Tuesday, August 10, 2010

Chinese Government Success Creates New Problems

The Chinese trade surplus surged by 170% from a year earlier in July to $28.7 billion, as exports increased 38.1% while imports increased by only 22.7%.

This is a direct result of the success that the Chinese government has had in curbing excessive credit expansion. By limiting that, it has limited malinvestments and asset bubbles, and thus reduced future problem emanating from that.

However, a lower credit expansion will limit import growth, which in turn translates into a larger trade surplus.

And this, along with the yuan's trade weighted value again dropping due to the drop in the dollar against the euro, pound and most other currencies and the increasing likelihood of a double dip U.S. recession, increases the risk of a U.S.-Chinese trade war, which would be mutually destructive, but might be "good politics" for some politicians and pundits.