LINING UP: Light trucks are waiting to be exported to Algeria in Lianyungang Harbor in the coastal Jiangsu Province (WANG CHUN)

Efforts to combat the economic recession are taking effect, as Chinese economic recovery gains momentum in the second half of this year amid the unfolding financial crisis. According to figures from the National Bureau of Statistics (NBS), the year-on-year GDP growth climbed significantly from a rock-bottom 6.1 percent in the first quarter to 7.9 percent in the second quarter, almost reaching the 8-percent annual target.

The economic takeoff in the first half of this year, however, was driven by fixed-asset investment and consumption, two of the three major propellers of the national economy. Export, once the biggest driver that shored up China's GDP before the crisis, has since been pulling the GDP growth down this year.

NBS statistics showed that the year's first-half investment contributed 87.6 percent to the GDP growth, driving the GDP growth by 6.2 percentage points year on year. The proportion made by consumption was 53.4 percent, driving GDP growth of 3.8 percentage points. But exports made a negative 41-percent contribution to economic growth, and dragged the GDP rise down by 2.9 percentage points.

Some of the most discussed topics in the country now revolve around what the export situation will look like in the second half of this year, if it will continue to pull down the nation's economic growth, and whether China will come up with new stimulus policies to spur exports.

Stiff headwinds

Compared with other economic improvement indicators, Chinese exports have performed badly, showing a decline of 17.5 percent year on year in January, 25.7 percent in February and 17.1 percent in March.

"In March, we once felt relieved and thought export decline will stop soon," said Yao Jingyuan, Chief Economist of the NBS.

But Yao admitted that judgment was too optimistic, citing the 22-percent year-on-year export drop in April, and a deep plunge of 26.4 percent in May.

"The figures indicate exports have not turned for the better. The steep fall in foreign demand will be one of the biggest problems facing the Chinese economy," said Yao.

In 2008, about 60 percent of China's economic growth depended on exports, which meant that over 60 percent of the 30-trillion-yuan ($4.4-trillion) of Chinese GDP was linked to the world economic performance. A current clog in exports will force exporters to reduce or suspend production, which will in turn wither the demand for raw materials, thus leading to a substantial decline in China's industrial output.

The export situation will remain bleak in the short term, and negative growth can be expected as exports will continue to drag down the country's GDP growth this year, Yao said.

Three major challenges

Chen Changying, a veteran international trade expert at the International Economic Research Institute under the National Development and Reform Commission, also worried about the country's exports in the next half of this year, illustrating three major unfavorable factors discouraging China's foreign trade development.

First, international trade will be directly affected by foreign demand. At present, the economies of developed nations have not stabilized for growth yet. The speed and level of their recoveries are still in question and it is quite possible that they will nose-dive again. A prolonged upturn or any fluctuation in demand will place considerable pressure on Chinese exports.

Second, the final effects of the stimulus measures are relatively small. The Chinese Government has launched a series of measures, including raising tax rebates for certain export products, readjusting the category of restricted exports of the processing trade, keeping the renminbi exchange rate with the U.S. dollar at a relatively stable level and strengthening credit support for exporters, aiming to alleviate exporters' hardships. They have thus far had a positive influence on preventing exports from sliding further down and will continue to take effect in the next half of this year. Compared with past economic crises, including the 1997-98 Asian financial crisis, the measures will come at a higher cost since they are aimed more at injecting liquidity into the market as opposed to industrial restructuring.

Third, the new wave of worldwide protectionism in the wake of the economic crisis continues to hurt China's exports. Under such circumstances, China, as the third largest trade entity and the second largest exporter, will become a major target for international trade friction, as a significant number of trade disputes will be pointed at China. Moreover, some previous disputes under investigation will enter the process of ruling in the second half of this year, and projected negative results will substantively affect China's exports.

"Due to the above-mentioned factors, we forecast China will export $1.26 trillion this year, down 12 percent compared with that of last year, which will serve as a negative factor in the country's GDP growth," said Chen.

Trade policy at a crossroad

The bleak external demand and domestic production suspension have put foreign trade policy-making in a difficult situation.

Sun Jun, an economic information researcher at the China Council for the Promotion of International Trade, said of the target 8-percent GDP growth, exports should contribute at least 10 percent and make up 0.8 percentage points of the growth rate.

The first-half's export performance, however, will make it difficult to attain the 0.8-percentage point contribution to GDP growth.

Confronted with such a predicament in exporting, the question arises about how Chinese foreign trade policy can be readjusted to achieve the growth.

The Ministry of Commerce (MOFCOM) adopted policies that promote free trade and oppose trade protectionism, as well as export-oriented policies, in a bid to spur exports. "But the effects of those policies are not obvious," Sun said.

The current trade policy is stuck in a dilemma, Sun said. It must not only safeguard free trade by requiring foreign countries to keep their markets open so that "made-in-China" products get access to international markets, but must also address the shrinking market demand that are taking their tolls on exports.

Exploring new markets

Given its current export situation, China should not start a new round of export tax rebate hikes, Chen said.

Since the outset of the global financial crisis, China has raised export tax rebates seven times, adding competitiveness to exporters and increasing employment. However, unless exports continue to plunge, no new rebate hikes should be adopted, since the current rebate rates have already yielded positive effects, Chen said.

The most urgent task, Chen said, is to expand cross-border renminbi settlement pilot bases (where importers and exporters are able to trade in renminbi), a procedure in line with the export expansion demand and a prerequisite for the future reform of the renminbi exchange rate system. Chen urged the government to set up more pilot bases and enact details covering cross-border renminbi settlements.

Exporters can also explore emerging markets on top of stabilizing traditional markets, Chen suggested. "Our exporters should take advantage of the economic slowdown to invest more in the Middle East, Latin America and Africa, especially the markets in Russia, Brazil and India," Chen suggested. In the meantime, "we can expand exports by way of providing aid to foreign countries. We can provide financial support to recipient countries, but require those countries to buy Chinese products," Chen said.

Africa and India, the two economies with expected high growth rates, are also the markets where Chinese exports saw slight declines in the first half of this year. Hence, domestic companies may try to expand their exports to these regions in the second half of this year, Chen added.