With the combined effect of the slowing global economy and weakening demand in major markets, China's rapid rise in foreign trade may taper off.

The worsening situation in the international market could add more uncertainties to the country's export and import businesses. In particular, the export growth rate is expected to moderate and is set for a gradual decline in the near future.

In the first eight months of this year, China's exports were up 22.4 percent year-on-year to US$937.7 billion, down from 25.7 percent in 2007. Imports jumped 30 percent to US$785.7 billion, accelerating 10.4 percent year-on-year.

With growth in exports slowing while imports were accelerating, the country's trade surplus decreased to US$152 billion in the same period, shrinking US$10 billion from last year.

Meanwhile, China's exports to the United States were up just 10.6 percent, dropping 6.1 percent from a year earlier, while shipments to Europe and Japan increased 26.3 percent and 15.6 percent, down 5 percent and 3.9 percent year-on-year respectively.

As global economic problems mount, weakening demand in major markets such as the US has slowed China's export growth.

It is estimated that every 1 percent decline in US GDP would cause a 4.75 percent drop in China's export growth rate.

According to the procurement managers' index (PMI) announced by the China Federation of Logistics and Purchasing, the sub-index for new export orders was 48.4 points in September, dropping 2.3 points from a month earlier, while the purchasing sub-index plunged to 44.7 points, the first time it fell below 50 since 2006.

All of this indicated that foreign demand was on the wane and companies relying on exports were bearing the brunt of foreign imports.

As the RMB has continued to appreciate, exporters have displayed prudence in accepting foreign orders since the latter half of 2007. The value of the RMB appreciated more than 6 percent in 2007.

To prevent the risk of exchange rate fluctuations, many export enterprises changed long-term orders into short-term ones, and large orders into smaller ones.

Global inflationary pressures pushed up the price of raw materials on the international market, which increased exporters' production costs.

In recent years, the price of primary products like crude oil, coal, steel and agricultural products has soared on both the international and domestic markets.

In the first eight months of 2008, the cost of China's imported iron ore jumped 77.9 percent, crude oil rose 71.2 percent, refined oil was up 91.7 percent, coal increased 64.9 percent, and soybeans jumped 79.2 percent.

In addition, due to fierce competition and weakening demand on the international market, the markup of manufactured products' prices fell behind that of primary products.

Other factors including increased labor costs and environmental protection expenditure added to export-oriented enterprises' burdens.

These reasons forced a slowdown in China's foreign trade, with its growth rate expected to linger between 15 and 20 percent this year.

From 2009, the pace of growth in overall exports and imports may have largely decelerated, with the growth rate falling below 15 percent and the trade surplus remaining at US$200 billion.

Dealing with the situation

To cope with the deteriorating situation in foreign trade, a number measures should be taken to stimulate overseas demand.

First, the government should strengthen its supervision of key export products and help exporters deal with their lack of current capital and fend off risks presented by exchange rate fluctuations.

Second, the pace of the RMB's appreciation should be decelerated to maintain export growth.

Keeping a lid on the value of the RMB or even making it slightly depreciate against the US dollar would help to restore exporters' confidence.

Third, the destination of exported products must be diversified.

Increased exports to emerging markets like the Middle East, Russia and Latin America could help to mitigate the effect of declining exports to developed countries.

Fourth, gradually transferring labor from exporters to other sectors would relieve the heavy burden on domestic employment caused by the slowing growth of export businesses.

Last, it is of vital importance to improve the quality and added value of exported products and promote export-oriented industry's transformation from being labor-intensive to a more capital- and technology-intensive structure.

(China Daily October 15, 2008)