Policy changes provide keys to trade imbalance

In 2006, China saw a total trade volume of $1,760.7 billion and a trade surplus of $177.5 billion. The foreign exchange reserve mounted to $1,066.3 billion -- $247.3 billion more than it was at the end of 2005.

In the face of these figures, Minister of Commerce Bo Xilai said that cutting the trade surplus was of top importance for the trade issues for 2007. It was also stressed at the Central Economic Work Conference, a top-level meeting on the country's economic policies held from December 5 to 7, that moving toward an international trade balance was high on the agenda for ensuring steady economic growth.

Obviously, China's international trade balance has become one of the primary concerns of the central government on the economic front.

Actually, the trade surplus gained momentum after China became a member of the World Trade Organization (WTO) in 2001. The trade surplus was 2.5 percent of the gross domestic product (GDP) in 2004. It jumped to 4.5 percent in 2005 and went beyond 7 percent in 2006.

The trade surplus was supported by several factors, the most significant of which is China's unusually high saving rates.

The families, businesses and the government of China have been putting a large proportion of their income into the banks since the mid-1990s. In the absence of a reliable social security system, families save their money for future uncertainties.

At the same time, the businesses and the administration do not have the opportunities or the motives to pump enough of their revenues into consumption. As a result, much of their money also goes into savings.

China's trade surplus, especially with the developed countries, originates from the characteristics of its economy.

Its cheap labor costs attract manufacturers from around the world to move their bases to China. As a result, the processing trade takes a prominent position in trade ties with the developed countries.

The processing trade volume, both import and export, was $831.2 billion in 2006, 47.2 percent of the year's total trade.

Meanwhile, the ever-growing direct foreign investment, the major form of foreign investment China attracts, is also an important source for the trade surplus, especially since the WTO entry. Exports by foreign invested enterprises accounted for 58.3 percent of all exports in 2005. The trade surplus caused by these enterprises' exports was 55.65 percent in the total trade surplus.

Admittedly, China's economic policies are also a cause for the gigantic trade surplus.

Since the late 1970s, the central government has adopted trade policies encouraging exports and limiting imports. Its industrial policies also supported domestic products that could substitute for imported parts. And export-orientated businesses are preferred in the policies for enticing foreign investors.

A natural result of these policies is that exports have been growing year by year and the growth of imports has lagged far behind.

Besides the trade surplus, China also has a surplus in its capital account. This surplus is forged by the excessive liquidity on the global financial market, the low investment of domestic businesses overseas, speculative investors expecting the appreciation of yuan, and a handful of other elements.

To sum up, the international imbalance is a result of economic globalization as well as lopsided development of the global economy itself.

Admittedly, the huge foreign exchange reserve accumulated through the trade surplus would help cushion the risks on the international financial market and offer strong leverage for future reform of China's financial system.

However, the international imbalance may threaten the sound economic development of the country and its economic ties with trade partners.

A fundamental solution to the problem would be a strategic change in China's economic policies. The first facet is to stimulate domestic demand, especially consumption.

The decision-makers should take care of the specific demands of the people and encourage them to spend.

The social security system should be fully established to cover all citizens equally. Medical care, education, housing and other programs for the public welfare should be worked out to eliminate consumers' worries about the future.

The income distribution mechanism should be improved so that the income of individuals is raised as a whole, giving them stronger consuming capability.

The consumer environment should also be improved, including improving legal protection of consumer rights and offering commodities and services catering to the different needs of different consumers.

The second facet is to switch the trade mode from the current one featuring low prices and massive production to the mode with comparative advantages in technology and management. It is also important to take measures to cut down the export of energy-intensive and resource-intensive commodities and encourage those of high added-value and environment-friendliness.

The third facet is to develop better communications with the global community on the international trade imbalance. China's trade surplus was not produced solely by domestic factors, so the correction also relies on the joint efforts of its trade partners.

China and the United States made a good start in this regard by launching a strategic economic dialogue in December, 2006. The talks were evidence of mutual efforts to promote a balanced development of bilateral trade.

Source: China Daily; By By Miao Yingchun, is a researcher with the Economics and Management School of Wuhan University.