China Trade Surplus to Fall 19% on Imports Surge

China's trade surplus may slide 19 percent in 2010 as imports surge because of growing domestic demand, Bank of America-Merrill Lynch said.

The amount will narrow to $160 billion from an estimated $198 billion this year, Lu Ting, a Hong Kong-based economist for Merrill, said in an interview today.

A smaller surplus may reduce friction between China, which is poised to become the world's biggest exporter, and its major trading partners, the commerce ministry said Dec. 16. Disputes with the U.S. or Europe span shoes, tires, screws and the Obama administration's complaint this week that Chinese plans to foster "indigenous innovation" are erecting a trade barrier.

"The key factor in the narrowing of the surplus will be the increase in imports, driven by rising domestic demand," Lu said. In 2010, imports may climb 16 percent, outpacing a 9 percent gain in exports, he added, forecasting an economic expansion of 10.1 percent.

China's trade surplus, a record $295 billion in 2008, was slashed in 2009 by the collapse in global commerce caused by the worst economic slump since World War II. Imports climbed for the first time in 13 months in November, jumping 27 percent because of the low base a year earlier and extra demand created by stimulus spending and record lending.

Lu cautioned against expecting trade tensions to disappear.

"That's still a very big trade surplus," he said. "Conflicts with trading partners will still occur and protectionism will remain a risk next year."

Currency PegOne source of friction with the U.S. and Europe is the nation's currency, effectively pegged to the dollar since July last year to help exporters sustain overseas sales. In November, Premier Wen Jiabao rebuffed calls by European officials including Central Bank President Jean-Claude Trichet to let the yuan strengthen.

In 2008, China was the world's second-biggest exporter of merchandise, trailing Germany, according to the World Trade Organization. It ranked behind the U.S. and Germany as an importer.

Besides the possible easing of trade tensions, a smaller surplus may make monetary policy more effective, commerce ministry spokesman Yao Jian said at a briefing in Beijing on Dec. 16. Inflows of money from trade and foreign direct investment can increase the risk of asset bubbles and excessive inflation. The central bank uses bill sales and lenders' reserve requirements to manage liquidity.

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