The fall in China's trade surplus was long expected since top Chinese leaders have repeated on many occasions their intention to reduce the country's external imbalance. However, the sharp drop of the trade surplus in February is still shocking enough to arouse mixed feelings among Chinese policymakers.

China's net export plunged from $19.5 billion in January to only $8.6 billion last month. The January figure already marked the first monthly trade surplus under $20 billion since last May.

Now, a 63-percent drop in the trade surplus from the same month last year puts in spotlight the trade sector's resilience against the looming impact of a US slowdown.

For Chinese policymakers who are taking care of the country's ever ballooning foreign exchange reserves, such a big drop in the trade surplus may allow them to breathe a sign of relief.

Sizzling growth of the trade surplus in 2007 boosted the country's foreign exchange reserves to $1.53 trillion by the end of 2007, up 43 percent from a year earlier. The later, in turn, has pumped excess liquidity into the domestic economy which borders on overheating.

The monetary authorities who have been busy with mopping up such excess liquidity must be happy that the flood peak seems to have passed. If decline in the trade surplus continues, they can go in a more efficient and thus effective way, with a tight monetary policy to tame climbing inflation.

Yet, for labor and social security officials, the shrinking trade surplus can pose an imminent threat to their goal of creating jobs for 10 million people entering the workforce this year. The trade sector has served the purpose as the country rises rapidly as a global manufacturing powerhouse.

But the recent decrease in the trade surplus indicates that domestic exporters are unlikely to further expand employment any time soon.

Caution over reading too much into the monthly data is certainly needed given distortions from the timing of the Chinese Lunar New Year as well as the severest winter weather that disrupted production and shipment schedules. But it is hardly reassuring that external demand is weakening significantly as the US economy slides into recession and an appreciating currency that makes Chinese exports more expensive.

Policymakers may be tempted to weigh the tightening policies against possible job losses resulting from plummeting trade surplus. This is just one of the tests they should prepare to face during the country's war on inflation that is just in the beginning stage.

(China Daily, March 11, 2008)