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Sweet Surrender

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With trade deficits in sight, is China ready to revalue the yuan?

Protecting the state and its interest has always been the top priority of China and its people since ancient times. The Great Wall is a testament to this.

But as its economic rival the United States presses the Chinese government to stop pegging the yuan to its dollar, China faces a new challenge as imports surged for the first time since April 2004, resulting in a trade deficit amounting to US$7.2 billion.

Commerce officials say that imports increased in March by 66% to US$119.3 billion compared to a year earlier. China’s export growth has been surpassed by the rise in its imports, as it only increased by 24.3% to US$112.1 billion year-on-year.

The import surge has been attributed to China’s growing need for raw materials like copper, iron ore, coal, and crude oil, prices of which have been soaring continuously, according to Chinese Vice Minister of Commerce Yi Xiaozhun.

Commerce Minister Chen Deming says the nation will see its exports pick up in three years before reaching pre-financial crisis levels. Contrary to a statement he made previously, Chen says that while the deficit could be bound to happen, it will only be a “short-lived phenomenon.” Global economists support this notion saying China will see its trade surpluses bouncing back in a short matter of time.

Throughout 2009, China’s growth rebounded by 8.7% from domestic spending and loans, a result of shifting the country’s focus from international to domestic demand.

Make Hay, Not War
China has been keeping the yuan low to increase exports, a move seen as beneficial to Chinese manufacturers especially during the global financial crisis. Keeping it artificially low against the dollar could also benefit the Chinese workforce, as more factory jobs could be generated by the increased demand for China exports and relatively cheaper wages.

China has been pegging the yuan for over the past two decades, breaking the spell in 2005 to allow the yuan to appreciate by 20%.The pegging resumed in mid-2008 during the global economic crisis.

In several news reports, the US Congress and the U.S. Treasury Department have labeled China a “currency manipulator” for continuously adjusting the value of its yuan. The US Congress is also pressing President Barack Obama to take “stronger steps” to push China to appreciate the yuan. In reaction to the international pressure placed on China to revalue its currency, China Premier Wen Jiabao said in a forum that China “did not want trade and currency wars.”

Chinese authorities contest, though, that the trade deficit only proves that the value of the yuan doesn’t pose a threat to global trade. Ministry of Commerce spokesperson Yao Jian says that China’s trade surplus continued to fall despite a stable yuan exchange rate. “This again shows that in an era of economic globalization, the deciding factor for balanced trade is not the exchange rate, but other factors such as the relationship of supply and demand in the market,” he said in a statement.

Analysts say that it is possible for China to appreciate the yuan for domestic gains without displacing international pressure put on it. Finally trying a different approach instead of continuously bullying the Asian nation, US Treasury Secretary Timothy Geither said in a statement during a visit to India that it is “China’s choice” to appreciate the yuan.

“As I said before and I’ll say it again, but I want to make sure I am repeating myself, I am confident that China will decide it’s in their interest to resume the move to a more flexible exchange rate that they began some years ago and suspended in the midst of the crisis,” he said.

Chen still believes, though, that it would be “irrational” for China to revalue the yuan as it would affect not only Chinese exporters but also American consumers who will be burdened with higher price tags on China-made goods.

Like its symbolic great wall, China knows how to weather external pressures, and might still come out as a clever player in the wake of the financial crisis.

Print ed: 05/10


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