Tuesday, July 12, 2005

About the growing Chinese trade surplus

China's trade surplus increases sharply in June, from $1.8 billion June last year to $9.7 billion June this year, reflecting a export growth of 30.6% versus import growth of "only" 15.1%. This is of course bound to increase protectionist hysteria in the West and seemingly strengthen the argument of those who call the yuan"manipulated".

Of course, the yuan is manipulated, but so are all other currencies in today's world, including the US dollar. And fixed exchange rates are no more manipulation than floating exchange rates. If anything it is less manipulation as there would be "fixed exchange rates" (Or actually no exchange rates) under a free market monetary system i.e. the gold standard. And does Nevada have a "manipulated exchange rate" with New York since the "exchange rate" between dollars in Nevada and New York is always constant at 1:1?

China's booming trade surplus reflect a seemingly successfull effort to contain excess investments while China's savings rate has continued to increase for structural reasons (i.e. cultural attachment to thrift and lack of a social safety net). Until early 2004 China's surplus was falling and even briefly turning into deficit during early 2004, just like India has recently gotten a current account deficit despite Paul Craig Roberts' assertion that it has a "absolute advantage in everything".

This is not to say that China should keep the peg. Given current political realities, increased protectionist measures seem inevitable unless the yuan rises significantly in value. A revaluation would damage China less than western tariffs, particularly at the 27.5% level proposed by Senators Schumer and Graham, since it at least would mean lower import prices. Moreover particularly with the large inflow of speculative capital into China betting on a revaluation , this forces China to purchase large quantities of low yielding U.S. government securities to maintain the peg. But it is wrong to argue that China is a bigger currency manipulator than any other country.


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