WORLD / Wall Street Journal Exclusive
Trade surplus swells to record
By ANDREW BATSON (WSJ)
Updated: 2006-08-11 11:56
http://online.wsj.com/public/article/SB115520527409332038-eQZkzjV5eUDvjFPFy
mQ8vTQuhHI_20060817.html?mod=regionallinks
BEIJING -- China's latest record trade surplus is fueling concerns over
whether its government has the tools to reduce the imbalance.
China's customs administration said exports of goods in July exceeded
imports by $14.6 billion, edging out the previous record monthly surplus
of $14.5 billion in June. The July surplus, the third consecutive record
in as many months, was driven by a 23% jump in exports from a year
earlier. That outpaced the 20% rise in China's purchase of products from
abroad.
The trade surplus -- now on track to reach an unprecedented $150 billion
or so in 2006 -- has become a focal point for international concerns over
China's rise, with the U.S. and European Union contending that they can't
sustain such a huge imbalance in their trade with Beijing. The surplus
also is aggravating domestic jitters that China's economy could spin out
of control, as the surpluses cause cash to accumulate in the banking
system and stimulate investment despite official attempts to rein it in.
Yet while there is a growing consensus the trade surplus is a problem, it
is still far from clear what should be done to fix it. Many U.S.
politicians and economists argue that a sharp strengthening of China's
currency against the dollar would make its exports more expensive,
thereby cutting sales and reducing the surplus.
However, the effects of such an appreciation might not be so easy to
predict, in part because of the unique nature of China's trade. The
majority of its exports actually come from companies backed by foreign
investors. Having decided to do their manufacturing in China, they might
not respond quickly to shorter-term policy changes.
"China's trade surplus is more a reflection of the continued reallocation
of global manufacturing to China, rather than an intention of policy,"
says Qu Hongbin, an economist with HSBC. While foreign investment is off
its peak, Mr. Qu says that unless there is a major decline, "the reality
is that China is going to have to learn to live with this trade surplus
for the foreseeable future. To use government policy to influence this is
very difficult."
An appreciation of the yuan would mean not only that more dollars or
euros would be needed to buy the same amount of Chinese currency, but
also that each yuan could buy more foreign currency. Since many Chinese
exports are made up largely of imported components and raw materials, a
rise in the currency could actually lower exporters' costs. Some
economists argue that exporters would be able to pass on much or all of
those lower costs to customers, offsetting the effect that a stronger
yuan would otherwise have on the final foreign-currency price of their
goods.
The latest string of record surpluses have come despite a slight
appreciation of the yuan. The Chinese currency has risen nearly 4%
against the dollar since the de-facto dollar peg was scrapped in July
2005.
Chinese authorities, rather than focusing solely on the level of the
yuan, are looking at broader imbalances in the economy that they believe
contribute to the trade surplus.
"As part of a batch of policies, the exchange rate can play a certain
role in adjusting the imbalance in the international balance of
payments," the central bank said in its quarterly monetary-policy report,
issued Wednesday. However, it emphasized that "the most fundamental way
to solve the problem of a large balance-of-payments surplus is still to
expand domestic demand, particularly consumption, and lower the savings
rate."
Those aren't changes that can happen overnight. Authorities have been
saying for some time that they want to encourage consumption and promote
more imports. But the government hasn't made much progress so far in
improving the social safety net and public services like education, which
most observers believe would free Chinese households to spend more and
save less.
Meanwhile, recent economic trends signal that China's trade surplus might
even widen further. For instance, Beijing has rolled out a series of
measures to slow bank lending and curb investment in infrastructure and
new factories. If those efforts succeed, as some economists expect,
imports of capital equipment and raw materials likely would fall --
increasing the gap with exports.
Moreover, many analysts are predicting the dollar will start to decline
now that the U.S. Federal Reserve has paused in its campaign of
interest-rate increases. Since the yuan still tends to track the dollar
more than any other currency, a decline in the dollar could pull down the
yuan against currencies like the euro and yen. "This will cause even
larger trade surpluses," economists from J.P. Morgan Chase said in a
research report Thursday.
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