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Originally published January 12, 2006 at 12:00 AM | Page modified January 12, 2006 at 12:14 PM

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Trade surplus triples for China

China's trade surplus tripled to a record $102 billion in 2005 as exports jumped, increasing tensions with the U.S. and European Union over...

Bloomberg News

China's trade surplus tripled to a record $102 billion in 2005 as exports jumped, increasing tensions with the U.S. and European Union over the nation's currency policy.

The gap increased from $31.9 billion in 2004 and $16.7 billion in 1995, as overseas sales helped China become the world's fastest-growing major economy. Exports rose 28 percent last year and imports grew 18 percent, the Beijing-based customs bureau said on its Web site Wednesday.

The surplus, which climbed $11 billion in December, has prompted the U.S., Europe and Japan to accuse China of keeping the yuan artificially weak to spur exports. U.S. lawmakers are threatening to impose tariffs on Chinese imports, and the EU has said it may complain to the World Trade Organization.

"I don't think the world can tolerate such a massive surplus," said Dong Tao, chief Asia economist at Credit Suisse First Boston (CSFB) in Hong Kong, who forecasts China's economy will grow 10.1 percent this year.

"What this does is just reinforce the case that China is manipulating its currency," said Ernest Preeg, a senior fellow at the Manufacturers Alliance, an Arlington, Va.-based group representing companies such as Caterpillar and Motorola. "China is a whole cloud over trade policy."

The yuan strengthened to 8.0677 Wednesday. The currency would rise to 7.7175 against the U.S. dollar in a year if freely traded, according to the forward contracts Wednesday in Hong Kong, up 0.5 percent from Dec. 30.

The contracts allow investors to bet on the value of a currency that isn't fully convertible or hedge investments denominated in it.

Foreign investors such as Nokia and Sony poured $213 billion over the past four years into building factories in China to take advantage of low labor costs and falling trade tariffs.

The resulting surge in overseas shipments helped the Chinese economy expand by an average 9.2 percent annually between 1995 and 2004. It also prompted the U.S. and Europe to step up calls for a more freely traded currency.

The People's Bank of China's decision to revalue the yuan by 2.1 percent in July and let it fluctuate against a basket of currencies failed to satisfy U.S. lawmakers. Sen. Charles Schumer, D-N.Y., and Rep. Phil English, R-Pa., have introduced legislation to impose tariffs on Chinese imports unless the yuan rises further.

"China has a major role in preventing" the U.S. from imposing tariffs by taking "significant action" on the currency, Sen. Max Baucus, D-Mont., a ranking member of the Senate Committee on Finance, told reporters Tuesday in Beijing. A yuan revaluation "would have a considerable economic benefit."

Japanese Finance Minister Sadakazu Tanigaki said Wednesday that China has room to make its currency more flexible.

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""A more flexible Chinese currency policy will help not only China, but also the global economy," he told reporters after meeting with U.S. Treasury Secretary John Snow.

Snow said Tuesday at a news briefing that he's not concerned China might reduce its holdings of U.S. government debt.

With the U.S. snapping up Chinese-made goods, Chinese investors are shoving the proceeds into U.S. Treasuries. China owned $247.6 billion at the end of October, making it the second-largest holder of U.S. debt after Japan.

Even as exports continue to rise, China's trade surplus will probably shrink 20 percent next year as the government adopts policies to stimulate domestic demand, boosting imports, said Tao of CSFB.

China's exports have soared from $267 billion in 2001. That's three times as fast as growth in global trade, according to Morgan Stanley economist Andy Xie. The increase equals the value of Japan's 2005 overseas sales, Xie said.

In the first 11 months of 2005, China's exports amounted to about three-quarters of Germany's, measured in dollars. In 2001, China's exports were less than half of Germany's, based on the average exchange rate between the dollar and the euro for that year.

Shipping companies and port operators are continuing to invest in China, betting the trade boom will continue.

A.P. Moeller-Maersk, Hutchison Whampoa and three other companies said last month they are investing in the second phase of Shanghai's $16 billion Yangshan port, which is on track to be the world's busiest harbor by 2010. The expansion will double the city's cargo-handling capacity by the end of the decade.

"We expect trade to grow at a high rate and probably close to what we've experienced in recent years," Tommy Thomsen, a partner in A.P. Moeller and head of its container business, said in a December interview. "Shanghai is positioned to become the world's largest port within three to four years."

China's exports have surged an average of more than 30 percent over the past three years amid an investment boom triggered by the nation's entry into the World Trade Organization in December 2001.

Companies supported by foreign investment accounted for almost 90 percent of technology exports in the first 10 months of the year and for more than half of total overseas shipments, according to commerce-ministry data.

Economists including Paul Cavey forecast that export growth will cool to about 20 percent this year as the expansion in new production capacity tails off.

"Export growth has been driven by information-technology products, which has been a function of Taiwanese companies moving to the mainland," said Cavey, China economist at Macquarie Securities in Hong Kong. "That structural outbuilding of Chinese capacity is now coming to an end."

Bloomberg News reporters Alison Fitzgerald, Mark Drajem, Minako Kawai and Kevin Carmichael in Washington, D.C., Bernard Lo and Katherine Kwun in Hong Kong, and Duncan Hooper in Brussels contributed to this report.

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