China's Trade Surplus Set to Slow

The Financial Times ^ | 1/13/08 | Richard Mcgregor and Krishna Guha

[Clemenza]

China's trade surplus rose by nearly 50 per cent to a record $262bn in 2007, but import growth exceeded export growth in each of the final three months of the year, suggesting that the period of huge expansion of the controversial surplus might be drawing to a close.

In another first, the European Union also replaced the US as China's largest export market. Sales to the expanded EU rose 29.2 per cent in 2007, compared with just 14 per cent to the US - though Europe's bilateral deficit remains much lower than that of the US because it exports more to China.

Meanwhile US data showed that its recent surge in net exports faltered in November, when the US trade deficit hit a 14-month high. Most but not all of the deterioration was due to high oil prices, raising fresh concerns over the extent to which the US can rely on strong global demand to keep its economy out of recession.

Frederic Mishkin, Federal Reserve governor, pledged "timely, decisive and flexible" action from the US central bank to contain the impact of the credit crunch.

Rising non-oil import prices in December underscored the risk that the US could import inflation due to the weak dollar.

China's overall surplus for 2007 was up 47.7 per cent on 2006, driven by solid demand for textiles and footwear, which have long been staple Chinese exports, and sharply rising sales of electronics and metals, especially steel.

Xinhua, the official news agency, said exports rose by 21.7 per cent in December, while imports increased by 25.7 per cent in the same month, cementing a trend that started in October.

Import growth has not outpaced exports for three consecutive months since the first quarter of 2004.

The turnround is especially notable because the end of the year is a strong time for Chinese exports of toys and other goods.

Numerous factors inflated the cost of imports in 2007, including rising commodities prices - notably for oil and iron ore. But the biggest driver of the new trend has been sustained investment in China and falling demand offshore, especially in the US. "You have strong investment demand in China and weak consumer demand in their big markets," said Arthur Kroeber, of Dragonomics.

The trade figures imply that China's current account surplus in 2007 was still about 10.5 per cent of GDP, said Stephen Green of Standard Chartered. This is unprecedented for an economy of China's size. The trade surplus will also continue to swell in 2008, albeit at a slower pace, Mr Green argued.

China's currency, the renminbi, which has appreciated by about 12 per cent since Beijing officially broke its peg with the US dollar in mid-2005, has helped limit the surplus by making imports cheaper. But the appreciation to date does not yet appear to have had any material impact on China's exports, which remain hyper-competitive.

[ME-262]

China is raising a generation of only children. One would not be surprised if they wind up a little spoiled and soon prefer buying to working.