Chinese foreign trade under international financial crisis

Chinese foreign trade under international financial crisis

 

Released: 2008-11-12

Source: Chinese Academy of International Trade & Economic Cooperation, Ministry of Commerce

 

 

In the first three quarters of 2008, China accelerated restructuring its foreign trade and realized sustaining and fast growth, despite impacts of slowed world economic growth, dramatically rising international energy resources prices and domestic production costs, and strained floating capital with small and medium-sized enterprises. They were particularly known for the following features:

1.     Slowed export growth and accelerated import growth, resulting in smaller trade surplus. In the first three quarters, China imported and exported 1.96713 trillion U.S. dollars worth goods, up 25.2% over the same previous period. Among them, exports grew 30.3% in the first quarter, while they dropped in growth rates in the second and third quarters. China exported a total of 1.07406 trillion U.S. dollars goods in the first three quarters, up 22.3% year on year. The growth rate dropped 4.8 percentage points from the same previous period. China accelerated import in the beginning of 2008, valuing 893.07 billion U.S. dollars in the first three quarters, up 29.0% year on year. The growth rate was 9.9 percentage points higher than the same previous period. China’s foreign trade surplus stood at 180.99 billion U.S. dollars in the first nine months, down 2.6% year on year.

2.     Fast growth in export of mechanical and electrical equipment and in import volumes and prices of energy resources. In the first three quarters, China exported 617 billion U.S. dollars mechanical and electrical equipment, its largest export variety, up 24.0% year on year. Because of rising operation costs and sluggish demands, export of traditional bulk commodities of garments and their accessories grew only 1.8%, down 21.2 percentage points in growth rate compared with the same previous period. Export of other bulk commodities dropped somewhat in growth rates. Among the imported commodities, energy resources remained to grow the fastest. Crude oil import increased 8.8% in volumes and 85.5% in values year on year. Iron ore import surged 22.0% in volumes and 116.0% in values. Soybean import soared 32.3% in volumes and 137.4% in values.

3.     Foreign trade kept robust growth through the general trade mode and went on dropping in growth rate via the processing trade mode. In the first three quarters, China maintained vigorous growth in general trade, hitting 956.57 billion U.S. dollars in gross import and export, up 35.9% year on year. Among them, export amounted to 500.78 billion U.S. dollars, up 26.9%. Import reached 455.79 billion U.S. dollars, up 47.3%, which was 22.7 percentage points higher than the same previous period. Processing trade slowed down in growth rate, valuing 803.4 billion U.S. dollars. It was 13.8% higher than the same previous period. Among them, export grew 15.6%, and import grew 10.7%.

4.     Export dramatically slowed to the United States but grew fast to emerging markets. In the first three quarters, China slowed down export to developed countries. Export to EU surged 25.6% to the value of 220.47 billion U.S. dollars. Export to the United States increased 11.2% to 189.13 billion U.S. dollars. Export to Japan went up 16.0% valuing 85.85 billion U.S. dollars. China’s trade with some emerging economies continued to rise fast. For instance, export mounted up 43.1% to India, 28.4% to Republic of Korea and 90.2% to Brazil.

The current financial crisis is spreading to the real economy. Since individual consumption expenditures and exports grew less than expected, the United States corrected its GDP growth from 3.3% to 2.8% for the second quarter. Some research institutions estimated the U.S. individual consumption might see negative growth in the third and fourth quarters. The U.S. economy would correspondingly step into moderate negative growth at least. The euro zone and Japan dropped to negative growth in the second quarter. Developing countries and emerging economies also slowed their economic growth. In the fourth quarter, leading developed countries might have shrunk import. The global commodity trade would obviously decelerate. Because of the financial crisis, some regions and enterprises had had a hard time in payment. Chinese import and export businesses had clearly sensed growing reduction of new export orders and payment risks.

Futures prices of main primary products began to drop in July on the world market. The recent disorder on the financial market and fears of future global economic decline further squeezed false high futures prices. However, U.S. dollar-based primary product prices remained to stand at historic record high. It was also hard to remove the feasible fluctuations from market speculations. China’s inflation rates remained to stand high. The export sector would go on to suffer from rising costs.

Since the foreign exchange mechanism was reformed, renminbi (RMB) appreciated more than 20% against U.S. dollars, and more than 8% against euro and Japanese yen. In the recent period, the RMB exchange rates largely kept stable. It was partly attributed to leading developed economies, such as the United States, Europe and Japan, adopted measures to stabilize the financial market and subsequently suppressed exchange rate fluctuations. It relaxed pressures of surging RMB appreciation on exporting enterprises for the moment.

Because of the aforesaid elements, China’s export would further slow down in growth rates in the fourth quarter. The annual export growth might be lower than 20% in 2008.

First, the world economy will plunge into low tide and deepening crisis cannot be ruled out.

Although governments of various countries are working closely to prevent the current financial tsunami from triggering a great depression similar to that of 1929, it will take a fairly long period to resume market confidence and settle systematic and structural problems. Optimistically estimated, developed countries will recover their economies at least at the second half of 2009, or might retard to even later stages. It is yet hard to confirm how seriously developing countries and emerging economies are affected in the financial crisis. The overall world economy will enter a long period of downturn. To date, the U.S. real estate market has not demonstrated sign of overall recovery. Problems with the subprime loans might worsen, disclosing non-performing loans with more financial institutions. As a result, we cannot yet rule out the financial crisis might worsen.

Second, primary product prices will remain high and vibrate violently.

If primary product prices could fall to fairly low after the rise, it will be good to reduce costs of import countries and stimulate economic recovery. However, the main factors leading to soaring energy and resources goods prices in recent years have not changed, which are great demands from emerging markets and U.S. biological energy policies. It is not easy to increase supply of energy and resources goods, because of rising exploitation difficulty, insufficient investment of producing countries and reduced arable farmlands. In order to maintain high prices, OPEC recently prepared to cut down global oil output. Various countries have injected huge amounts of liquidity to save the financial market. Due to fears of depreciation of U.S. dollars, more international idle funds will take bulk commodity futures as inflation-proof tools. All these elements will intensify price fluctuations on the international commodity market.

Third, the Doha Round meets gloomy prospects and trade protectionism threats loom.

Different from the 1997 Asian financial crisis which only affected a portion of the market, the current financial crisis hits hard developed economies, including the United States and Europe, and threatens stability of the global trade. When the Doha Round talks broke last July, some essential disparities became hard to amend, although many members, particularly developing countries, hoped to restart the process. The outbreak of the financial crisis made it even harder for the Doha Round to make some breakthroughs. Besides, shrinking trade and rising unemployment will stimulate some countries and regions to adopt more conservative trade policies. Trade protectionism becomes increasingly perilous across the world.

On the whole, China might be further affected by sunken economy and sharply reduced import demands of main trade partners, dramatic fluctuations of international commodity markets, and possible depreciation of main currencies, which are triggered by the international financial crisis. It was estimated the foreign trade situation will be not optimistic in 2009. China will observe drops in both import and export growth.

China’s foreign trade has grown fast for seven consecutive years. In recent years, the Chinese government has dramatically adjusted its foreign trade policies, including continuous appreciation of renminbi, the Chinese currency, which allow enterprises to accommodate to worsening environments for survival in advance. Many localities and enterprises are actively transforming growth modes, optimizing import and export commodity structure, accelerating technological progress and processing trade remodeling and upgrading, and vigorously exploring emerging markets, with admirable results. A few enterprises simply relying on low-price competition have been eliminated, while enterprises boasting competitive technologies, brands and clients will have greater rooms for expansion. Most exported commodities are sold at higher prices. It must be admitted the Chinese export sector is very competitive on the whole, and it has not lost its low-cost advantages. The global financial crisis and economic downturn will stimulate a new round of international industrial reshuffling. Chinese import and export businesses meet great challenges as well as new development opportunities.

The Chinese economy will remain as before enjoy ample inherent dynamics for development in 2009. The fundamentals of the national economy and financial system are healthy. The country will go on benefit from immense and long-term investment and consumption demands, thanks to profoundly implementing the scientific development concept, adjusting and optimizing economic structures and planning urban and rural development as a whole. Relying on solid material foundations cultivated since reform and opening up, adopting flexible and prudent macro economic policies, and actively and effectively expanding domestic demand will support and accelerate the national economy to maintain steady and fast growth.

The Chinese government recently decided to raise tax rebates for the export of labor intensive products of garments and textiles and high value-added electromechanical products. There remains fairly large room to support competitive enterprise and product exports in the future. Local governments and administrative organs will intensify credit support to import and export enterprises, speed up export tax rebates, encourage and assist enterprises to overcome difficulties, develop marketable products and explore new markets. Meanwhile, China has sufficient foreign exchange reserves. It will continue to actively expand import to balance international revenue and expenditure. This will help improve relations with leading trade partners and reduce trade protectionism pressure. China has been improving investment environments and infrastructures, projecting great development potentials. So far, foreign businesses remain showing great enthusiasm to directly invest in China. In this sense, China will continue to enjoy bright prospect in its foreign trade in the mid and long terms.