China's trade surplus reaches record high

To many developed economies’ annoyance, China’s trade surplus soared to a record high in July supported by solid growth in exports and modest imports during the month. This is likely to reignite the hot debate over China’s foreign exchange policies and increase resentment towards Chinese exporters who are believed to prosper thanks to the country’s undervalued currency, the yuan, and abundant cheap labour.

China's trade surplus jumped to $28.7 billion last month, the highest since January 2009. Exports increased 38.1% year-on-year to $145.5 billion and imports grew 22.7% year-on-year to $116.8 billion, the General Administration of Customs of the PRC announced on its website yesterday. The export growth is higher than market consensus while the import growth is lower.

The growth in overseas sales was mainly seen in labour-intensive products such as garments and textiles, toys, shoes and suitcases, according to the customs bureau.

The statistics come at a time when foreign countries are urging China to spend more in the global markets and ship out fewer cheap products, and foreign policymakers fret about China’s slow pace in increasing the value of the yuan.

China’s central bank announced on June 19 that it would begin to allow the yuan to fluctuate more flexibly against other currencies, but the value of the yuan has crawled up less than 1% since then.

However, Chinese exporters will find it increasingly hard to maintain this growth even without a stronger yuan. They are facing a series of hurdles including demand for increased wages and a shortage of skilled workers. Nipping at its heels are lower-cost markets such as Vietnam.

Indeed, a number of economists believe China is about to run out of cheap labourers. China’s workers nowadays are better educated and aspire to live a more urbane and urban lifestyle than their predecessors, whose main goal was to remit money home to support the family and fund siblings’ education. Although China's average wages are still a small fraction compared with those in developed countries, they are much higher than 10 years ago.

Lately strikers in different areas of the country have won for themselves 20% to 50%  wage increases in many manufacturing plants. That will be passed down the pipeline and mean more expensive production costs.

For example, factory workers at Atsumitec in Foshan, Guangdong, which supplies gear parts to Honda, received a pay rise of 47% when they reported back at the production lines on July 22. Guangdong, a preferred factory spot for manufacturers, recorded at least 36 strikes between May 25 and July 12, according to official newspaper China Daily.

While strikes might be the here and now, demographics indicate wages will continue to rise over the long term. It has been 30 years since China’s one-child policy was introduced, and the number of people now aged between 18 and 29 is smaller than it used to be, and will shrink further, observers say. That means those who are most experienced will be able to command hirer salaries.

In other words, China’s massive pool of manufacturing workers is shrinking and getting more expensive.

The slowdown in exports is foreseeable. “We expect China's exports to soften gradually in coming months, while still maintaining a double-digit pace of growth,” said Qu Hongbin, co-head of Asian economics research at HSBC, in a report.

In the short-term, imports will stay flat or decline modestly as companies speculate that the yuan will appreciate. So for now, they don't want to buy. “When businesses know that the yuan at some point in the near future will be stronger, they likely withhold spending on items which are not essential to production. There could hence be a build-up of import demand,” said an analyst at Moody’s.

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