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China's Trade Performance

Published June 2007

China's Global Trade Surplus

China's trade surplus hit $63.3 billion at the end of April--88 percent higher than in the first four months of 2006. The trade surplus seems to be growing faster this year--at about $15.9 billion each month--than last year, when it grew an average of $14.8 billion per month. The surplus is increasing friction with China's main trading partners, leading to louder calls in some quarters for a stronger RMB. Though China has made a few adjustments aimed at reducing exports, such as cutting VAT rebates for exports of certain products, these have had little effect on the overall trade surplus. In fact, analysts have noted that the first-quarter surge in exports may be a result of firms trying to export before the VAT adjustments kick in. In 2006, China's trade surplus reached a record high of $177 billion, up 74 percent from the previous year. China's total trade (imports and exports) with the world rose by 24 percent in 2006, reaching $1.8 trillion (see Table 1).

China's Imports and Exports

Through 2006 and thus far in 2007, exports of electrical machinery and equipment and power generation equipment served as key drivers of export growth. Meanwhile, PRC authorities said in April that the government would continue to roll back VAT rebates for steel exports and implement export quotas for this sector. Some analysts doubt this will slow Chinese steel exports, as domestic overcapacity persists; iron and steel exports were up 93 percent over the first quarter of 2006.

China's Trading Partners

Some recent shifts among China's top 10 import suppliers have stood out. China's 2006 imports from Thailand rose 28 percent, propelling the country into eighth place among China's import suppliers--its highest rank since China's WTO accession--moving past traditional large-share importers Singapore and Russia. In this shift in the Asian supply chain, the PRC is supplanting other Asian nations as a key supplier to the United States. China's imports from the Philippines jumped 37 percent in 2006, vaulting the country into China's list of top 10 import suppliers for the first time. First quarter figures for 2007 indicate this trend is continuing: PRC imports from Thailand and the Philippines rose 32 percent and 47 percent respectively, over last year's first quarter figures.

China's Trade with the United States

First quarter US exports to China rose almost 16 percent (see Table 2). US exports to China jumped 32 percent in 2006, far outpacing US export growth to any other major market. As China moves up the manufacturing value chain and as domestic consumption grows, US exporters can expect even PRC demand for high-end US goods and services to continue to grow. In 2006, the United States ran a $3.3 billion surplus with China in services.

US imports from China still far exceed US exports to China, up 19 percent in the first quarter of 2007. The bilateral trade deficit reached $57 billion at the end of the first quarter of 2007. To the extent that China is supplanting other Asian nations as a source of US imports, this deficit will continue to expand, despite the strong growth in US exports.

Looking Ahead

Political pressure from China's rising global trade surplus is likely to intensify through the year, and will focus increasingly on the value of China's currency, unless China takes stronger steps to cool exports. Export VAT rebate policy seems to be an area where further actions are likely, but further VAT rebate reductions may not be enough on their own to curb the surplus. An alternative to reducing exports, of course, is boosting imports. China has made a few moves aimed at boosting domestic demand and increasing imports--including the large buying mission that preceded the SED in May--but these too have had only a small impact thus far. The State Information Center, a research body under the National Development and Reform Commission, expects trade surplus growth to slow in the second quarter because of a stronger RMB, a slowing US economy, and the VAT rebate adjustments. Given numbers through April, however, this may be wishful thinking rather than an accurate forecast.