Bottom Line: Export growth outpaced import growth for third straight year in 2007, with annual trade surplus reaching US$262bn. But in recent months imports have been consistently rising faster than exports, pointing to a significant change to China’s external imbalance. The currency will remain under pressures from large trade surplus in absolute terms and elevated inflation.

• December 2007 export growth slowed to 21.7% year-on-year from 22.8% in November, while import growth ticked up to 25.7% from 25.3% in November. Trade surplus came in at US$22.7bn in December 2007, up 8.1% y-o-y but below November’s US$26.3bn. 
• For the whole year of 2007, exports grew 25.7% and imports grew 20.8%, with trade surplus surging 47.7% to US$262.2bn. But since October 2007 imports have been consistently rising faster than exports (Export growth fell to 22.8% y-o-y in 4Q07 from 26.2% in 3Q07, while import growth rose to 25.2% in 4Q07 from 20.8% in 3Q07). A number of factors are behind this significant change:

1. In 2007 China scrapped much tax on imports, and also reduced or abolished VAT rebates on a wide range of export goods in an effort to cure its external imbalance.
2. The breakout of subprime crisis in August 2007 could weaken demand on Chinese exports.
3. A pick up in RMB appreciation in 4Q07 could also play a role in rising import growth and falling export growth.

• Actually, if measured in RMB (given rapid currency valuation changes, we believe it’s more appropriate to use RMB in some circumstances), export growth fell more rapidly in 4Q07 due to an acceleration of RMB appreciation in that period (See the Chart).
• In sum, trade surplus in absolute terms was still high and the currency will remain under pressure. But we see the turning point in China’s foreign trade in 4Q07 and we expect import growth to continue to match export growth in 2008. We also believe weaker export demand in 2008 will have significant bearings on China’s macro policy (for an outlook of Chinese economy, see our report “Chinese Economy in the Year of Rat”, 10 January 2008).

Link to the full report: http://researcharchive.worldnet.ml.com/GetDoc.aspx?id=10686770&type=Pdf

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