By Long Guoqiang

Due to negative influences from the deterioration of the international economic situation, China saw marked drops in both imports and exports this year compared with the previous year. In this article, the author analyses the foreign trade situation in China this year and looks into the prospect of the country's foreign trade situation for the year as a whole and for the coming year by taking into consideration the development of the world economy and the new situation arising from China's entry into the World Trade Organization.

I. Basic Characteristics of Development of Foreign Trade in China in the Year 2001

1. Simultaneous Deceleration of the Growth of both Imports and Exports and Marked Reduction of Trade Surpluses

From January to September of 2001, China's exports totaled US$194.98 billion, 7% up from the same period of the previous year. Its imports, meanwhile, amounted to US$181.39 billion, growing by 11.2%. This ended in a trade surplus of US$13.59 billion, US$5.61 billion or 29.2% less than the same period of the previous year.

If analyzed on a monthly basis, exports grew in all the months except June, when exports saw a marginal negative growth. Since February, however, the speed of growth began to decelerate from month to month. The growth of imports was basically the same as that of exports, although with 4 or 5 percentage points faster than the latter. (Graph 1)

2. Decrease in Exports by State-owned Enterprises and Strong Growth of Exports by Enterprises of Other Ownership

In the year 2000, China's State-owned enterprises saw their exports grow by a rate of 18.2%. In the first eight months of the year 2001, however, they saw negative growth of exports in both general trade form and processing trade form, with the total value of exports falling by 3% from the same period of the previous year. The proportion they take in the country's total value of exports also shrank from 46.6% at the end of the year 2000 to 43.5% by August, 2001. In comparison, exports by foreign-invested enterprises maintained a growth rate of 13.4% in spite of deterioration of the international market situation. Exports by collectively-owned enterprises and enterprises of other ownership, meanwhile, grew by as much as 36.8% and 93.6% respectively due to comparatively small base figures. What should be pointed out here is that imports by foreign-invested enterprises for processing trade grew by merely 0.6%, while the growth of exports hit as much as 10.5%. This indicated a noticeable rise of value-added rates in China. It can be seen from the comparison made above that State-owned enterprises are comparatively poor in terms of adaptation to fluctuations at the international market, and still have much to do to sharpen their competition edge at international markets. Growth of exports of traditional products was weak, while exports of electro-machinery and hi-tech products were brisk.

Since the current round of global deceleration of economic growth has resulted from market surplus of IT products, traditional products should not have been affected so much. In China's case, however, exports of traditional products slackened, with the growth rate of textile raw materials and textile products, shoes, headwear, and other bulk traditional products standing at between merely 0.7% and 3.3%, and that of some textile products falling below zero in the first eight months of the year 2001. In comparison, the trade of electro-machinery and hi-tech products was extremely brisk, with exports growing by 13.7% and 25.1% respectively. Since exports of these two categories of products have been conducted in the form of processing trade, their growing indicates that the growth of the aggregate volume of China’s trade and the improvement of structure is attributable mainly to the development of processing trade in the country.

3. Strong Growth of Exports in the Eastern Region and Some Provinces and Municipalities in the Western Region and Big Fall of Exports in the Southern and the Northeastern Region

The development of foreign trade in different parts of China has varied. The provinces and municipalities in the Eastern Region maintained strong growth momentum. Zhejiang Province, for instance, saw a growth of 20.4%; Jiangsu, 13.8%; and Shanghai, 14%. Some areas in the Western Region also saw high-speed growths. Chongqing achieved a 38.5% growth; Qinghai, 50.7%; and Gansu, 20.8%. What has been eye-catching, however, is that growth of exports in the Southern Region and the Northeastern Region decelerated substantially. Heilongjiang Province even reported a negative growth rate, -6.7%. Guangdong Province, which contributes one third to China’s exports, saw a growth rate of merely 0.9% in the first eight months. Shantou, a city in Guangdong Province, suffered 58.7% drop in exports. This indicated that nonstandard business operations would harm exports enormously. Slow growth of exports from Guangdong Province has constituted a major factor in the substantial deceleration of the growth speed of China's exports.

4. Balanced Growth of Exports to Major Markets, and Initial Success in Tapping New Markets

It is apparent that China's exports are subject to influences from changes in demands at imports markets. In the first eight months of the year 2001, China’s exports to Japan, Europe and the United States, three of its major export markets, grew by 10.8%, 9% and 4.9% respectively. The US economy suffered the biggest deceleration of growth speed in the previous year. Correspondingly, China’s exports to the United States suffered the biggest fall. In a situation of sluggish markets in developed countries, the Chinese Government and the Chinese enterprises have made vigorous efforts to open up the markets in developing countries and achieved noticeable results. The growth rate of China’s exports to Africa and Latin America, for instance, stood at 21% and 16.8% respectively. What is worthy of attention is that China's exports to and imports from Hong Kong grew by merely 2.2% and 3.9% respectively. This indicates that with the improvement of port facilities and circulation services on the Chinese mainland, Hong Kong has come down correspondingly in its position as a trade intermediary.

II. Basic Factors Affecting China’s Situation in Foreign Trade

The characteristics of China's foreign trade in the year 2001, as described above, have resulted from the joint action of many factors, including the following basic factors:

First of all, growth of the world economy has slowed down. Since the latter half of the year 2000, the US economy decelerated enormously. The European economy became weak in the year 2001, and the Japanese economy continued to dive even deeper into mire. This is the first time since 1990 for the growth rate of the three major economies to slow down simultaneously. The influences of the slowdown have far outgrown those from the Asian financial crisis. China has become the world’s 7th biggest exporting country. Slowdown of the world economy has contained the growth of external demands, and become a major factor to blame for the slowdown of China's exports. Since about half of China’s exports are executed in the form of processing trade, slowdown of exports has resulted in a slower growth of imports in the form of processing trade.

Secondly, competition in electro-machinery products at the international market has relatively intensified. The current deceleration of the world economy has resulted from surplus capacity of production in the IT industry. Although demand at the world market has remained sluggish, China’s export of electro-machinery products dominated by IT products has gained a comparatively sharp competitive edge at the international market and remained a comparatively fast growth. The major reason lies in investment by a large number of foreign businessmen in China in recent years to set up IT production and assembly enterprises. As a result, an IT production base with supplementary facilities has been developed in the Southern Region and Eastern Region. As the situation of demand at the international market deteriorated, the parent companies of quite a number of transnational corporations followed each other to close their factories in other countries, transfer their orders to China, and expand their production here for the purpose of sharpening the competitive edge of their products. Meanwhile, these companies carried out production mainly in the form of processing trade, and suffered comparatively fewer influences from changes in exchange rates. In addition to the cheap land and labour price in China, these companies gained an upper hand in competition so far as their labour-intensive production of electro-machinery products is concerned.

In the third place, the competitive edge of China's traditional products has become comparatively blunted at the international market. Three factors have affected the competitive edge of China’s traditional products, such as clothing. First, relative appreciation of the Renminbi yuan. Since China has been implementing an exchange system dovetailed with the US dollar, the relative devaluation of the currencies of some Southeast Asian countries against the US dollar has resulted in relative appreciation of the Renminbi yuan, thus blunting the competitive edge of China's traditional products in the third-country markets. Second, due to import restrictions, the prices of some textile raw materials, such as cotton, in China has risen higher than the international market level. And third, delay in implementation of the policy of tax refunding has plunged Chinese enterprises into difficulties for fund circulation.

Fourthly, the statistical reason. In the previous year, China recorded considerable increase in exports, with monthly growth over US$ 20 billion. This has raised the statistical base to a new height. To grow on the basis of a comparatively big base figure needs a certain period of readjustment.

Fifthly, some special factors. For instance, China has intensified its crackdown upon smuggling, tax deceit, and some other criminal activities in coastal areas, thus clearing up statistical exaggerations by some areas and departments.

III. Prospects and Policy Suggestions for the Coming Years

To look into the future, the factors that will influence the growth of China's exports will continue to be, first of all, the development of the world economy, and secondly, the changes in the competitive edge of Chinese products at the international market. In addition, some other factors, such as the statistical factor, may also produce certain influence.

For a certain period of time in the future, the world economy will remain depressing. The "September 11" Event in the United States has added new woes to the US economy. According to forecasts by authoritative organs concerned, it will be hardly possible for the US economy to recover at least before the latter half of the year 2002. Moreover, the uncertainty of the scale and time length of the US war against terrorism will add new uncertainty to the future of the US economy. The European economy will also grow slowly, and the Japanese economy is hopeless of recovery. It can be seen from all these that China will continue to face an international market with sluggish demands and that it is not realistic to expect a fast growth of China’s exports.

What should be seen, however, is that the new round of international transfer of industries has been in the ascendant and that the relative competitive edge of various countries has entered a stage of rapid changes. So long as China maintains its excellent investment environment, especially the policies on processing trade, and tries to absorb more overseas investment, it will be highly realistic and feasible for China to further sharpen the competitive edge of electromechanical products. The fact that China has managed to maintain the high-speed growth of exports of electro-mechanical products since the start of the year 2001 despite of decline in international demand for IT products has demonstrated changes toward this direction.

Viewed from the statistical factor, China's monthly exports have been on the fall since August of 2000 when it reached a peak figure. From May of 2001, however, China’s monthly exports have been on the increase month by month, hitting US$ 23.99 billion by September. Even if the figures in the last quarter stand at the average level between March and September, China's exports will maintain a positive growth of less than 4%. For this reason, it is extremely likely that China will achieve 5% growth in exports for the whole year of 2001. It may also set the targeted growth of exports at between 3% to 5% for the year 2002.

So far as China's imports are concerned, its accession to the World Trade Organization will compel it to fulfil various commitments about market access. Under a situation of lasting strong demand at the domestic market, China may see its imports grow faster in 2002 than in 2001. For this reason, China will see its trade surplus shrink even further or even suffer a trade deficit.

In view of the foreign trade situation China will face in the year 2002, it is necessary for the Chinese Government to shift the emphasis of policy readjustment to sharpening the competitive edge of export products. Only in this way will China be able to maintain a certain growth rate of exports in an unfavourable international economic environment. This will also be inevitably necessary to prevent any serious imbalance of China's current account revenues and expenditures after its entry into the WTO. For this purpose, we suggest:

1. Earnest implementation of the policy on tax refunding for exports. Taxes should be refunded in full and due time according to the actual growth of exports instead of plans as has been practiced at present. On the basis of agreement with local governments, it may be considered to replace the current practice of "refunding after collection in the first place" with the practice of ‘exemption, compensation and refunding’ at the earliest date possible.

2. Earnest implementation of the reform measures to grant enterprises greater power over foreign trade. In the year 2001, the Ministry of Foreign Trade and Economic Cooperation promulgated in succession policies on purchases and exports by foreign-invested enterprises and policies on granting greater power over foreign trade to Chinese enterprises. Since these policies on exports have involved several departments including the customs and tax departments, the reform of granting greater power over foreign trade to enterprises has not yet been duly carried out in reality. We suggest that the State Council coordinate the policies worked out by different departments so that the reform can be implemented as soon as possible.

3. An all-round improvement of policies on processing trade to further bring out its macro efficiency and benefit. Economic globalization has resulted in re-division of work. Processing trade is the fundamental way for China to develop the manufacturing base of the world. China’s current policies on processing trade were formulated in the early 1980s. Although some amendments have been made after their promulgation, these policies can hardly conform to the continuous and global division of work. Processing trade should be regarded as a trade that will influence China’s participation in international division of work in the future, our policies on processing trade should be fully improved in line with the new trend of international division of work. The numerous policy barriers unfavourable to increasing the proportion of domestic purchases, in particular, should be totally removed so as to fully bring out the macro efficiency and benefit of the processing trade.



Research Department of Foreign Economic

October 2001