To gain a competitive edge for the future, China must restructure and upgrade to high-end industries

Although China witnessed a record trade surplus last month, according to statistics from the General Administration of Customs, pressures remain on foreign trade growth.

The trade surplus last month was $35.92 billion (26.35 billion euros), an increase of 74.9 percent on a year earlier, with exports increasing by 7 percent year-on-year to $195.47 billion, and imports decreasing by 1.6 percent year-on-year to $159.55 billion.

It was the highest single month surplus in five years.

However, it is still too early to hail the expanded trade surplus as a positive sign for China's foreign trade prospects.

An analysis of China's foreign trade data in the previous four months of this year and for the whole of 2013 will show that the country's trade surplus was only 215.4 billion yuan ($34.58 billion) from January to April, a decrease of 42.9 percent from the same period last year. Thus, the export rebound last month has only to some extent checked the tendency of China's tumbling foreign trade, given that the country's exports in the previous five months declined by 0.4 percent year-on-year, 13.9 percentage points down from the same period of the previous year.

At the same time, the increased trade surplus last month was also a result of the decrease in imports that month. The same statistics indicate that last month the value of China's imports decreased by 1.6 percent year-on-year, 2.5 percentage points down from the growth in April. From January to May, the country's imports increased by only 0.8 percent year-on-year, a decline of 7.4 percentage points from the same period last year.

Therefore, the sharp increase in the country's May trade surplus as a result of its dwindling import demand is more like a "recessionary trade surplus".

In a general sense, a recessionary trade surplus comes after a country's external demand deteriorates and both its exports and imports shrink, but imports decease at a faster rate. This usually occurs during a global economic slump or recession.

China's declining import demand is to a certain extent a result of the widespread decline in bulk commodity prices. Against the backdrop of economic deceleration in the world's major emerging nations, the market has shown a weak demand for bulk commodities, thus curbing price rises.

For example, the average price of China's imported crude oil has declined by 3.3 percent since the beginning of this year, and the price for the country's imported coal has fallen 15.3 percent and the price of soybeans has fallen by 5.9 percent. The falling prices of imported commodities have directly resulted in a decline in import volumes.

On the other hand, the country's looming overcapacity has checked its investment growth, which is also a factor behind its declining import demand. In recent months, China's HSBC Purchasing Managers Index has stayed below 50, the prosperity line, and its producer consumer index has suffered a negative growth for 26 consecutive months.

Many of its industries have been running at less than 75 percent of their capacity. All these have contributed to China's declining demand for overseas raw materials, energy and other products. Thus, the non-typical increase in China's trade surplus last month, a rise caused by dwindled imports, is by no means something we should applaud.

Considering some adverse economic circumstances at home and abroad, China will face increased pressures in the latter half of this year if it wants to realize a 7.5 percent full-year foreign trade growth target.

China should not focus on ensuring it meets its set foreign trade growth target, instead it should focus on middle and long-term industrial and trade upgrading.

The country has long depended on low-cost factors of production, such as labor, land, resources and the environment, to gain an advantage in the international competition and labor division, but such low-end competition is unsustainable and also makes it difficult to achieve some breakthroughs in vested interests. At the same time, to lie in the low end of the global industrial chain too long will likely cause the country to customarily target its industries at "low-end" demand.

Global industrial competition in the following years will be in the value chain. Whether or not China can gain a leading edge in this competition will decide its industrial competitiveness and the fate of its future economy.

Facing the re-industrialization trend emerging in the United States and other developed countries and the challenges caused by its disappearing traditional comparative advantages, China must build new competition advantages, climb to the higher end of the global value chain, and push for the full upgrading of its trade structure and industrial structures.

The country should also actively nurture homegrown transnational companies to increase their ability to participate in and dominate the global value chain. It should further optimize its domestic processing trade pattern and accelerate its industrial upgrading. Besides, China should also actively follow the wave of global trade liberalization and accelerate efforts to sign free trade agreements with other countries to push for its transformation from a big to strong trading country.

The author is an associate research fellow with the China Center for International Economic Exchanges. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 06/27/2014 page11)