Parsing China's
Trade Surplus
Nicholas Lardy of the Institute for International Economics
explains how it has become so huge and how it will affect the yuan's value
Some numbers just make you sit up and take notice. After seeing
those out of Beijing on Jan. 11 -- showing China's trade surplus had topped
$101 billion last year, triple the 2004 figure -- the world definitely
noticed. The big jump came in spite of a 2% revaluation of China's currency,
the yuan, in July. With the latest figures, trade hawks in the U.S. and
elsewhere are sure to call for a more significant appreciation of the yuan to
slow the flood of exports from mainland factories.
But would that really help cut the surplus? BusinessWeek Asia Editor David
Rocks on Thursday spoke with Nicholas Lardy, a senior fellow at the Institute
for International Economics in Washington, to get some perspective on the
numbers. Edited excerpts of their conversation follow:
What's driving China's trade surplus?
The big driver isn't on the export side but on the import side. Export growth
fell a bit, but import growth was barely half what it was in 2004, so there
has been this ballooning of the trade surplus.
Based on the data available so far, it looks like the biggest
decline in imports is in machinery and equipment. Parts and components that go
into export processing are still growing at 25% to 30% annually. But machinery
and equipment is running at about a third the rate of 2004 -- that's to say at
10% rather than the 30%-plus growth seen in 2004. So what we're seeing in 2005
was some slowing in the pace of domestic investment.
This comes against the background, you'll recall, of investment
growth that began to accelerate in 2002 through early 2004. Then the
government got worried about excess investment and overheating, so they
started to put the brakes on the economy. This is evidence that the measures
they took are starting to bite.
What are the strongest export sectors?
The big drivers of export growth have continued to be information
technology, electronics, and telecom. Those have been the big drivers for the
past few years, and it continued in '05.
And a lot of those goods are produced by Western
multinationals exporting from China, right?
About 55% of all exports are from foreign-owned companies or joint ventures.
That share has been growing about 1 or 2 percentage points annually in recent
years but may be stabilizing now. It looks like foreign capital coming into
China in 2005 is going to be down slightly -- the first time in many years
that it will have fallen. That may mean the share of foreign-produced goods
won't grow as fast as it has in the past.
But even if you take out all the foreign-owned exporters,
Chinese domestic companies have been growing their exports. Their share has
been declining, but many companies are exporting more and more. And a lot of
people don't recognize that about half of all the goods produced by foreign
companies in China are sold in China. The auto sector is the best example --
95% of the autos sold there are made by foreign companies or JVs.
Will the trade surplus continue to grow?
The big question for the overall trade situation next year
is whether import growth starts to pick up again. Some people thought they saw
a resumption of import activities in the closing months of the year. If that
trend strengthens, then the trade surplus may be lower next year. If the world
economy slows, then China's export growth will slow, but if global growth is
strong, we'll see export growth from China continue at maybe 20%.
How much would a further revaluation of the yuan affect the
situation?
I've been in the camp that has said the Chinese currency is
undervalued and that the adjustment last July was far too modest. But even if
China were to revalue its currency significantly, it would continue to have a
trade surplus with the U.S. The fact is, most of the goods that are produced
in China used to be made somewhere else. If you look at the overall U.S. trade
deficit, Asia's share has been declining.
We have a huge growing deficit with Germany. They have slow
growth, so their imports are down. And there's a lot of energy imported from
the Middle East.
A revaluation would contribute to a reduction of the U.S.
current account deficit. But what really has to happen is an increase in the
savings rate in the U.S. and a simultaneous depreciation in the value of the
dollar. It needs to fall further mostly against the yuan and other Asian
currencies that have been heavily managed.
China's leadership is seeking to increase internal
consumption. Will that have much of an effect on the trade surplus?
Not really. If you look at the composition of imports, there are almost no
consumer goods. China has tremendous production capacity in most of the things
people are buying -- consumer electronics, automobiles. So Dell (DELL ) may
sell more computers in China, or other foreign companies may sell more
flat-screen TVs, but those will be made in China. I don't see a lot of that
consumption demand coming from imports.
China's foreign currency reserves are heading toward $1
trillion. What effect might this have on the U.S.? Does it give China greater
control over the U.S. economy?
I don't think it gives them much clout. They're in the very
unhappy position of being at risk of a significant decline in the value of
their reserves. Eventually the dollar has to depreciate quite a bit,
particularly against Asian currencies. So they're at risk of their reserves
depreciating in terms of their domestic currency. They can't really diversify
out of dollar holdings because the minute they start to do that they impose
losses on themselves.
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