TO THE POINT: Chinese economic performance in the first quarter was impressive. Imports and exports during this period stood at $457.74 billion, up 23.3 percent from last year. But the trade surplus shrank nearly 40 percent from March of last year, with experts wondering if the Chinese Government’s effort to curb the surplus actually yielded results. Chinese stock markets performed amazingly well in the first quarter. The benchmark Shanghai Composite Index continued breaking records following its 10-percent plummet on February 27. Of all companies listed on the A-share market in Shanghai, China Petroleum & Chemical Corp. boasted the largest ever turnover, exceeding 1 trillion yuan in 2006 despite losses in the refining sector. Sensing possible dangers arising from excessive liquidity, the Chinese central bank raised the reserve requirement ratio for the third time this year, up to 10.5 percent. However, its impact on investors wasn’t compelling as the stock market continued to rise. The possibility of another interest rate hike seems unavoidable.

Shrinking Trade Surplus

Surprisingly, China’s trade surplus shrank sharply to around $6.9 billion in March (see graph). This put the surplus at just 29 percent of February’s total, and 61.8 percent of what it was in March 2006. It’s the lowest amount in the past 12 months. According to the latest figures from the Ministry of Commerce, the European Union remained China’s largest trading partner, followed by the United States and Japan.

“My guess is that Chinese exporters rushed to export in the first two months due to concerns over a reduction in export tax rebates,” said Zhang Yongjun, an economist with the State Information Center, when asked to try to explain the drop.

Tao Dong, chief economist with Credit Suisse First Boston for Asia, contended that he didn’t take the trade figures for February or March too seriously, saying both figures were likely distorted due to the Chinese Lunar New Year celebration, when exporters rush to export more before the holiday season while importers are reluctant to import.

The Chinese Government is drafting more regulations to reduce or eliminate tax rebates on products it would like to discourage the export of. For instance, the government reduced tax rebates on iron and steel exports to 5 percent, effective from April 15. The figure in 2004 stood at 15 percent.

Some experts believed the surplus drop was temporary and estimated that it will regain increased momentum, rebounding by 25 to 27 percent in the coming months.

Taking the first quarter as a whole, total exports amounted to $252.09 billion, and total imports stood at $205.65 billion. The quarterly trade surplus, though less than the previous two quarters, nearly doubles the first quarter figures of last year.

Wei Jianguo, Vice Minister of Commerce, has stated that China will adopt measures attempting to boost imports of advanced technological equipment from countries such as Russia and the United States. He also contended that renminbi appreciation could reduce import costs for Chinese importers.

The Chinese Government is working to strike a balance in international payments, but it takes time for the relevant measures to take effect.

Stock Market-Up, Up and Away

For trading veterans, the Chinese stock market gods “must be crazy.” They have endured drastic and dramatic upturns from the bearish gloom of a year ago as well as the buoyant bull floating about since late last year.

The benchmark Shanghai Composite Index, lingering around 1,300 last April, jumped to 3,495 points on April 11 this year.