Uncertain global economic outlook may help cool spiralling trade surplus

PUBLISHED : Wednesday, 26 December, 2007, 12:00am
UPDATED : Wednesday, 26 December, 2007, 12:00am
 

The mainland's prosperous economy and record-breaking trade surplus have been blamed for souring relations with its key trading partners.

But it has also helped build the nation's financial muscle to weather waning consumer demand in the United States, the biggest destination for mainland exports.

As the subprime lending crisis in the US deepens and spreads to Europe, economists warn that the US economy is heading for a slowdown at best, or at worst a recession.

The more pessimistic economists believe the weakening consumer appetite in the US will pull back growth of the mainland's export-led economy next year, even though it powered ahead at 11.5 per cent in the third quarter and is projected to record double-digit growth for the fifth straight year.

Some argue that weaker demand for mainland exports spells bad news for Hong Kong and mainland manufacturers, but is welcome news for the central government.

'Indeed, a significant external slowdown will reduce the need for more aggressive tightening of China's macroeconomic policies,' said JP Morgan chief economist Frank Gong, who expects the mainland to sail through uncertain global economic times next year. 'This creates a healthier environment that will foster the need to shift toward more sustainable, domestically-driven growth.'

Despite efforts by Beijing to tame runaway growth, the mainland's trade surplus snowballed relentlessly to a fresh peak of US$238.13 billion in the first 11 months of this year, surpassing last year's 12-month total of US$177.5 billion.

Exports and imports grew so rapidly in the 11-month period that the country's total trade reached US$1.96 trillion, ahead of US$1.76 trillion for the whole of last year. With the total expected to exceed US$2 trillion this year, the mainland is on track to eclipse over Germany as the world's No2 trading nation after the US.

The hazy economic outlook for the US and the European Union has economists widely anticipating that growth in mainland exports will taper off next year.

Deutsche Bank chief economist Ma Jun expects growth to slow to 18 per cent next year, from 26 per cent this year, after taking into account factors such as central government measures to weed out the manufacturing of low-end exports and to squeeze export tax incentives.

Credit Suisse chief economist Tao Dong forecast that slowing exports and strengthening domestic demand would bring the country's trade surplus down 15 per cent to US$219.6 billion next year from an estimated US$258.6 billion this year.

Still, the trade surplus is expected to continue to fuel disputes with the US and the EU. They accuse Beijing of keeping the yuan so weak that mainland exporters have an unfair edge over their own manufacturers.

The outcry has intensified in the eurozone, where the mainland replaced Britain as the biggest supplier of imported goods based on the strength of the euro.

According to the EU, about Euro123.7 billion (HK$1.39 trillion) worth of mainland imports poured into the EU in the first nine months of this year, up 20 per cent from a year earlier.

The EU and the US held separate dialogues earlier this month with Beijing and intensified their push for a faster rise in the value of the yuan. However their calls have fallen largely on deaf ears.

At the risk of making enemies, Beijing promised only to be 'flexible' in its currency policy. The central government's tough stance, according to economists, reflects its efforts to keeping the rice bowls of hundreds of millions workers intact and maintain social stability. A more expensive yuan could hurt farmers' incomes and throw factory workers out of work.

Tensions between Beijing and Washington are also flaring because of a wave of recalls of tainted food, poisonous toys and other unsafe products.

Relations between Beijing and Brussels are not faring any better, with extended anti-dumping duties on mainland shoes and energy-saving light bulbs among dispute issues.

'More trade friction is expected, especially at a time when the US economy is slowing,' Morgan Stanley chief economist Wang Qing said.

In an attempt to reduce such friction and build a sustainable economy, the mainland is pushing industries considered resource-heavy and environmentally unfriendly to move up the technology ladder and value chain or be exiled to western parts of the country.

The policy - together with the yuan's appreciation, more stringent environmental controls, and surging costs in production, labour and raw materials - is aggravating the plight of some 60,000 Hong Kong manufacturers across the border.

Ting Siu-kwan, chairman of the 300-member Hong Kong Metal Merchants Association, said the metals industry was hit hardest and he was not surprised there had been a fresh round of sector consolidation.

'The industry underwent a fairly severe round of consolidation after the Asian financial crisis in 1997,' he said. 'The operating environment in the Pearl River Delta is deteriorating and we are having a most difficult time.'

He added that factory owners should seriously consider improving efficiency and productivity, developing their own brands, investing in research and development, or migrating their operations to interior provinces such as Hunan, Jiangxi and Shanxi.

Some economists pointed out that Hong Kong's economy would not escape unscathed if manufacturers collapsed, given a working population of roughly 500,000 Hong Kong Chinese in the Pearl River Delta.

In addition, supporting industries such as logistics and courier services, and professions including accounting, legal, consulting, printing and design are at risk.

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