July 11, 2007
China June Trade Surplus Renews Currency Pressure
By JOSEPH KAHN
BEIJING, July 10 —The politically sensitive Chinese trade surplus surged to a record $26.9 billion in June, potentially heightening tensions with the United States and increasing pressure on China to allow its currency to appreciate.
The figures suggested that incremental adjustments by the Beijing authorities in the value of the currency, the yuan, had so far done little to alter a trade picture that has angered American lawmakers and some business groups in Washington.
Some of the increase in the surplus may have resulted from a push by major Chinese exporters to ship goods before government export tax rebates expired on July 1, a move to reduce incentives for domestic companies to produce energy-intensive goods for the global economy.
But the hefty surplus, which increased 27 percent from June 2006, also reflected slowing growth in imports. Imports in June expanded at a relatively modest 14 percent compared with the year before.
The yuan has been allowed to appreciate by a little over 9 percent since China broke the currency’s fixed tie to the United States dollar two years ago. The Bush administration and members of Congress have pressed Beijing to allow the yuan to rise much faster, with some arguing that it be allowed to appreciate by a third or more against the dollar.
Several leading senators are backing legislation that would allow American companies to request steep antidumping duties against countries that keep their currencies artificially undervalued to gain a trade advantage. If the measure is enacted, China will probably be the major target of such petitions.
The export surge also comes as China has faced heavy pressure to crack down on companies that export counterfeit or shoddy goods that led to safety problems in the United States and other countries.
The overall Chinese trade surplus for the first six months was $112.5 billion, up 84 percent from a year earlier. Its trade surplus for all of 2006 was $177.5 billion.
Export-driven growth is unusual for a major continental economy like China’s. Similar economies usually rely more on domestic investment and consumption than on exports to stimulate growth.
Goldman Sachs estimated that the Chinese export surplus in the first half of the year equaled about 8 percent of the gross domestic product. The surplus in the first half of 2006 equaled 6.3 percent of its output.
On the whole, China depends more on domestic investment and consumption than on exports to generate its growth. But no large economy in recent history, including Japan’s in its productive heyday, has had such high trade surpluses in relation to total output, Goldman said.
“This level of trade surplus is unprecedented for China or any other major economy in the world,” Hong Liang, a Goldman economist in Hong Kong, said in a research note. “This again highlights the ineffectiveness of the policy tinkerings that have so far failed to tackle the root cause of China’s bloating trade surplus: the significantly undervalued currency.”
Some Chinese officials and private economists said they expected exports to cool in the second half of 2007. Export tax rebates adopted in the late ’90s to stimulate a then-slumping Chinese economy have been phased out in many industries.
But the central planning agency, the National Development and Reform Commission, has forecast a total surplus of at least $250 billion in 2007, which suggests a continued rapid growth in exports and a slower growth in imports.
In contrast to the first part of this decade, China now has a large surplus with many trading partners, including the European Union. Previously, its trade surplus was attributable mainly to its oversize gap with the United States. The surplus with Washington reached $14 billion in June, while that with the European Union was $11 billion.
Even so, many economists argue that China is serious about reducing imbalances in its economic development, including the trade surplus.
Chinese leaders have repeatedly pledged to raise domestic consumption as a source of growth, relying less on investment and net exports.
“The government is taking significant steps to discourage exports of goods that consume resources that China does not have,” said Andy Rothman, a CLSA Emerging Markets economist in Shanghai.
But he said those measures were aimed more at China’s energy and environmental issues, and not specifically at reducing its trade surplus.
Over time, he said, trade should come more into balance, but possibly not fast enough to ease tension with Washington. “The problem for China,” he added, “is that there is very little it can do in the short term to reduce the size of the U.S. trade deficit.”
Mr. Rothman said the value of the yuan was not the most important factor in the Chinese trade picture. American exports to China have increased 188 percent since 2001, a much faster pace of growth than the United States has had with any other major trading partner, despite what some economists argue is the yuan’s artificially low purchasing power.
“This is a very long-term structural problem that the Chinese are as eager as anybody else to fix,” Mr. Rothman said. “But we have to recognize that it will take more time.”