There's more to China's huge trade surplus than the export factor. February is a good example of that. The month saw $23.76 billion in China's trade surplus, second only to the record high of $23.83 billion in October 2006. According to the General Administration of Customs (GAC), in February, the total volume of China's foreign trade amounted to $140.44 billion, a year-on-year increase of 32.9 percent. Of the total, exports hit $82.1 billion, soaring 51.7 percent, while imports grew 13.1 percent to $58.34 billion.
The 51.7-percent growth in exports is quite surprising. The trade surplus thus created showed a year-on-year increase of nearly 50 percent.
According to Feng Yuming, analyst of Orient Securities Co. Ltd., the increase of exports and trade surplus in February was much higher than expected. Normally, exports grow about 25 percent in February.
The 51.7-percent increase also indicates that a package of measures adopted by the Chinese Government since September last year to balance foreign trade, including lowering the tax rebate rate and readjusting the mix of exporting products, failed to function as expected.
It also suggests that hot money may play a large role in raising the surplus to such a high level.
Why the surplus?
Most of China's hefty trade surplus comes from foreign-funded enterprises, said Bo Xilai, Minister of Commerce, at a press conference held in Beijing on March 12. According to Bo, China's trade surplus mainly comes from processing trade where foreign-funded enterprises play a major role. Moreover, among general trade, more than half is comprised of foreign-funded enterprises.
Since China introduced its reform and opening-up policies in late 1978, it has encouraged the development of processing trade. Many transnational companies based in Western developed countries have transferred their low- or medium-end manufacturing industries to China. According to the Ministry of Commerce, by the end of 2006, China had attracted $704 billion worth of foreign direct investment, 70 percent of which went to the manufacturing industry. The continuous growth in both the scale and number of foreign-funded enterprises enabled them to create a huge production capacity of manufactured goods in China, which boosted their desire to export.
Last year, the Chinese Government adopted a series of measures such as reducing or even abolishing tax rebate rates of textiles, clothing and resource products to reduce exports, and lowering import tariffs of science and technology products to increase imports. However, pushed by manufacturing enterprises' expanding exporting desire, these measures did not work and exports kept growing.
Because China's exports are mainly contributed by foreign-funded enterprises, some countries have benefited from China's trade surplus. Just as Minister Bo has said, in Sino-U.S. trade, the surplus is credited to China while profits go to the United States.
"The mutually beneficial nature enables Sino-U.S. trade to develop in a sound way. Both the buyers and the sellers are voluntary, and there is no transaction by force," said Bo. "The American traders are wise and they are top winners in business worldwide. Surely they will not do business with China if they cannot make profits."
In Bo's opinion, China's trade surplus will maintain a high level due to the role played by the market economy.
Of course, it is not trade that mainly leads to China's trade surplus. According to Bo, it is the industrial structure and the international economic situation that decide China's trade surplus. In the short term, the surplus cannot be reduced only with trade-related measures.
Zhou Xiaochuan, Governor of the People's Bank of China (PBC), the country's central bank, deems that the trade surplus depends on domestic demand and international demand for Chinese products. Buoyant domestic investment and foreign direct investment in China have helped raise production capacity and boost exports.
"Both exports and imports are growing. We have to see which will grow faster," Zhou said.
Sun Jiwen, Deputy Director of the Foreign Trade Department of the Ministry of Commerce (MOFCOM), holds that exports increased rapidly in February because many export-oriented enterprises, worrying about tightening trade measures, tried to complete all orders at the beginning of the year.
Feng Yuming believes that China should not be blamed for the high trade surplus. In the international industrial chain, China has become a "world factory," while the market for the world factory is indeed the whole world, not just China.
In Feng's opinion, competitiveness of Chinese products has improved in the international market. For example, the proportion of machines and transport equipment, which can reflect the level of a country's manufacturing industry, has increased from 18 percent in 1994 to 48 percent at present.
"With growing outside market demand, expanding exporting capacity and more competitive products, it will be an inevitable trend for exports and trade surplus to grow rapidly," Feng added.
Nevertheless, Premier Wen Jiabao said in his recent government work report that China would strive to reduce its "excessively large" trade surplus this year.
'Hot money' factor
Some experts think that it is hot money that leads to China's high trade surplus, especially the alarming figure in February.
"The excessive growth rate is caused directly by influx of hot money," said Guo Shuyan, Deputy Director of the Financial and Economic Committee of the National People's Congress (NPC).
Justin Lin, economist and member of the Chinese People's Political Consultative Conference (CPPCC), agrees. According to Lin, the rapidly growing surplus is related to speculation in foreign exchange by some institutions and fraudulent tax rebates by some companies. Some companies exaggerated their export volumes to achieve higher tax rebates.
Actually, the "hot money argument" began two years ago.
Early in 2005, Stephen Green, economist of Standard Chartered Bank, publicized a report suggesting that among China's $102 billion trade surplus in 2005, only $35 billion was authentic. The remaining $67 billion, accounting for 60 percent of the total trade surplus, was non-trade capital inflow hidden in foreign trade, or hot money speculating on the appreciation of the yuan.
At a forum held by Beijing Normal University in January 2006, Li Deshui, formal director of the National Bureau of Statistics, said a large part of China's trade surplus was not real because some companies falsely reported higher exports to attain higher tax rebates and made sham imports to speculate in the yuan's appreciation.
Li Yafang, a CPPCC member, believes that among the total capital flowing to the stock market in 2006, at least 300 billion yuan was without clear sources. Most of the hot money came from Europe, the United States and Japan.
According to Li, there are several possible avenues for hot money. One is false transaction. To speculate on appreciation of the yuan, some foreign trade companies falsely report high exports and low imports so that a large amount of foreign currency flows into China. The other is false foreign investment. Since the Chinese Government used to provide preferential policies for foreign-funded enterprises, many domestic enterprises established companies abroad and made investment in China with the status of foreign-funded enterprises. But as China has introduced uniform tax rates and the yuan is faced with appreciation pressure, it is better for this capital to return to China. These sham foreign companies decided to return before the new Corporate Income Tax Law was adopted by the NPC in early March, but how? The simplest way is false trade, reporting higher exports. For example, a product worth $10 may be priced at $100 for export and nobody will care since both the importer and exporter are the same company. This kind of hot money led to the rapid increase of exports in February.
According to figures from the GAC, the European Union (EU), the United States and Japan will remain China's three largest trading partners this year with the growth of bilateral trade volumes all surpassing 20 percent. In the first two months, growth rates of China's trade with the EU, the United States and Japan were 23.3 percentage points, 6.9 percentage points and 10.7 percentage points higher than those in the same period last year. This seems to confirm Li's opinion that most of the hot money may come from Europe, the United States and Japan.
Focus on surplus reduction
To China, high trade surplus brings both advantages and disadvantages. What will benefit China is that the surplus can increase its foreign exchange reserves, improve its ability to deal with international financial risks, help boost the domestic economy, increase employment and push domestic demand.
However, the high trade surplus has not only aggravated trade frictions between China and its main trading partners, but also subjected China's foreign exchange policy to greater international pressure. Many countries have launched anti-dumping measures against China's rapidly growing exports. Among the total anti-dumping cases worldwide last year, 37 percent saw involvement of Chinese enterprises. Anti-dumping cases launched by European countries and the United States last year affected 8,500 Chinese enterprises and 500,000 employees. MOFCOM is very busy in dealing with these cases, and its staff often have to work overtime to handle related problems, said Bo Xilai.
More importantly, economic growth mainly driven by foreign trade makes China's economic development unbalanced. The trend of GDP growth shows that contributions by investment and consumption are decreasing, while increase via net exports is increasing.
Hence, the Chinese Government readjusted tariff rates last year in order to guide industrial structural adjustment by expanding imports and reducing surplus. This policy will be enforced more strictly this year.
According to Sun Jiwen, MOFCOM is considering increasing the list of products with tax rebates either reduced or eliminated, as well as that of processing trade products whose exports are prohibited or limited. Environmental protection requirements will be incorporated into the supervision system of processing trade and exports of related products will be restricted in order to cut down the rapidly increasing exports and the huge trade surplus.
When restricting exports, MOFCOM will relax control over imports in 2007, formulate preferential tax and financial policies to boost imports of resources, energy and advanced technologies. MOFCOM also encourages formulation and implementation of effective local policies to vigorously expand imports in accordance with local demands.
In 2007, MOFCOM will also strengthen its legislation efforts to promote transformation of the mode of economic growth, especially that of the trade growth pattern. Gao Hucheng, Vice Minister of Commerce, indicates that the legislation efforts are focused on fields like environmental protection, workers' interest protection and production safety. For a long time in the past, many Chinese enterprises gained price advantages with excessive resources consumption and serious environmental pollution.
To cope with the hot money, a joint investigation team has been formed by the State Taxation Administration, MOFCOM, GAC and PBC to check abnormal trade activities such as false trade and fraudulent foreign investment.
In order to hold back false exports and quell the froth in trade, Hu Huaibang, Secretary of the Department for Inspecting Discipline of the China Banking Regulatory Commission, suggests a special inspection on imports and exports of hi-tech products, machines and transportation equipment, textiles, and rubber and mineral products, which saw abnormal fluctuations in trade volume over recent years.
Yi Xianrong, a research fellow with the Chinese Academy of Social Sciences, lists three urgent tasks: to check problems in present import and export trade; to readjust policies based on problems that have been found; and to stabilize foreign exchange rates.
According to Yi, it is not difficult to find evidence of hot money. Many exported products are not cleared in the customs of the importing countries, and the prices recorded in those countries are much lower than the statistics of the Chinese customs. The truth can be found by checking the figures from all related parties.
Beside inspections, Li Yafang also suggests strengthening supervision over foreign exchange and fighting against illegal foreign exchange transactions across the border. Moreover, a data system should be established so that related departments can share the data and adopt effective real-time control over foreign exchange transactions.
| 
