More friction to come as export machine races ahead

China will hit two magic numbers by the end of this year - US$1 trillion and US$100 billion. The first will be the value of its foreign exchange reserves; the second its merchandise trade surplus.

Both reflect the power of its export machine which earns foreign exchange faster than the country can spend it.

China has surprised even itself this year by tripling its merchandise trade surplus. In the first eight months, the surplus reached US$60.2 billion and is on track to hit at least US$100 billion for the full year. Exports grew 32 per cent and imports just 14.9 per cent.

The substantial surplus, especially with the United States, will remain a structural feature of the economy. China has posted a surplus in 14 of the 15 years since 1990 and will continue to deliver such outcomes long into the future; notwithstanding a deficit in non-merchandise trade of US$9.6 billion last year that is too small to make a difference to the overall balance.

The country's leaders believe such a surplus is essential for the country's security, employment and growth. In slow-growth years, exports make up for the slack in domestic demand. China's exports last year accounted for more than 30 per cent of GDP and two percentage points of GDP growth. Import and export taxes were about 18 per cent of total tax revenue and firms involved in foreign trade employed more than 80 million people.

'From 1978 to 2004, world trade grew 6.4-fold or an annual average of 6.6 per cent,' Commerce Minister Bo Xilai bragged in a recent speech. 'Our trade grew 56-fold or an annual average of 16.8 per cent.'