China trade moves raise tension

BEIJING —  Fearing a deepening downturn, China’s government is using its muscle to prop up the nation’s economy. It’s encouraging banks to lend. It’s investing billions in infrastructure. It’s stockpiling key raw materials. And it’s placing restrictions on purchases of foreign goods.

Those measures have helped keep China growing faster than any other major country. Its economy is projected to expand by 7.2% this year, according to a recent World Bank estimate.

But China’s efforts to keep its citizens employed and avoid social upheaval are raising tensions with its trading partners and reinforcing its dependence on exports.

This week the U.S. and Europe lodged a complaint with the World Trade Organization accusing China of restricting exports of zinc, coke and other raw materials needed to manufacture steel. The Chinese are protecting domestic manufacturers, competitors said, by allowing them to get first crack at the much-needed raw materials at bargain prices.

China has rejected the complaints, saying limits on raw-materials exports were put in place to protect its resources and the environment. It also fired back through the WTO by challenging a U.S. ban on Chinese poultry.

Western nations are encouraging China to help balance international trade by using the lull in global demand to spur more domestic consumption and to create more jobs in services.

China’s exports fell 26.4% in May from a year earlier -- a sharper decline than the 22.6% drop in April. Foreign direct investment, another engine traditionally tied to China’s growth, fell 17.8% in May from a year earlier, marking the eighth consecutive month of declines.

But weaning China from its reliance on exports won’t be easy. The central government has staked its legitimacy on spreading prosperity, and the manufacturing sector employs tens of millions of workers.

To keep the sector humming, China has raised tax rebates for exports seven times since last August on thousands of items including shoes, toys and sewing machines. Export duties will soon be eliminated on some grains and steel wire, and nonferrous metals will have their duties halved.

China clearly intends to retain its status as the world’s factory floor. It’s using the downturn to strengthen its industrial competitiveness.

On Wednesday, Chinese oil giant Sinopec announced a $7.2-billion takeover bid for Canadian oil and gas exploration company Addax Petroleum Corp. It has locked up oil deals with Russia and Iran and pursued mineral interests as well.

Beijing’s massive domestic stimulus plan centers largely on infrastructure projects heavily reliant on the raw materials the U.S. and European Union accuse China of stockpiling.

Bank lending has also soared. State media reported that loose monetary policy is projected to result in an unprecedented 6.5 trillion yuan in new loans the first six months of 2009.

The World Bank, however, warned that the measures couldn’t last forever and was unwilling to say that a sustained recovery was on the way.

“There are limits to how much and how long China’s growth can diverge from global growth based on government-influenced spending,” said Ardo Hansson, the World Bank’s lead economist for China.

This month China’s top economic planning body, the National Development and Reform Commission, ordered local governments to use only Chinese goods and services when spending money tied to the national stimulus plan.

Observers speculated that the move was a response to “Buy American” provisions in the U.S. stimulus package.

“We are inching our way to greater protectionism,” said Ben Simpfendorfer, an economist for Royal Bank of Scotland.

Some experts doubt that the trade spat will reverse the cooperative tone set during U.S. Treasury Secretary Timothy F. Geithner’s recent visit to China.

“These things pop up on a regular basis,” said Andy Rothman, an economist at brokerage and investment group CLSA Asia-Pacific Markets. “This is expected of a relationship getting bigger and deeper.”

Still, economists say it is in the best interest of both China and the U.S. to resolve their trade differences quickly.

“In the midst of the global downturn, many countries have pursued policies that have a bearing on global trade, including support for domestic industries and preferential purchasing policies,” wrote Jing Ulrich, managing director of China equities for JPMorgan Chase & Co. in Hong Kong.

“Despite the decline in global trade, economic conditions in China are recovering quite well, thanks in large part to the government’s aggressive fiscal stimulus program,” Ulrich said. “While progress is being made in rebalancing China’s economy toward a more consumption-driven model, trade will continue to be a major part of the Chinese economy for some time to come.”

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david.pierson@latimes.com

Tommy Yang in The Times’ Beijing bureau contributed to this report.