Tuesday, February 14, 2012

Umm, Yeah, About China's Dangerous Trade Imbalance

Right on the heels of the US visit of Xi Jinping, Chinese Vice President (and likely to replace President Hu Jintao as secretary-general of the Chinese Communist Party), comes news that one of the main indicators of supposed Chinese trade malfeasance - it's global trade surplus - has all but disappeared:
China's current-account surplus for 2011 shrank to $201.1 billion, from $305.4 billion in 2010. More important, as a ratio of gross domestic product, the current-account surplus fell to about 2.7%. That's close to a decade low and below the 4% threshold that suggests an exchange rate out of whack with equilibrium.

The argument in past years has been that the fall in China's surplus is cyclical, the result of the investment-heavy domestic stimulus that led to a surge in commodity imports, and recession in major trade partners that crimped exports.

But the International Monetary Fund seems to think there could be something more at work. The IMF now predicts China's current-account surplus will be 3.8% of GDP in 2013, way down from a forecast of 6.2% last September. Taken together with an unusual fall in the value of China's foreign-exchange reserves in the final quarter of 2011, it's a serious challenge to the argument that the yuan is undervalued....

In an election year, and with unemployment at 8.3%, the U.S. might still ratchet up the rhetoric on the yuan. But investors should prepare for China to start ratcheting down the pace of appreciation.
The IMF is already re-examining whether China's currency remains "substantially undervalued" because (i) "the yuan has appreciated more than 8% in the last year and the fund is developing a new method of assessing global currencies; and (ii) "the real effective exchange rate, based against a basket of currencies and accounting for inflation, is up almost 20% in the last three months on an annual basis and by over 8% in 2011."  I've already noted that the significant increase in the RMB's real effective exchange rate (and decrease in the same metric for the USD), and recently the nominal RMB-USD exchange rate went below 6.3 for the first time since the early 1990s.  Couple these facts with China's disappearing trade surplus, and the IMF's re-evaluation certainly appears warranted.

Meanwhile, the US trade deficit just reached a six-month high.  Hmmm....

Now, I'm certainly not saying that China's trade balance is some sort of magical indicator of the success, failure or legality of Chinese trade policy.  As I've repeatedly explained, trade balances - particularly bilateral ones - are increasingly unimportant in this regard.  However, a lot of "important" people - like a certain New York Times columnist and various campaigning politicians - have relied on China's trade surplus to justify their breathless calls for aggressive US protectionism to counter China's supposedly-pernicious trade practices.  Indeed, in many cases, China's trade balance is the only reason cited for their extremely provocative anti-trade proposals. 

So with this supposedly-critical metric, along with various indicators of the value of China's currency, now arguing against such unilateralism, will these pundits and politicians revise their positions?

Don't hold your breath.

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