China is very likely to have a year-long trade deficit this year, the first since 1993.

 

While economists say that the possible trade deficit will mostly be caused by temporary factors, they recommend the government and industry players adopt measures to avoid the impact of surging imports.

 

Customs statistics released last week showed that China posted its third monthly trade deficit in a row in March. The deficit totaled US$540 million last month. For the first quarter, the deficit totaled US$8.43 billion.

 

China's exports were 42.9 percent higher in March, reaching US$45.85 billion, while imports rose 42.8 percent to hit US$46.39 billion.

 

Exports in the first three months stood at US$115.7 billion, up 34.1 percent from a year earlier, while imports were US$124.1 billion, up 42.3 percent.

 

In the first quarter of 2003, China also had a deficit of US$1 billion, but this time, things are different.

 

"The trend of slower export growth than import is expected to continue in the second quarter, causing more deficits, and the situation will improve in the second half of this year. The annual figure is very likely to be a slight trade deficit," said Chen Fengying, a senior economist with the Institute of Contemporary International Relations.

 

Last year, China realized a trade surplus of US$25.53 billion.

 

The changed tax return policies for exports that started this year is a major reason for the reduction in the growth rate of China's exports, Chen told China Business Weekly.

 

Last October, the government decided to reduce the average tax return rate for exports from 15 percent to 12 percent. The policy adjustment pushed exporters to sell their goods overseas in the fourth quarter last year to enjoy the higher tax return rate.

 

On the other hand, China's average import tariff rate was slashed from 11.3 percent last year to 10.4 percent this year, promoting more imports.

 

Meanwhile, the strong domestic demand for raw material and machinery equipment resulting from heated fixed asset investment greatly increased China's imports, said Zhang Yansheng, director of the Institute of Foreign Economies under the State Development and Reform Commission (SDRC).

 

In the first two months of this year, China's fixed asset investment rocketed by more than 50 percent. The investment growth rate for the first quarter is expected to surpass 40 percent.

 

Imports of iron ore, crude oil, soybean and edible oil surged because of huge industrial demand. According to Li Yushi, deputy director of the Chinese Academy of International Trade and Economic Cooperation, the imports of raw material accounted for 80 percent of the total imports in the first quarter's US$124.1 billion.

 

Mainly as a result of surging Chinese demand, the price of raw material in the international market has rapidly risen since late last year.

 

The price index of raw material in the international market rose 17.2 percent in the last quarter of 2003, and the price hike continued this year.

 

Zhang said that in the latter half of this year, policies to curb economic overheating will gradually take effect, reducing the demand on raw material and machinery equipment.

 

Last month, the People's Bank of China, the nation's central bank, raised the bank reserve rate from 7 percent to 7.5 percent to curb commercial banks lending money to heavily invested sectors.

 

The powerful SDRC also introduced some punitive measures to warn local leaders not to invest excessively.

 

But the effect of the policies might not totally offset the huge demand for imported material in the current economic boom, Zhang told China Business Weekly.

 

On the other hand, foreign direct investment (FDI), which has been an engine to promote Chinese exports, has increased slowly. This also possibly reduced the export growth rate, experts believe.

 

China drew US$53.5 billion in FDI in 2003, up just 1.4 percent from the previous year, although that is due in part to the SARS (severe acute respiratory syndrome) outbreak that led to the delay or cancellation of some contract signing.

 

As China has huge foreign reserves and is short of some crucial raw materials such as oil, its trade deficit is not a big problem in the short term, Li said.

 

The reducing trade surplus may even benefit the country as this can weaken international pressure on China to reevaluate its currency the renminbi, economists suggest.

 

But in the long term, continued trade deficits can hurt the Chinese economy which is mainly pushed by exports and investment.

 

An immediate problem of China's rising imports is that the huge Chinese demand often spurs international prices of raw material to rise rapidly, Zhang said.

 

This is mainly because international prices of raw material are manipulated by traders in the developed countries, who are very sensitive to China's rising imports and would not hesitate to increase the price of their commodities.

 

Economists say a measure to solve the problem is to avoid concentrated purchases of raw materials. Domestic buyers should buy oil, steel or coal at different times, in different markets and from different countries. More Chinese companies should be encouraged to invest in mines and oil fields in other countries, especially in Africa where resources exploration has not been totally controlled by giant international mining firms.

 

Zhang also suggested China better utilize the international futures market to buy goods like oil or soybean when prices are cheaper. It should also quicken the process of establishing energy reserves to avoid speculative price fluctuation in the international market.

 

"As a whole, there is oversupply of raw material in the international market. As a big country and major importer, China should decide the price instead of passively accepting it,"said Zhang.

 

(China Business Weekly April 25, 2004)