China is very likely to have a year-long trade deficit this
year, the first since 1993.
While economists say that the possible trade deficit will mostly
be caused by temporary factors, they recommend the government and
industry players adopt measures to avoid the impact of surging
imports.
Customs statistics released last week showed that China posted
its third monthly trade deficit in a row in March. The deficit
totaled US$540 million last month. For the first quarter, the
deficit totaled US$8.43 billion.
China's exports were 42.9 percent higher in March, reaching
US$45.85 billion, while imports rose 42.8 percent to hit US$46.39
billion.
Exports in the first three months stood at US$115.7 billion, up
34.1 percent from a year earlier, while imports were US$124.1
billion, up 42.3 percent.
In the first quarter of 2003, China also had a deficit of US$1
billion, but this time, things are different.
"The trend of slower export growth than import is expected to
continue in the second quarter, causing more deficits, and the
situation will improve in the second half of this year. The annual
figure is very likely to be a slight trade deficit," said Chen
Fengying, a senior economist with the Institute of Contemporary
International Relations.
Last year, China realized a trade surplus of US$25.53
billion.
The changed tax return policies for exports that started this
year is a major reason for the reduction in the growth rate of
China's exports, Chen told China Business Weekly.
Last October, the government decided to reduce the average tax
return rate for exports from 15 percent to 12 percent. The policy
adjustment pushed exporters to sell their goods overseas in the
fourth quarter last year to enjoy the higher tax return rate.
On the other hand, China's average import tariff rate was
slashed from 11.3 percent last year to 10.4 percent this year,
promoting more imports.
Meanwhile, the strong domestic demand for raw material and
machinery equipment resulting from heated fixed asset investment
greatly increased China's imports, said Zhang Yansheng, director of
the Institute of Foreign Economies under the?State Development
and Reform Commission (SDRC).
In the first two months of this year, China's fixed asset
investment rocketed by more than 50 percent. The investment growth
rate for the first quarter is expected to surpass 40 percent.
Imports of iron ore, crude oil, soybean and edible oil surged
because of huge industrial demand. According to Li Yushi, deputy
director of the Chinese Academy of International Trade and Economic
Cooperation, the imports of raw material accounted for 80 percent
of the total imports in the first quarter's US$124.1 billion.
Mainly as a result of surging Chinese demand, the price of raw
material in the international market has rapidly risen since late
last year.
The price index of raw material in the international market rose
17.2 percent in the last quarter of 2003, and the price hike
continued this year.
Zhang said that in the latter half of this year, policies to
curb economic overheating will gradually take effect, reducing the
demand on raw material and machinery equipment.
Last month, the ,
the nation's central bank, raised the bank reserve rate from 7
percent to 7.5 percent to curb commercial banks lending money to
heavily invested sectors.
The powerful SDRC also introduced some punitive measures to warn
local leaders not to invest excessively.
But the effect of the policies might not totally offset the huge
demand for imported material in the current economic boom, Zhang
told China Business Weekly.
On the other hand, foreign direct investment (FDI), which has
been an engine to promote Chinese exports, has increased slowly.
This also possibly reduced the export growth rate, experts
believe.
China drew US$53.5 billion in FDI in 2003, up just 1.4 percent
from the previous year, although that is due in part to the SARS
(severe acute respiratory syndrome) outbreak that led to the delay
or cancellation of some contract signing.
As China has huge foreign reserves and is short of some crucial
raw materials such as oil, its trade deficit is not a big problem
in the short term, Li said.
The reducing trade surplus may even benefit the country as this
can weaken international pressure on China to reevaluate its
currency the renminbi, economists suggest.
But in the long term, continued trade deficits can hurt the
Chinese economy which is mainly pushed by exports and
investment.
An immediate problem of China's rising imports is that the huge
Chinese demand often spurs international prices of raw material to
rise rapidly, Zhang said.
This is mainly because international prices of raw material are
manipulated by traders in the developed countries, who are very
sensitive to China's rising imports and would not hesitate to
increase the price of their commodities.
Economists say a measure to solve the problem is to avoid
concentrated purchases of raw materials. Domestic buyers should buy
oil, steel or coal at different times, in different markets and
from different countries. More Chinese companies should be
encouraged to invest in mines and oil fields in other countries,
especially in Africa where resources exploration has not been
totally controlled by giant international mining firms.
Zhang also suggested China better utilize the international
futures market to buy goods like oil or soybean when prices are
cheaper. It should also quicken the process of establishing energy
reserves to avoid speculative price fluctuation in the
international market.
"As a whole, there is oversupply of raw material in the
international market. As a big country and major importer, China
should decide the price instead of passively accepting it,"said
Zhang.
(China Business Weekly April 25, 2004)