China's Trade Performance

Published February 2007

Summary

China's global trade surplus surged in 2006 to record levels, creating monetary pressure that the PRC government will have to address in 2007, possibly through more rapid appreciation of the renminbi and further reductions in export value-added tax rebates.
Exports in the electrical machinery and equipment and power generation equipment categories, which include consumer electronics, remained primary drivers of China's large trade surplus in 2006.
US exports to China grew at a record 33 percent through November over the same period in 2005, while imports from China grew at nearly half that rate--registering the lowest import growth rate since China's World Trade Organization entry in 2001. Nonetheless, the United States recorded a $214 billion trade deficit with China in 2006.
A number of free-trade agreements under way in Asia will enhance China's position in the regional supply chain and further shift trade patterns within the region.

China's Global Trade Surplus Surges

In 2006, China's trade with the world grew 24 percent, reaching $1.7 trillion, with a surplus of exports over imports of $178 billion. This new record high was up 74 percent from last year's trade surplus. China now has more than tripled its trade with the world since its 2001 World Trade Organization (WTO) entry. The large trade surplus is not only exerting pressure on the macroeconomy (see China's Economy) but is also resulting in political pressure from the United States and European Union, among other trading partners, over large trade deficits and China's management of its currency.

China's Imports & Exports

Exports

China's exports to the world reached $969 billion in 2006. The growth rate of these exports, at 27 percent over 2005, was the lowest rate since 2002, when exports increased by 22 percent. The average annual increase during the 2003-05 period was almost 33 percent. The slowdown in growth is consistent with expectations that 2006 would see a return of Chinese export growth to levels more consistent with long-term, historical trends.

China's exports to key trade partners appear to be shifting: Growth rates of exports to economies such as South Korea, Singapore, Hong Kong, and Italy have outstripped the export growth rate to the United States. China now ships more to the European Union than the United States. Economists estimate that the US share of China's global exports fell from 29 percent in 2002 to 24 percent in 2006. Though the United States continues to be China's largest single export market, the higher export growth rates to other economies indicates that China is diversifying into new markets.

Tech products Electrical machinery and equipment once again topped the list of China's top exports with a total of $205 billion exported through November. Five key ministries, including the State Administration of Taxation and the General Administration of Customs, issued a notice on September 15, 2006 adjusting export value-added tax (VAT) rebates for various goods. The regulations raised rebates for certain large technical equipment, information technology products, biomedical products, and high-tech products from 13 to 17 percent. The rebate increases are clearly meant to encourage exports in these sectors as China's leaders have placed a priority on developing indigenous high-tech manufacturing capability.

The export categories that include electrical machinery and equipment have consistently been the top PRC export categories. These categories include both relatively low-end consumer electronics and high-end goods. Evidence of a shift in China's export product mix toward higher-tech goods will appear in changes within these categories.
Steel, iron, and raw materials Also in September, PRC authorities reduced VAT rebates for certain metal and nonmetal raw materials. Rebates for steel products as well as for various nonferrous metals dropped from 11 to 8 percent and from 13 to 5, 8, or 11 percent, respectively. In 2005, China became a net exporter of steel for the first time, thanks to increased production combined with lower domestic demand. The trend continued in 2006, as steel and iron exports from China increased by 48 percent year-on-year for the January to November period.
Textiles Global textile exports from China increased by 34 percent between 2005 and 2006. US imports of textiles from China increased by only 14 percent over the same period, however, a dramatic slowdown in growth from the 2005 increase of 60 percent. The slowdown is the result of China's imposition of export quotas on textiles bound for the United States. A deal struck between the United States and China in 2005 called for the PRC Ministry of Commerce (MOFCOM) to establish annual quotas for 34 categories of textiles and apparel that had previously been subject to US safeguards. The annual quota system took effect on January 1, 2006 and lasts until 2008. A similar textile agreement with the European Union will expire in 2007. The European Union will be renegotiating its textile agreement this year; the United States may do so in 2008, when its agreement is set to expire. In the absence of any renewal of such arrangements, China could become the target of textile antidumping and/or antisubsidy cases from these trading partners.

Imports

Through December 2006, China imported $792 billion worth of goods. This was a 20 percent increase, up from the record low of 18 percent growth registered between 2004 and 2005. A resurgence of Chinese imports could help reduce China's trade surplus in 2007 but will not be enough to eliminate the surplus entirely.

Agriculture According to the PRC General Administration of Customs, agriculture, fish, and forestry accounted for $7 billion in imports from the United States and $6 billion in exports to the United States through November 2006. Over the same period, the United States remained China's largest supplier of agricultural, fishery, and forestry products, with a share of 19 percent of China's total imports of these products.

The overall increase in the value of imported agricultural goods from the United States, however, was only 16 percent. This is the lowest increase among the top five agricultural suppliers to China and could signal the beginning of a more even reliance on China's top suppliers.

In April 2006, the General Administration of Quality Supervision, Inspection, and Quarantine (AQSIQ) implemented regulations on examination and approval of labels for imported and exported foods that reduced the total fees levied and centralized the approval process. The streamlined approval process for labels may facilitate imports. But the centralization of approval guidelines may not resolve the problem of inconsistent interpretation of standards at the local ports of entry where the labels are inspected.
Oil Low crude oil prices in the fourth quarter of 2006 prompted China to break its monthly record for crude oil imports. China has been seeking to build a strategic oil reserve since 2002. Analysts believe that China added 8 million barrels to its reserve in November. This leap came after a similar surge in August when China put aside 3 million tons (about 22 million barrels) of oil.

Through November, mineral fuel and oil became China's fastest growing top-10 import commodities, largely due to the decrease in 2006 of imported iron and steel--the traditional leader in this category (see below).
Iron and steel China's iron and steel imports decreased by 18 percent through November 2006 over the same period in 2005. Nevertheless, China remains the world's leading importer of contract ore, and observers predict that PRC demand for steel will continue to lift global prices for iron ore. Analysts have described 2007 as the year in which China replaces Japan as the key determinant of global iron ore prices. Indeed in 2006, China attempted to establish itself as a major player in price negotiations, asserting itself early by calling (unsuccessfully) for price reductions. After multiple rounds of difficult talks, China eventually accepted a 19 percent price increase. The likelihood of further price increases in 2007 could spell more strain in global negotiations this year.

China's Trading Partners

Aside from Russia and the Netherlands switching places in the number 9 and 10 spots on China's list of top 10 trading partners, the ranking of China's top trade partners has remained unchanged for the last two years.

On the export side, it was Singapore that made the largest move in the rankings, with exports from China to Singapore up by 41 percent in the January-November 2006 period over the same period in 2005. Italy replaced Russia as the new number 10 export destination for Chinese goods, possibly reflecting the diversification of China's export markets. Chinese exports to Italy grew 35 percent through November.

Meanwhile, on the import side, China's imports from Thailand increased by nearly 30 percent last year, propelling the country into the ranks of China's top 10 import suppliers, above traditional large-share importers Singapore and Russia. The emergence of Thailand and the Philippines as top import suppliers over the past two years points to shifts within the Southeast Asian supply chain as Hong Kong finds itself displaced for the second year in a row as a key import supplier.

US-China trade

US exports to China increased 33 percent through November of 2006, substantially exceeding the 20 percent increase during the same period in 2005. Both growth rates are nevertheless record highs since China's WTO entry and far outpace export growth to any other major market for US products. Growth of US exports to China also is increasing at a rate almost twice that of imports from China. US imports of Chinese goods rose by only 18 percent through November 2006 over the same period in 2005. This was the lowest growth rate of US imports from China since 2001.

US export growth may be the result of several recent developments. First, China's WTO-mandated market access openings are increasingly being reflected in export numbers. For example, the relaxation of trading and distribution rights in 2005 has allowed companies to directly sell in China goods not made there, instead of through Chinese trading companies. Also, China's move up the manufacturing value chain means that PRC demand for high-end US goods and services may be increasing. On the import side, the slowing import growth rate may reflect a leveling off of demand for low-end Chinese imports as a result of the slight slowing of the US economy. This may also be why China's export markets seem to be shifting somewhat--it is possible that slightly lower US demand has forced China to sell its goods to other markets.

Heading into 2007, analysts expect that any slowdown of the US economy and corresponding decrease in demand for imports from China would have a greater impact on China's trade surplus than would domestic Chinese tightening or currency adjustment measures.

Free-trade agreements

In January 2007, PRC regulators pledged to further reduce tariff rates for a wide array of products, including chemical, agricultural, and electronic goods imported to and exported from China. Many of these rates were lowered in accordance with various region-based trade agreements including the Asia-Pacific Trade Agreement with Bangladesh, India, Laos, South Korea, and Sri Lanka. Similar deals involved economies included in the China-Association of Southeast Asian Nations (ASEAN) Free-Trade Area, as well as separate deals between China and Chile under their free-trade agreement (FTA) and with Pakistan under the "Early Harvest Agreement." China also implemented tariff reductions for certain products imported from 28 least-developed African nations. These preferential trade agreement tariff reductions were implemented alongside WTO commitments that included reduction of duty rates on 44 items, continuing duty-free treatment for certain information technology products, and continuing quota management for wheat, fertilizer, and cotton products.

Soon after the 12th Asian Summit concluded in January 2007, China took another step toward a full China-ASEAN FTA by signing a new agreement with ASEAN that covers 60 service industries, including transport and energy. The agreement will take effect on July 1, 2007. Though only a small step toward a complete FTA between China and ASEAN, such an agreement could be cemented by 2010. China has already agreed to help train 100 and 150 specialists in agriculture and aquaculture, respectively, over the next five years and has pledged to provide farm products as well as farm machinery to ASEAN countries. These overtures reflect China's increasing integration into the Southeast Asian supply chain.

What to Watch in 2007

The strong growth in US exports to China should continue through 2007, as China's WTO-related policy changes create more opportunities for sales of US products. It may be too soon to tell whether the slightly lower import growth rate will persist.

From China's side of the ledger, even modest export growth would produce record trade surpluses with the United States and with the world this year.

Dealing with the trade surplus

PRC leaders have acknowledged publicly in recent weeks that they must reduce the country's global trade surplus. There appears to be a growing consensus within China that trade-linked foreign currency inflows are creating difficulties for macroeconomic management.

Thus, companies may see continued adjustment to export VAT rebates and possibly a more rapid appreciation of the renminbi, although most observers project a strengthening in the 5 percent range. Deutsche Bank expects China's export growth to slow to around 17 percent in 2007. But with tighter liquidity at home (potentially reducing import demand), UBS notes, the trade surplus will likely remain high, even if it does not grow much bigger. Over the long run, PRC government efforts to spur domestic consumption could eventually have the effect of increasing domestic demand for imported goods and services.

Bilateral trade in services

Services trade may receive more scrutiny in the coming year and beyond, because of its designation as a focus of discussions under the Strategic Economic Dialogue. Indeed, according to a study by the China Business Forum, USCBC's research arm, the United States ran a small services trade surplus with China of $3 billion in 2005. Net profits from foreign-invested affiliates in China amounted to another $500 million. Although the level of services trade is low relative to bilateral goods trade, the study demonstrates that the potential for growth is significant as China's WTO services openings kick in.

Should the pace and scope of China's reforms for the service sector accelerate beyond the WTO obligations, the US services trade surplus could reach $60 billion by 2015, according to Oxford Economics, which authored the study. The study concluded that China's implementation of WTO commitments is only the first step toward maximizing the mutual economic benefit for both the US and PRC economies. This progress will largely hinge upon whether the existing impediments to China's service sector are fully removed in the years to come.

Table 1: China's Trade with the World ($ billion)
Note: PRC exports reported on a FOB basis; imports on a CIF basis Sources: PRC General Administration of Customs, China's Customs Statistics; and the National Bureau of Statistics
	2002	2003	2004	2005	2006
Exports	325.6	438.2	593.3	762.0	969.1
% Change	22.4	34.6	35.4	28.4	27.2
Imports	295.2	412.8	561.2	660.0	791.6
% Change	21.2	39.8	36.0	17.6	20.0
Total	620.8	851.0	1,154.6	1,421.9	1,760.7
% Change	21.8	37.1	35.7	23.2	23.8
Balance	30.4	25.5	32.1	102.0	177.5

Table 2: China's Top Exports, Jan.-Nov. 2006 ($ billion)
Percent change over Jan.-Nov. 2005 Source: PRC General Administration of Customs, China's Customs Statistics*
HS#	Commodity Description	Volume	% Change*
85	Electrical machinery & equipment	205.8	34.0
84	Power generation equipment	168.2	24.9
61, 62	Apparel	80.2	33.7
72, 73	Iron & steel	46.1	47.5
90	Optics & medical equipment	29.5	29.3
94	Furniture	25.4	25.4
28, 29	Inorganic & organic chemicals	20.9	20.8
95	Toys & games	20.8	22.4
87	Vehicles other than railway	20.4	35.3
39	Plastics & articles thereof	20.2	26.0

Table 3: China's Top Imports, Jan.-Nov. 2006 ($ billion)
Percent change over Jan.-Nov. 2005 Source: PRC General Administration of Customs, China's Customs Statistics*
HS#	Commodity Description	Volume	% Change*
85	Electrical machinery & equipment	198.0	26.8
84	Power generation equipment	98.9	13.9
27	Mineral fuel & oil	82.9	43.0
90	Optics & medical equipment	53.4	19.5
39	Plastics & articles thereof	34.1	12.5
28, 29	Inorganic & organic chemicals	32.8	8.8
26	Ores, slag & ash	29.0	22.9
72, 73	Iron & steel	24.4	-17.5
87	Vehicles other than railway	15.4	41.3
74	Copper & articles thereof	15.2	28.1

Table 4: China's Top Trade Partners Jan.-Nov. 2006 ($ billion)
Percent change over Jan.-Nov. 2005 Source: PRC General Administration of Customs, China's Customs Statistics*
Rank	Country/Region	Volume	% Change*
1	United States	238.7	24.7
2	Japan	187.6	12.4
3	Hong Kong	149.4	24.0
4	South Korea	121.9	20.2
5	Taiwan	98.1	19.6
6	Germany	71.0	24.5
7	Singapore	36.8	24.2
8	Malaysia	33.5	21.7
9	The Netherlands	31.0	18.4
10	Russia	30.6	15.3

Table 5: China's Top Export Destinations Jan.-Nov. 2006 ($ billion)
Percent change over Jan.-Nov. 2005 Source: PRC General Administration of Customs, China's Customs Statistics*
Rank	Country/Region	Volume	% Change*
1	United States	184.8	25.1
2	Hong Kong	139.5	27.6
3	Japan	83.2	9.0
4	South Korea	40.3	26.9
5	Germany	36.5	25.0
6	The Netherlands	27.7	17.4
7	United Kingdom	22.0	27.1
8	Singapore	20.7	40.5
9	Taiwan	18.9	26.5
10	Italy	14.4	35.2

Table 6: China's Top Import Suppliers Jan.-Nov. 2006 ($ billion)
Percent change over Jan.-Nov. 2005 Source: PRC General Administration of Customs, China's Customs Statistics*
Rank	Country/Region	Volume	% Change*
1	Japan	104.4	15.2
2	South Korea	81.6	17.1
3	Taiwan	79.2	18.1
4	United States	53.9	23.1
5	Germany	34.5	24.0
6	Malaysia	21.2	18.2
7	Australia	17.4	18.1
8	Thailand	16.2	29.2
9	Russia	16.2	11.2
10	Singapore	16.1	8.1

Table 7: China's Trade with the United States ($ billion)
Note: US exports reported on an FOB basis; imports on a general customs value basis Sources: US International Trade Commission, US Department of Commerce, and US Census Bureau
	2001	2002	2003	2004	2005	Jan.-Nov. 2005	Jan.-Nov. 2006
US Exports	19.2	22.1	28.4	34.7	41.8	37.6	50.0
% Change	18.3	15.1	28.5	22.2	20.6	19.8	33.1
US Imports	102.3	125.2	152.4	196.7	243.5	222.9	263.6
% Change	2.2	22.4	21.7	29.1	23.8	24.4	18.3
Total	121.5	147.3	180.8	231.4	285.3	260.5	313.6
% Change	21.4	21.2	22.8	28.0	23.3	23.7	20.4
Balance	-83.0	-103.1	-124.0	-162.0	-201.6	-185.3	-213.5

Table 8: Top US Exports to China, Jan.-Nov. 2006 ($ billion)
*Percent change over Jan.-Nov. 2005 Sources: US International Trade Commission, US Department of Commerce, and US Census Bureau
HS#	Commodity Description	Volume	% Change*
85	Electrical machinery & equipment	9.3	54.0
84	Power generation equipment	7.0	22.9
88	Air & spacecraft	5.4	40.2
90	Optics & medical equipment	2.7	24.9
39	Plastics and articles thereof	2.4	12.8
12	Oil seeds & oleaginous fruits	2.2	8.3
52	Cotton	2.1	59.3
72, 73	Iron & steel	2.0	16.7
28, 29	Inorganic and organic chemicals	1.9	5.2
76	Aluminum and articles thereof	1.6	91.2

Table 9: Top US Imports from China, Jan.-Nov. 2006 ($ billion)
*Percent change over Jan.-Nov. 2005 Sources: US International Trade Commission, US Department of Commerce, and US Census Bureau
HS#	Commodity Description	Volume	% Change*
85	Electrical machinery & equipment	59.2	23.3
84	Power generation equipment	57.3	19.4
95	Toys & games	18.9	5.3
61, 62	Apparel	18.2	14.4
94	Furniture	17.7	13.9
64	Footwear & parts thereof	12.9	9.6
72, 73	Iron & Steel	9.6	42.4
39	Plastics & articles thereof	6.9	12.8
42	Leather & travel goods	6.3	9.3
87	Vehicles other than railway	4.7	23.4