Wednesday, 14 March 2007

Record Trade Surplus: What next?

There have been numerous articles highlighting the recent record trade surplus that China recently announced.

The customs authorities said there was a near-record 23.8-billion-dollar trade surplus in February, almost 10 times the year earlier figure and certain to spark more protests that China keeps the yuan deliberately undervalued to gain an export advantage.

China's surplus last year soared 74 percent to hit a record 177.5 billion dollars but some economists are pencilling in 230 billion dollars for 2007.

February exports totalled 82.1 billion dollars, up 51.7 percent from a year earlier, while imports increased 13.1 percent to 58.3 billion dollars, the General Administration of Customs said.

The trade surplus is a major bone of contention with China's trade partners, especially the United States which claims a weak yuan is a major contributor to the problem and the February data could worsen the atmosphere.

So how will the surplus issue be addressed? (can this be called a surplus problem?).

One answer is to revalue the RMB or to at least allow the so-called managed float to be a little less managed. Reading the suggestions below reminded me of ECON101 teaching. It will be interesting to see if or by how much the trading bands are widened to.

I suspect we will see much larger surpluses in the future. What is more interesting is what China plans to do with this surpluses. See next post.
In an apparent bid to address overseas pleas to address the surplus, central bank governor Zhou Xiaochuan said Monday that exchange rate policies could go some way toward tackling the problem.

"As a supplementary policy, exchange rate policy can have a certain function as price leverage and can help adjust the balance between imports and exports," Zhou told reporters at a briefing.

A statement issued alongside Zhou's appearance before the press and dealing with objectives for 2007 suggested slightly more vigorous application of this leverage in the year ahead.

"The managed floating exchange rate regime will be further improved and the flexibility of the exchange rate will be enhanced," the statement said.

"(We will) keep the exchange rate basically stable at an adaptive and equilibrium level," it said, repeating a standard formula.

The managed floating exchange rate regime is China's way of describing a system which still appears to many observers to be tightly controlled by the authorities.

In July 2005, China delinked the yuan from the dollar and since then it has risen by nearly seven percent against the US unit, including a 2.1 percent revaluation at the time of the decision.

The yuan was also set in a daily trading band against the dollar of 0.3 percent either side of a base rate set by the authorities. In practice, daily changes have not come anywhere near that modest amount, sparking protests that Beijing still keeps the yuan on a very tight rein.

Even as the central bank promised a more flexible yuan, Zhou on Monday gave no direct indication of concrete measures, such as whether the trading band might be expanded.

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