The Wall Street Journal-20080112-World Economy Threatens China Growth
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World Economy Threatens China Growth
BEIJING -- The explosion of China's global trade surplus -- which surged 48% in 2007 -- has boosted the nation's economy to its fastest growth in a decade, but that growth is also at risk of a slowdown as the world economy weakens and the U.S. flirts with recession.
Three straight years of increasingly massive surpluses mean that exports are now playing a bigger role in China's traditionally investment-driven economy -- and thus the country has more to lose than it once would have from a global economic slowdown. Based on current trends, China's trade surplus last year would be equivalent to about 8% of the nation's gross domestic product for 2007, compared with about 2% a year at the beginning of this decade.
The trade surplus in goods -- the excess of exports over imports -- expanded to $262.2 billion in 2007 from $177.5 billion in 2006, according to customs figures issued Friday. Exports for the year were up 25.7% to $1.22 trillion, shrugging off a stronger currency, product-safety scares and higher taxes. Imports expanded 20.8% to $955.8 billion. The surplus for December was a smaller-than-expected $22.69 billion, as export growth slowed to 21.7%, in what could be an early sign that tougher times are ahead for China's export engine.
The huge trade surplus also has worsened trade frictions and raised the risk of inflation by pumping huge amounts of cash into the banking system. The most visible sign of that has been the surge in China's foreign-exchange reserves, now the world's largest. That stockpile ended the year at $1.53 trillion, representing an increase of about $38 billion each month, according to separate figures issued Friday. Total bank loans outstanding, meanwhile, grew 16% in 2007.
In response, a Chinese government that historically heavily promoted exports has declared that the huge trade imbalance is no longer beneficial and said it would start encouraging imports as well. Authorities imposed new taxes on exports of several types of products, such as refined metals, and speeded up the appreciation of the yuan. The currency rose 6.9% against the U.S. dollar in 2007, more than twice the 3.4% gain in 2006, pushing up prices for U.S. imports from China.
The impact of those measures has so far been modest at best. But it now seems increasingly likely that the slowing global economy will do what the government couldn't. Many economists say that weaker exports will mean the surplus expands by only another 10% to 25% in 2008 -- or even stays flat. That would deliver a smaller boost to growth than the big increases in the past couple of years.
Based on official estimates, exports contributed about 2.5 percentage points of China's 11.5% growth rate in the first three quarters of 2007, a much greater proportion than during the last U.S. recession at the beginning of this decade. "Softer external demand should have a considerably larger impact on overall Chinese growth than five years ago," argues Michael Kurtz, Asia economist for Bear Stearns.
Still, subtracting 2.5 percentage points from China's growth rate would leave the economy expanding 9% this year -- not exactly slow. With China's leaders in recent months having become increasingly concerned about economic overheating and inflation, such a cooling in growth could be welcome rather than worrisome. And with the recent boom pushing tax revenues up 30% last year, well above the budgeted increase, the government has plenty of funds with which it can stimulate the economy if desired.
"Although China's export growth is expected to slow significantly, strong investment growth and a pickup in consumption are expected to sustain overall GDP growth," said Wang Tao, China economist for Bank of America, who is forecasting a 10% overall economic expansion in 2008.
Though some local economists have begun to sound warnings about slower growth this year, officials remain largely optimistic. "In the foreseeable future, the growth of China's trade surplus is expected to slow down, but it will still remain at a relatively high level," the People's Bank of China wrote in its most recent monetary-policy report. "China's increased diversification of foreign trade will also help reduce any negative impacts on global trade caused by regional economic slowdowns."
