Trade surplus

    Booming exports have contributed significantly to the Chinese economic miracle. In recent years, the cart of the Chinese economy has been hauled by the two "strong horses" of investment and foreign trade, with the "weak donkey" of consumption tottering in the middle.

    To sustain steady development of the national economy, China's policymakers aim to spur domestic consumption by increasing consumer purchasing power.

    Such a strategy can help rein in over-investment, ease pressures on the Renminbi and dissuade foreign anti-dumping lawsuits resulting from the mammoth trade surplus, industry officials say.

    In the five years since China's accession to the WTO, the country's foreign trade has grown at an average annual rate of over 30 percent.

    In the first six months of 2006, China's foreign trade reached 795.7 billion U.S. dollars, up 23.4 percent year on year. China chalked up a trade surplus of 61.5 billion U.S. dollars in the first half of this year, up 54.9 percent year on year, according to statistics from the General Administration of Customs. On this basis, China's trade surplus is set to exceed 100 billion U.S. dollars for this year, industry officials say.

    "China's foreign trade imbalance is driven by brisk global demand for China-made products and the ongoing migration of industries from developed to developing nations," said Mei Xinyu of the Trade Research Institute of the Ministry of Commerce.

    In the 1980s and 1990s, attracted by cheap labor costs, multinational companies began shifting their manufacturing to China, opening factories in East China to process materials and export the processed products.

    "The fact is most exports by these multinationals have been included in China's trade figures, and China's trade surplus mainly comes from processing trade. A high proportion of export profits in fact stay in the pockets of multinationals," said Mei Xinyu.

    In the first half of this year, foreign-invested, export-oriented processing firms generated total foreign trade of 465.3 billion U.S. dollars, up 25.8 percent on the same period last year, accounting for 58.5 percent of China's total.

    In comparison, state-owned companies posted 195.3 billion U.S. dollars in foreign trade, up 11.7 percent, while private firms' imports and exports rose 34.9 percent to 135.1 billion U.S. dollars.

    To fend off the ill effects of the 1998 Asian financial crisis, in 1999 China raised its average export rebate from 6 to 15 percent. The export growth rate promptly doubled and China became the third-largest commodity trader in the world, in terms of gross value, after the United States and Germany.

    However, annual export rebates have now become a burden on central finances. Between 2001 and 2005, aggregate export tax rebates reached 1.19 trillion yuan, nearly 3.8 times as much as for the period from 1996 to 2000, according to official statistics.

    In addition to this financial burden, the rebate system conflicts with China's new determination to attack pollution and conserve energy.

    The structural problem of an oversupply of low-end products and undersupply of high-end products haunts many Chinese industrial sectors at present. Lower export rebates will deal a blow to low-end products.

    "Reducing export rebates for energy-consuming and resource-intensive products shows the government's resolve to discourage exports of such products," said Professor Liu Xiaochuan of Shanghai University of Finance and Economics.

    Moreover, reducing export rebates may help ease pressures to revalue the Renminbi, the Chinese official currency.

    Experts calculate that comprehensive rebates for the export of one U.S. dollar worth of commodities amounted to 0.4429 yuan in 2005. Abolishing export rebates would be equivalent to a revaluation of the RMB yuan by 0.4420 yuan against the U.S. dollar. On this basis, the exchange rate would have been 7.7 yuan for one U.S. dollar at the end of 2005. In theory, then, abolishing export rebates will help ease pressures to revalue the RMB yuan.

    In October 2003, China lowered the export rebate rate by an average 3 percent and required local governments to pay 25 percent of all rebates. In 2004, China cut export rebate rates for certain products --high energy consuming, low value added products or products from sectors with low technical content, and abolished rebates for crude oil, refined oil and unsawn timber. Export taxes were also raised on phosphor, ferrosilicon and copper products.

    In January 2005, China officially removed the 8 percent export rebates on 17 categories of energy-consuming and resource-intensive products including non-forged or non-rolled aluminum, ferromanganese and ferrosilicon. China nullified a 13 percent export tax rebate on steel billet on April 1, 2005.

    In April 2006, China further raised export taxes on refined copper and copper alloy from 5 percent to 10 percent, and interim export taxes for copper materials from zero to 10 percent. China also put a stop to rebates on electrolytic aluminum exports and banned the processing of alumina for export.

    "All these new deals have helped alleviate pressure on the central government's finances and ensure steady and sustained growth in Chinese foreign trade," says Liu Xiaochuan.

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