If these projections came true, China would overtake Saudi Arabia and Russia to have the world's second largest trade surplus after Germany, said the report.

The government think tank said last year's trade surplus would grow 66.4 percent from a year earlier to US$169.4 billion, about US$1.9 billion higher than the Ministry of Commerce's official projection of US$167.5 billion.

It also predicted that the year's imports and exports would reach US$2.137 trillion, up 21.6 percent or US$137 billion from the figure forecast by the Ministry of Commerce in December.

The forecasts show the size of the challenge facing China in dealing with its rocketing trade surplus. The government hopes to keep the country's annual foreign trade growth at 10 percent in the next five years and to balance imports and exports by 2010.

But robust market demand and the global transfer of industry which has turned China into the world's factory are powerful engines boosting the country's exports.

"This year, the trade surplus with the United States and the European Union will grow even faster to hit US$178.2 billion and US$133.1 billion respectively," said the report.

"With its surplus expanding exponentially, China will face more trade disputes this year. The focus of friction will shift from clothing, textiles and shoes to electro-machinery products, steel and chemical products," it said.

Textile and clothing exports might slow slightly as a result of trade protection and barriers, it noted.

Exports of higher value-added electro-machinery products would post a surplus of 118.1 billion U.S. dollars in 2006, up 54.2 percent from 2005, and US$185.2 billion this year, up 56.9 percent year-on-year.
High-tech product exports would register a surplus of US$34 billion in 2006, up 67.2 percent on a year earlier, and US$80 billion this year, up 131.2 percent from 2006, said the report.

The government has deployed a battery of policy and tax incentives to facilitate exports of electro-machinery and high-tech products to alleviate trade frictions caused by cheap lower value-added exports.

The report argued, however, that the positive effects of such measures would not show up immediately because the real cure was to ensure domestic companies acquire key production technologies.

About 90 percent of China's exports of information technology products are made by foreign-invested companies, blowing out China's export figures but bringing little value in terms of advanced technology, it said.