Op-Ed Contributors

Deficit fears a non-issue

By Mei Xinyu (China Daily European Weekly)
Updated: 2011-04-22 10:36

It should be noted that some of the fastest growing imported commodities, despite having caused the quarterly trade deficit, would expedite the import substitution process and boost related exports.

For instance, China's mechanical and electrical imports in the first quarter grew by 25.6 percent year-on-year to $172.9 billion, among which were consumer goods like automobiles that grew by 31.8 percent year-on-year to 236,000 units. But a large part of the imports were investment goods like technical equipment, which will continue to increase in volume given China's efforts to upgrade its industries and develop manufacturing. And the growing investment imports, either as an alternative to older imports or a boost for China's export capability, can improve the country's trade balance in the long term.

Viewed in this light, there is no need to worry over the quarterly trade deficit. What should draw the government's attention instead is the over-expanding productivity at home because of soaring prices of primary commodities in the global market.

In recent years, the rising price of iron ore has stimulated domestic production. The quality of metallic minerals mined in China, in general, is lower than the imported ones. Hainan province, deemed the only producer of high-grade iron ore in China, has a limited reserve with a quality just equal to one-third of the Brazilian variety. So once the bubbles in the primary commodities' markets burst, global mineral prices will fall, and domestic manufacturers, forced to opt for low-grade domestic minerals because of cost, will restart importing high-grade minerals and push the domestic mining industry into a crisis.

It is thus important that the government orientates domestic mineral resources and mineral imports. China's mineral resources are comparatively of poor quality and difficult to develop and, hence, create environmental damage and high development cost. Most domestic coal, oil and metal resources do not measure up to development value. So domestic mineral resources hardly meet the domestic industrial demand, and their overuse will degrade the competence of the manufacturing industry and threaten economic security.

If China continues to rely on domestic resources, the downstream sectors would have to pay more for raw materials than their overseas counterparts. And if environmental damage is taken into account, the cost will be immense. Furthermore, the distribution of mineral resources in China is quite uneven, and bulk minerals are generally found far from economic centers and sea routes, and require huge transportation cost. For instance, Guangdong province has been importing coal from Australia since the 1990s, and still paying less than what it would have to if it bought and transported it from Shanxi province.

Notably, the export sector accounts for a large part of the consumed resources. Thus, the government should be cautious against exhausting domestic resources for the overseas market and compromising its economic, political and even military security.

China, therefore, should maintain the balance of payment, ensure domestic supplies, minimize the cost of supplies and maximize profit. In other words, it should use overseas resources to its advantage, particularly when the prices are fairly affordable, and save domestic mineral resources to stabilize global prices and domestic supplies.

The author is a research scholar with the Chinese Academy of International Trade and Economic Cooperation, affiliated with the Ministry of Commerce.