade partners have to shoulder due responsibilities."

He also said it may take time for China's macroeconomic policies to have an effect and foreign countries should weigh fairly and interpret correctly the influence of China's export growth.

(Shanghai Daily November 26, 2007)

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