Bridges Weekly Trade News Digest • Volume 14 • Number 11 • 24th March 2010

China, Expecting Trade Deficit, Calls Yuan Appreciation ‘Irrational’

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Chinese Minister of Commerce Chen Deming declared this week that pushing China to allow the yuan to appreciate is irrational given the current fragile state of the world economy.

Addressing the 2010 China Development Forum in Beijing, Chen acknowledged the global trade imbalance but said that the appreciation of its currency would only be of “limited help,” considering that even with the stable yuan, China is seeing its trade surplus continue to shrink. In 2009, the country’s surplus fell over 30 percent from the year before; in the first two months of 2010, it dropped another 50 percent compared to January and February 2009.

This month, China’s trade balance may even have fallen into the red for the first time since April 2004. The official trade numbers for March are due to be released on 10 April, but Chinese trade officials are hinting at the likelihood of a trade deficit. In the first third of March, China ran a trade deficit of approximately US$ 8 million, according to Chinese Premier Wen Jiabao.

Chen said that imbalances in global trade and payment are only part of the reason for the ongoing economic downturn. His office maintains that the crisis is more due to structural problems such as the imbalances of world wealth distribution, resource consumption and representation in international financial institutions - in essence, serious imbalance between North and South. He criticised US economic policy as protectionist and warned that erecting new barriers to trade could hamper the global recovery.

United States and European officials have been exhorting China to release the yuan from its fixed peg of 6.83 yuan to the dollar, held steady since mid-2008, in order to help the global economic recovery. Many experts and officials say that the yuan is artificially low and constitutes an effective subsidy of Chinese exports.

Beijing disagrees. Premier Wen told a meeting of foreign executives on Monday that China’s economic growth last year “was achieved mainly by relying on domestic demand.”

“To be honest with you, I am pretty happy about this development,” Wen said of the possibility of a trade deficit. If the 10 April trade numbers do show that China’s imports exceed its exports, the country’s case for leaving the yuan pegged to the dollar at the current rate will be strengthened.

Chen’s statements came a week after a group of US senators accused China of manipulating its currency, blaming an undervaluation of 25 to 40 percent against the dollar for US job losses. They announced legislation to tack extra duties on Chinese imports if the yuan is not allowed to appreciate.

In his comments at the Beijing forum, Chen criticised the US for politicising economic issues. He emphasised China’s sovereign rights over its exchange rate, saying it was not a matter to be negotiated between two nations.

Chen warned that if China is labelled a “currency manipulator” in an upcoming US Treasury report due for release in mid-April, Beijing will not “turn a blind eye.”

Chen also called for forward movement in the stalled negotiations of the WTO Doha Round, in the hopes that a final result will aid the world economy in its recovery. Rather than starting over again and “making a new kitchen,” nations ought to make use of the achievements that have been made so far and move forward, Chen said. He emphasised the importance of ensuring that the final outcome is favourable to developing countries like China.

ICTSD reporting; “China Accuses US of Politicizing Yuan as Trade Surplus Sinks,” BUSINESS WEEK, 21 March 2010; “China Expects First Trade Deficit in 6 Years,” WALL STREET JOURNAL, 24 March 2010.