context: The PRC trade surplus has remained high over the past few years, reaching a record of US$99 bn in June 2024 at the fastest rate in 15 months. While some PRC experts maintain that a high trade surplus plays a vital role in supporting the PRC’s growth, some also point to the 'passive' nature of recent surplus spikes (resulting from RMB depreciation, US sanctions and weak prices at home). A Tsinghua expert urges to expand imports actively, particularly in strengthening ties with trade partners and importing more key raw materials and advanced tech.
In an interview with 21jingji.com, Zhang Bin 张斌 Chinese Academy of Social Sciences Institute of World Economics and Politics vice director shares his thoughts on the Third Plenum's decision to further deepen reform. 'Institutional opening' mentioned in the decision is about calling for further corresponding domestic reforms in the PRC, which can help address trade imbalance, explains Zhang.
He outlines benefits of institutional opening and aligning with high-standard international trade rules
- increase the efficiency of resource allocation
- market-oriented trade reduces the loss of resource allocation brought about by policy distortion and market failure
- reduce the distortion to trade that can create trade imbalances
- the PRC is currently facing a trade surplus that is creating external pressure from partners threatening disputes and sanctions
- the current trade surplus is also marked by dampened domestic consumption and investment, which is creating high opportunity costs
- the real rate of return on overseas capital accumulated from trade surpluses is not high, and in most cases even lower than the real rate of return on domestic assets
- reducing inappropriate policy interventions and eliminating market failures will help to improve domestic resource allocation and reduce unreasonable areas in trade imbalance
- in their studies about trade imbalances, subsidisation policies for industrial investment and production will increase the production of trade goods and widen the trade surplus
- e.g. various forms of subsidies and preferential policies introduced by local governments (such as tax rebates, equity investment, export, investment and R&D incentives) are aimed at retaining enterprises to stay in the local area
- this creates
- competition amongst local governments and distorts resource allocation, creating more trade surpluses
- discrimination against other non-manufacturing sectors that do not enjoy such preferential policies
- this creates
- e.g. various forms of subsidies and preferential policies introduced by local governments (such as tax rebates, equity investment, export, investment and R&D incentives) are aimed at retaining enterprises to stay in the local area
- in their studies about trade imbalances, subsidisation policies for industrial investment and production will increase the production of trade goods and widen the trade surplus
Zhang proposes several policy recommendations
- governments to afford uniform treatment between
- the manufacturing and service sectors
- large and small enterprises
- policies to prevent local governments from finding ways to offer hidden and discreet benefits to businesses
- strict enforcement of fair competition regulations
- especially to prevent various forms of subsidies
- changing the assessment criteria for local government performance
- focus the assessment on economic activities beyond industrial growth, exports and imports
- increase investments and assessments related to urban public facilities, service quality, and living conditions of low-income and migrant worker populations
- strengthen assessments on the business environment
- including clearing government debts to businesses and helping them overcome various hidden market barriers
- strict enforcement of fair competition regulations
Zhang is confident implementing these recommendations can lead to better resource allocation, gradually shifting excessive resources from manufacturing to the service sector, which is much needed at this junction.