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No pain, no gain in trade transformation

2015-03-02 13:44:42Source:China DailyAuthor:

China's foreign trade got off to a rocky start in 2015, declining 10.8 percent in January compared with the previous year to 2.09 trillion yuan ($334.4 billion), according to figures by the General Administration of Customs. Exports reached 1.23 trillion yuan, a 3.2 percent drop, while imports nosedived by 19.7 percent to 860 billion yuan. After seasonal adjustments, the decline in all three categories narrowed somewhat, but still fell into the red.

The January performance came amid declines in the manufacturing sector and a general slowdown in the economy. The purchasing managers index, a gauge of the manufacturing industry, stood at 49.8, pointing to a contraction in business. Recently, the central bank lowered the required reserve ratios for banks and other financial institutions, an indication that policymakers were convinced that the economic slowdown was steeper than expected.

China's foreign trade sector will face mounting pressure this year. It is stuck in a transitional situation - one in which the old growth momentum built on easy credit and low costs is a thing of the past - but new impetus generated by added value, branding and services is still being shaped. During this painful and long-term transition, China's foreign trade will grow slowly, with occasionally monthly declines.

Entering 2015, most of China's major export markets were not performing well. The economies of the European Union, Southeast Asia, Japan, South Korea and Australia either shrank or slowed down, resulting in declines in China's trade with these economies in January. China's trade dropped 5.3 percent with the EU, 0.6 percent with the Association of Southeast Asian Nations, 17.3 percent with Japan, 9.7 percent with South Korea and 26.8 percent with Australia. The weakness in global demand is evident.

The United States was China's only major trading partner that registered growth in January, at 0.5 percent. The US economic recovery is solid, but unfortunately, there is less of a correlation between the US economic recovery and its trade performance with China because of the US' efforts to revitalize its manufacturing industry and relocate production chains.

If the global recovery remains fragile throughout the year, China's trade may find it hard to achieve the yearly growth target of 6 percent.

Domestically, a January decline in imports reflects weak demand in consumption and production. That trend might continue for some time because top policymakers appear to be refraining from proactive fiscal and monetary stimulus measures.

And a drop in exports means that new capital expenditure will be slashed across many sectors. For China, sluggish overall trade will put a dent in its economic prospects.

But the good news is that the Chinese economy's reliance on trade has been reduced in recent years. Net exports are no longer the dominant engine of economic growth. Indeed, in some quarters in recent years, exports have even negatively affected economic growth. Therefore, a temporary negative growth rate in trade is not totally unacceptable for both industrial players and government officials.

Over the long term, China's trade needs to develop along two paths.

First, there needs to be more measures that facilitate trade. Bureaucracy must be eliminated while administrative regulations should be simplified. One example of the benefits of loosening restrictions can be seen in the Shanghai Free Trade Zone. Last year, foreign trade in the zone amounted to more than 760 billion yuan, increasing 8.3 percent, beating the city's average of 3.7 percent and the national average of 3.4 percent.

Tianjin as well as Guangdong and Fujian provinces have already won the central government's approval to establish their own free trade zones, while many other provinces and regions including Xinjiang, Guangxi, Shandong, Liaoning, Shaanxi and Henan are all planning to apply for FTZs. With Shanghai's experience promoted nationwide, foreign trade will get a boost.

The second impetus' effect may be not as evident as the FTZs, but it is more essential: a structural change in exports. With the global relocation of labor-intensive production, China's exports will have to climb the value chain. Shoes and clothes and even low-end machinery gradually must be replaced by higher-end products that feature sound branding, independent intellectual property rights and global competitiveness.

In this regard, the government's push for heavy equipment such as railways and nuclear equipment can help improve China's exports structure. With progress in the "One Road, One Belt" initiatives - the Silk Road Economic Belt and the 21st Century Maritime Silk Road - more high-end, made-in-China exports are expected to be shipped overseas.

It will take time for all these positive structural changes to take place. Before the transition is done, China's trade will continue to undergo some bumps in the road.