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CHINA'S LOOMING TRADE DEFICIT SHADOWS YUAN DEBATE

By NBF NEWS
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Expressions of surprise, but not quite shock, recently greeted Minister of Commerce Chen Deming when he informed an audience of high-ranking officials that China would likely report a trade deficit for March, Market Watch reported on Monday.

'I personally expect that in March of this year, China will run a trade deficit,' Chen told the gathering of government officials, scholars and multinational executives at the China Development Forum in Shanghai.

Caixin is a Beijing-based media group dedicated to providing high-quality and authoritative financial and business news and information through periodicals, online and Television/video programs.

If the prediction proves accurate, the giant exporting nation would post its first monthly trade deficit since May 2004.

A day after Chen spoke, Premier Wen Jiabao confirmed that China had run a trade deficit through the first 10 days of March. He carefully added that government policy makers do not promote trade surpluses but, in fact, are trying every means to expand imports.

These official forecasts of an impending trade shortfall came as China and the United States sparred over the value of the Chinese currency, the yuan. Some U.S. leaders are pressing for an appreciation of the yuan in hopes of balancing trade between the two countries, but so far the idea has been rejected by China.

Chinese leaders from Chen to Wen to the central bank governor have asked the United States to focus on non-currency ways to balance bilateral trade. Revaluing the yuan alone, they say, will not fix the global economy.

Thus Chen's announcement, although considered surprising, was not completely unexpected. And many experts say a March deficit would only be a temporary blip, marking China's adjustment to changing global demand for its goods.

'Massive trade deficits are not sustainable over the long term for China,' explained a securities analyst. 'And it does not mean that, in the game of chess between China and America, China will adopt measures to further increase imports.'

Chen said at the forum that, in theory and practice, allowing a nation's currency to appreciate can have only a limited impact on current-account balances.

China's craving for raw materials and intermediate goods helps other countries develop their industrial sectors. And China's demand for luxury goods and services from countries with which it runs trade deficits helps support large numbers of jobs in those countries.

A look at a few statistics sheds light on China's position. Between 2005 and 2008, the yuan rose 20 per cent against the U.S. dollar. But at the same time, China's trade surplus rose to more than $295bn.

During the first two months of this year, China's imports rose sharply -by 63.6 per cent — while exports increased by only 31.4 per cent. As a result, China's trade surplus fell 50 per cent to $21.76bn at the end of February.

Yet a March trade-deficit report is unlikely to reduce external pressure for China to revaluate the yuan.

Song Hong, director of the International Trade Research Office at the Chinese Academy of Social Sciences' Institute of World Economics and Politics, said the impending deficit would continue a trend that started last year in which China's imports grew faster than its exports. He also noted that China recently sent several trade delegations overseas, generating many orders.