China's Foreign Trade— Time for a Reality Check
China's foreign trade has so far avoided a serious impact from the Sino-US trade dispute thanks to the sustained recovery of the world economy and the steady growth of global merchandise trade much of this year. While a truce has been called in the dispute，there is no longer term resolution. For the time being，the economy has generally maintained strong growth momentum. The pattern of trade is being optimized，and gains have been made in industrial restructuring. Nevertheless，there are near-term and long-term challenges that need to be addressed. China is facing possible adverse effects from a global economic downturn and its likely impact on trade. It is reasonable to prepare for a setback to global trade. In the longer term there will be adjustments in global trade. China should strive to boost investment and embrace advanced technology that meets the demands of the digital economy. The following essay takes a close look at these challenges and how China should respond.
China's foreign trade saw unexpected growth in October. Exports reached 1,490.71 billion yuan，up 17.8%，and imports were 1,257.09 billion yuan，up 20.3%. Nearly 70% of the increase in gross import and export values reflected expanded volumes. Although import growth slowed slightly compared with the 22.3% year on year rise in September，it reached a record high for the year in value terms. Exports had an even bettFer performance，with growth reaching a four-year high.
The trade increase topped expectations as a result of several factors. External demand was buoyed by the strength of the global economy，a weaker renminbi against the dollar，and the use of export rebates. Exporters may have also tried to speed up shipments to avoid punitive tariffs.
While imports and exports have risen，the trade surplus has narrowed. The surplus was 233.63 billion yuan in October 2018. Although it has continued to rise since August，it was down 5.1% year on year. The trade surplus from January to October of this year stood at 1,658.8 billion yuan，down 26%. The surplus in October in dollar terms was US$34.02 billion，down 7.8%，and the cumulative surplus was US$254.2 billion，a 22.3% decline.
China's exports to the US rose 13.1% to US$42.7 billion in October while imports from the US reached US$10.94 billion，a slight drop of 1.8%. China's exports to the US in the first 10 months of 2018 amounted to US$392.1 billion，up 13.3%，and imports from the US were US$133.98 billion，up 8.5%. China's trade surplus with the US stood at US$31.8 billion in October，up 19.4% over the same period last year. For the January-October period it totaled US$258.1 billion，up 15.8% from a year ago.
Despite the strong rebound in trade，the role of China's net exports in total output growth has declined. Although the contribution to GDP and the pull factor of net exports of goods and services rose 1 percentage point and 0.1 percentage point，respectively，in the third quarter compared with a year ago，they remained negative at -9.7% and -0.6%. The role of net exports has fallen since the outset of the financial crisis in 2008 when external demand declined significantly. Domestic factors such as China's effort to adjust its industrial structure and transform its development mode have also played a role in the weaker contribution of net exports to total output and overall economic growth. Even China's overall dependence on foreign trade has been reduced. Economic growth is more driven by domestic demand，especially consumption，rather than investment. This shift has had a positive significance for China in the face of a potential long-term downturn in the economy. It has spurred the shift from "quantitative change to qualitative change" as China strives for high-quality development.
The shift can be seen from the following data. China's net exports of goods and services accelerated from 423.56 billion yuan to more than 2.34 trillion yuan from 2004 to 2007 (valued at the then-prevailing exchange rates). Its compound annual growth rate was 68%，much higher than the nominal GDP growth rate of the same period. The proportion of net exports of goods and services in GDP also increased rapidly，from 2.6% to a peak of 8.6% in 2007. However，after the outbreak of the financial crisis，except for a slight rebound in 2015，the proportion declined. China's net exports accounted for only 1.97% of total output in 2017，the lowest level in more than 20 years. Though the contribution rate and pull factor for net exports to GDP growth in that year hit a new post-financial crisis high，they were only 9.1% and 0.6%，respectively. Meanwhile，the average contribution of final consumption expenditure to the growth in China's total output has increased from about 45% in the years around the financial crisis to 60% or so in recent years. Over the same time，the average contribution of investment to total output growth decreased，falling from about 60% to less than 40%. The contribution of investment to GDP growth – as high as 86% in 2009 – dropped to 32% in 2017，down by more than 50 percentage points.
China has already made significant achievements in industrial upgrading and the transformation of its development mode to one that is more innovation-driven，according to the National Bureau of Statistics. China's final consumption expenditure contributed 78% to economic growth in the first three quarters of 2018，46 percentage points higher than the contribution from investment. As for consumption，the proportion of service consumption continued to increase，which led to the rapid development of tertiary industry. The proportion of added value of tertiary industry in GDP reached 53% in the first three quarters，nearly 13 percentage points higher than that of secondary industry. Investment in high-tech manufacturing increased by nearly 15% year on year，nearly 10 percentage points faster than the growth in gross investment.
Optimized Structure
In addition to the above quantitative changes，China's foreign trade is undergoing some positive structural shifts.
China's trade surplus has gradually narrowed since the end of 2015 and the trend is expected to continue. China has taken the initiative to expand imports in the recent years，and imports have begun to grow faster than exports. The seasonally adjusted growth rate of imports has been about 7 percentage points higher than that of exports each month since August 2016. The trade surplus in October 2018 touched 233 billion yuan，down 40% from the peak level over the past seven years. It is expected that China's total imports of goods and services will exceed US$30 trillion and US$10 trillion over the next 15 years，respectively. This will promote the transformation of China's development mode and expand the nation's contribution to global trade and world economic growth.
China has also made progress in advancing its trade with countries besides the US. Trade with Russia，the European Union and the Association of Southeast Asian Nations increased by 19.4%，7.3% and 12.6%，respectively，in the first three quarters of this year. Trade with the countries participating in the "Belt and Road" program also gained momentum. The growth in trade with Poland and Kazakhstan rose 11.9% and 11.8%，respectively. The same period saw growth of only 6.5% for trade with the US. Trade with the "Belt and Road" countries was 3.3 percentage points higher than trade overall while trade with Africa was 3.9 percentage points higher and trade with Latin America was 3.8 percentage points higher.
Furthermore，foreign trade has seen an increased role for the private sector while the contribution from the nation's central and western regions has been advancing. The import and export volume from China's private sector reached 8.77 trillion yuan since the beginning of the year，an increase of 12.9% over the previous year. The volume accounted for nearly 40% of China's total imports and exports in value terms. The foreign trade of 12 provinces and cities in China's western region and 6 provinces and cities in the central region has increased by 16.3% and 13.9%，respectively. That exceeds the national average growth rate by 6.4 percentage points and 4 percentage points.
Lastly，improvement in the quality of foreign trade has been steady. China's general trade，which has a lengthy industrial chain and has high added value，witnessed a 13.5% growth rate in the first three quarters，approximately 4 percentage point