China's trade surplus slipped significantly in February. According to statistics released by the General Administration of Customs (GAC) on March 10, China's trade surplus stood at $8.56 billion in February, less than half of the January figure of $19.49 billion.

Before that, Reuters predicted that China's trade surplus would reach $21.9 billion in February, while Dow Jones surveyed nine economists who predicted an average surplus of $20.6 billion. The $8.56 billion trade surplus in February is obviously far lower than many people's estimates.

To China, a decline in its trade surplus is conducive to relieving excess liquidity. However, people are also worried that if the subprime mortgage crisis in the United States worsens, economic deterioration worldwide could lead to a sharp decline in China's exports. If this happens, it will adversely affect the Chinese economy where exports hold an important position.

Export decline leads the way

GAC statistics indicate that the drop in export growth led to the sharp decline in the trade surplus in February. During this month, China exported $87.37 billion worth of goods, a year-on-year increase of 6.5 percent, much lower than the 26.7-percent increase in January.

On March 12, Chen Deming, Minister of Commerce, explained in an interview that the sharp drop in February was mainly caused by four factors, the first of which was the Spring Festival.

The Spring Festival holiday this year started on February 6, much earlier than the February 19 date last year. According to Chen, since many companies rushed to finish export orders before the Spring Festival, export growth in January was large and the export value in February was $20 billion lower than in January.

Hao Daming, a researcher at China Galaxy Securities Co. Ltd., said that based on an analysis of monthly export volume before, during and after the Spring Festival since 1995, export volume during the Spring Festival month is always lower than those before and after the Spring Festival.

In Chen's opinion, international factors constitute the second, and what may be a more important reason. In February, China's exports to the EU only increased 1 percent, while those to the United States decreased 5 percent. The decline of exports to Europe and America pulled down the country's total export volume by 12 percentage points.

The third and perhaps the most important reason is based on recent policy changes. Last year, China launched a series of policies to regulate foreign trade, whose effects come out this year. In February, exports of crude oil and steel feed were near zero and those of rolled steel decreased to 3.11 million tons from 5.64 million tons in January, an aggregate decrease of 17.2 percent in the first two months. Export growth of labor-intensive products such as garments and shoes also dropped in February due to decreased tax rebate rates.

According to Chen, the fourth reason is the appreciation of the Chinese currency, known as renminbi. In the first two months, the renminbi appreciated 2.9 percent, and since the foreign exchange rate reform in July 2005, the renminbi has appreciated 16.5 percent.

Influenced by the export drop, stocks of export-oriented companies have kept falling since mid-February.

"Among the troika for economic growth, the contribution of exports to the growth of gross domestic product this year is likely to be negative," said Zhang Xiaoji, head of the Research Department of Foreign Economic Relations of the Development Research Center of the State Council.

Imports rapidly increase

While exports decreased significantly, imports hit record highs in the past three years. This also led to the decrease in the trade surplus in February.

GAC figures show that in February, China imported $78.81 billion worth of goods, surging 35.1 percent compared with the same period last year, which was 7.5 percentage points higher than the growth rate in January.

In order to reverse the surging trade surplus, since 2007 the Chinese Government has regulated imports and exports of products with high pollution and high energy consumption as well as resources by means of raising export tariffs and reducing tax rebates. At the same time, it has encouraged imports by cutting provisional import tariffs and abolishing automatic import license administration and so on. Effects of this policy started to be felt in the fourth quarter last year.

Nie Wen, macroeconomic analyst at Industrial Securities, thinks that rapid domestic economic growth and increased demand have led to the rise in imports.

Feng Yuming, chief macroeconomic analyst at Orient Securities Co. Ltd., said that price factors might have played an important role in pushing up import growth in February.