China's 2010 trade surplus dips, but little comfort

China's global trade surplus narrowed in 2010 for the second straight year, giving Beijing grounds to rebuff US pressure for faster currency appreciation ahead of a visit to Washington next week by President Hu Jintao.

The Chinese government can point to a 6% fall in its trade surplus last year to USD 183 billion as the latest evidence it is making steady progress in rebalancing its economy toward domestic consumption, cutting reliance on exports and giving the world a lift through surging demand for imports. Lawmakers in Washington, however, will find little comfort in the data showing that apart from some heavy machinery and agricultural commodities, the United States provides few of the goods fueling China's import growth. The mismatch meant the politically sensitive trade gap between the world's two biggest economies widened by 26% in 2010 to USD 181 billion, providing fodder for critics of Beijing's tightly controlled currency regime. "China deliberately undervalues its currency -- giving its exports an unfair and artificial price advantage over American-made products. There is bipartisan support to address currency manipulation in Congress and I will push for a vote," said Senator Sherrod Brown, an Ohio Democrat. The overall trade data from December alone was consistent with the pattern since the outbreak of the global financial crisis more than two years ago. With China growing much faster than the rest of the world, imports outshone exports. "Imports are much stronger than we have expected, indicating that domestic investment and internal demand are mainly pushing up domestic consumption," said Wang Han, an economist at advisory firm CEBM in Shanghai. China's December exports rose 17.9% from a year earlier and imports increased by 25.6%, the customs agency said Monday. That left the country with a trade surplus in December of USD 13.1 billion, well below analysts' expectations of USD 20 billion and the lowest in eight months. A smaller trade surplus means that less money is flowing into China, making it less urgent for the central bank to mop up the excess cash in the economy that has pushed prices higher. China's full-year trade surplus was 38% lower than its pre-crisis peak of nearly USD 300 billion in 2008. "This could reduce the pressure for yuan appreciation and also remove some pressure for the central bank to imminently launch aggressive tightening," said Wang Hu, an economist with Guotai Junan Securities. Along with quickening the pace of yuan gains, the government raised interest rates twice and banks' required reserves six times last year to rein in inflation that reached a 28 month high in November of 5.1%. The latest trade data was not a major factor for international markets, which were more focused on euro-area debt concerns. Shares in Shanghai fell a provisional 1.6% in reaction to news that southwestern Chongqing was set to be the first city in the country to impose a property tax to clamp down on sky-high house prices. US gap Chinese exports increased 31.3%last year as global demand recovered, but the extent of China's outperformance was underlined by a 38.7% jump in imports, fueled by its voracious appetite for oil, iron ore and other commodities. Apart from farming product such as soy beans, the United States provides few of the commodities sought by China. Yet, China's bilateral surplus with the United States is over-stated by the nature of the global processing trade, whereby Chinese factories assemble finished products out of intermediate goods produced in other countries. For example, when a television has a 'made in China' label on it, the computer chips and plasma screen in it may have been produced in Japan. "The United States imports a whole bunch of final goods from China and China imports a bunch of materials from the rest of the world," said Ken Peng, an economist with Citigroup in Beijing. "If we assign all the parts to various countries, it (the bilateral gap) would be less obvious," he said. Yuan's role  Critics in the United States say that China keeps the yuan cheap to give its exporters an unfair advantage in selling their wares to the world. These long-standing complaints have taken on added potency in the wake of the financial turmoil that has left the United States with an unemployment rate of 9.4%. "Without a fundamental correction in the misalignment of the yuan to the dollar, we will continue to struggle to put Americans back to work, to balance government budgets and to begin to pay down our massive foreign debt," said Charle Blum, executive director of the Fair Currency Coalition, which includes US labor, steel and textile groups. "It's critically important for the Obama administration and the Congress to act now in a decisive and effective way to end this problem," Blum said. But Beijing has counseled for patience, repeatedly pledging to reduce its economy's reliance on exports and to seek a more balanced trade relationship with the rest of the world. It has let the yuan rise 3% against the dollar since mid-June, when it lifted the currency from a nearly two-year peg that cushioned the economy from the impact of the global financial crisis. Chinese President Hu will meet US President Barack Obama in Washington on January 19, an event that is being billed as the most important state visit in 30 years. Although the two leaders will discuss the trade gap, analysts say the aim of the meeting will be to better the tone of the two countries' relationship after they locked horns last year over deadly North Korean attacks on South Korea and China's exchange rate policy. Having narrowed in 2009 and in 2010, there are signs that China's overall trade surplus could rebound this year. The export order sub-index in the country's purchasing managers' index, a leading indicator of export demand, has been very strong of late, Goldman Sachs economists Yu Song and Helen Qiao noted. And improvements in the US jobs market would also shore up global demand, Li-Gang Liu, an economist with ANZ in Hong Kong, said. "We still see a robust year ahead for China exports," he said.